Why Internet of Things Might, and Might Not, be the "Next Big Thing" for Telcos

Even if one agrees that the Internet of Things represents the single biggest future revenue opportunity for tier one telcos, some perspective is needed. The obvious way mobile or fixed network service providers might gain from IoT is a dramatic increase in the number of connected devices.

As a matter of perspective, consider that there are, in early 2015, perhaps 3.5 billion mobile phones in service. In a decade, some believe there will be as many as 30 billion to 50 billion additional devices connected to the Internet.

Broadly speaking, that suggests an order of magnitude (10 times) more connected devices than now are in service. If so, the upside will come directly from more subscriptions and indirectly from higher data usage or ancillary services related to Internet connectivity.

But many predict most of the new connected devices will use local wireless connections (Bluetooth, for example).

Still, on a base of 50 billion devices, some think an incremental one billion to two billion additional mobile connections are likely to be driven by IoT.

So the impact on Internet subscriptions (mobile or fixed) is not so clear. Still, it would be hard to name another area where the financial upside for telcos is higher, since the number of connected devices increases by about an order of magnitude with every generation of computing technology. Virtually all observers see something similar happening with IoT as well.  

Even if connection growth is substantial (one billion to two billion new mobile connections, for example), IoT will represent a huge new revenue stream for mobile service providers or fixed network telcos largely if the service providers are able to become part of the applications portion of the IoT business.

The reason is simple enough. IoT sensor connections, which might represent a few dollars of monthly revenue, are expected to drop into the cents per month range over time. Even two billion new mobile connections, at $1 a month, would add $24 billion in global mobile service revenue.

That is helpful, but in a business currently earning at something higher than $1.2 trillion worth of annual revenue, that is about two percent of current revenue. If that is all IoT ever represents for the telecom industry, it would be a rather small revenue contributor.

Some forecasters believe U.S. IoT application revenue already had reached the $1.4 billion range in 2014, representing 39.9 million accounts, expected to grow to 51.7 million accounts by the end of 2016.

IoT app revenues were estimated to grow from $1.43 billion in the second quarter of  2014 to $1.54 billion at the end of 2016 with a semi-annual growth rate of 1.4 percent.

In other words, average annual revenue for an IoT application was about $29.87 a month, according to one estimate by Compass Intelligence. Compare that to estimated IoT Internet access revenue of perhaps $3 a month.

Most of that activity undoubtedly includes the embedded base of industrial sensors deployed over the last three or four decades to support energy management or other industrial processes.

So the fundamental issue for tier-one telcos and mobile service providers is that most IoT revenue will be dominated by application providers, not “access,” as has been true of the Internet so far.

As telcos have struggled to find ways to create and own the key applications on the Internet, they likewise will have to strive mightily to create a role in the applications and services parts of the IoT ecosystem, to participate in most of the revenue upside.

That suggests IoT will be important for telcos and mobile service providers in the enterprise customer portions of their businesses. Fleet management operations, oil and gas, public safety or transportation, utility and factory operations are likely to be among the top vertical market opportunities.

Smart watches and other consumer IoT devices are unlikely to matter very much. That means it is not yet clear when fixed connections will be used, and when mobile connections are necessary (automobile apps, oil drilling platforms, aircraft).

If you had to make a bet, right now, about the most-promising big opportunity for tier-one telecom providers--something big enough to replace about half of all current revenue over about a decade--IoT would be the choice many would make.

The only other category that might rival IoT is streaming video, in part because of the indirect stimulation of demand for Internet access services. Assume there are about 142 million U.S. mobile Internet users. Assume there are about 85 million fixed high speed access accounts in service, for a total of 227 million connections.

Assume IoT helps drive increased purchasing of high speed access representing $5 per account, per month, or $60 annually. That might imply increased revenues of perhaps $13.6 billion in the U.S. market.

If U.S. telecommunications revenue overall is about $400 billiion, that would represent a revenue boost of about three percent.

In other words, it is hard to see how incremental IoT access revenue “moves the revenue needle” very much. If IoT is to drive significant new revenues, it would have to come from the applications and services side of the business.

Consider the impact of streaming video, by way of comparison. Assume a potential market of 80 million streaming video accounts, representing monthly revenue of $10, or $120 a year.

Assume telcos could gain 20 percent share of that market. That implies 16 million accounts with annual revenue of about $1.9 billion. If average monthly revenue were $40 a month, representing annual revenue of about $480, the industry upside might be $7.6 billion. Again, that is about two percent of U.S. industry revenues.

With fixed and mobile revenue slowing, flat or declining, the “next big thing” will matter. To be sure, there are lots of smaller and important things to be done.

But nothing might matter more than discovering big new markets and services to drive growth beyond today’s leaders. After all, the industry already has watched revenue leadership shift from fixed voice to mobile and voice to data. Video services will help, in some cases. Expansion out of market will help as well.

But organic growth still has to hinge on a new wave of services yet to be created, even if out of region expansion, video or fixed-mobile integration also drive additional revenues.  

Right now, it would be hard to name a category of services with more potential than Internet of Things, as fuzzy as that concept might be, since IoT represents many potential new markets and services, ranging from fitness trackers and watches to industrial and traffic sensors and in-home or in-car automation services.

With the Internet of Things at the peak of its hype cycle, we will all be hearing predictions of non-linear growth. Many forecasts, for example, call for deployment of 20 billion or 30 billion IoT units by 2020. That implies potential new Internet connections of as much as the same number.

A few years ago, some analysts had predicted that, by 2020, the market for connected devices  would be between 50 billion and 100 billion units. The point is that projections already have proven too optimistic.

None of that is at all unusual. Big new business opportunities are tough to pin down, in terms of concrete business models. Think of the Internet itself. In mobile, creation of sizable and concrete 3G and 4G revenue models took time.

But IoT remains in an early stage. For example, a recent survey of executives found they lack a clear perspective on the concrete IoT business opportunities, as promising as the field might be.
Semiconductor executives surveyed in June 2014 by McKinsey said the Internet of Things will be the most important source of growth for them over the next several years—more important, for example, than trends in wireless computing or big data.

Those hopes might be misplaced, though. “For players in the traditional semiconductor market, the Internet of Things may spark some growth, but it certainly will not change two percent industry growth today to the 10 to 15 percent growth we had in the 1980s,” one industry executive says.  

If so, that might imply that hopes for massive new service provider revenues might also be excessively optimistic, at the moment. Whether that also means service provider hopes are misplaced is the issue.

Important innovations in the communications business often seem to have far less market impact than expected, early on.

Even really important and fundamental technology innovations (steam engine, electricity, automobile, personal computer, World Wide Web) can take much longer than expected to produce measurable changes.

Quite often, there is a long period of small, incremental changes, then an inflection point, and then the whole market is transformed relatively quickly, but only after a long period of incremental growth.

Mobile phones and broadband are among the two best examples. Until the early 1990s, few people actually used mobile phones, as odd as that seems now.

Not until about 2006 did 10 percent of people actually use 3G. But mobiles relatively suddenly became the primary way people globally make phone calls and arguably also have become the primary way most people use the Internet, in term of instances of use, if not volume of use.

Prior to the mobile phone revolution, policy makers really could not figure out how to provide affordable phone service to billions of people who had “never made a phone call.”

IoT might prove to mimic that pattern. And that is the optimistic scenario. Not all innovations prove to have such impact.

Still, the reason the industry needs to create viable and big business models around IoT is that it now is the single best hope for replacing about a quarter of all current revenues.

We might reasonably expect video entertainment, mobile data and out or market expansion to produce additional revenue representing about a quarter of the size of existing firm activity.

The issue there is that some of those gains are “zero sum.” Gains by one contestant come only at the expense of another contestant, and do not represent net market growth. IoT is among the few big new revenue sources that actually grow the market.

And that is why IoT matters. But it will matter much more, for service providers, if they can create sustainable roles on the application side of the business. Patience will be required.

The Internet of Things likely will develop as many other technology-enabled markets do. Concepts are spawned in university computer labs, then are commercialized over time. That used to take the form of campus--enterprise-consumer. These days, the pattern is as likely to be campus-consumer-enterprise.

However, much like artificial intelligence, IoT might take a bit longer to gain widespread adoption. Some technologies embedded in products can be spot deployed (computers, watches, tablets, game systems).

Others require extensive ecosystems to be created (air traffic control systems, airports, reservation systems, distribution networks, aircraft, The first “Internet-connected Coke machine was demonstrated in 1982, for example. So we have been aware of Internet-connected machines for 30 years.

Technology enables new markets, but though necessary, is not sufficient to create them. Consumers and firms first need to see the value, and only then can viable and sustainable business models be created.

A great wave of expectation will be dashed initially, as growth forecasts prove too optimistic. Then, after a gestation period that could last as long as a decade, the practical value will be understood by end users, followed by a non-linear adoption pattern that occurs rather suddenly.
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