Tuesday, June 21, 2016

Access Providers Literally Cannot Own and Control IoT, So Partner

If current forecasts are correct, it literally will be impossible for access providers to dominate or control the broad Internet of Things business.

That might suggest it makes more sense to invest in stakes throughout the rest of the ecosystem--partnering, in other words--rather than staking everything on owning and controlling sizable portions of the value chain.

The Internet of Things, in all its forms--has a total potential economic impact of $3.9 trillion to $11.1 trillion a year by 2025, according to an analysis by McKinsey Global Institute. The biggest segments might well be industrial automation, smart cities and health apps.

At the top end, that level of value—including the consumer surplus—would be equivalent to about 11 percent of the world economy.

With the caveat that today’s access providers likely always will earn a majority of their revenue providing access services of various types (mobile, fixed, Internet access, Wi-Fi hotspot access,
Ethernet and other high-bandwidth connections), the key to future revenue is likely going to come from providing managed apps and services, as always has been the case.

That statement should be unremarkable, except for the fundamental change in business model since the advent of the Internet and IP communications.

In the past, one might have argued that most revenue came from selling apps (voice and messaging), and relatively less from “data access” connections (dumb pipe T-1, DS3 and so forth).

Even data access services such as frame relay, MPLS and ATM essentially were managed services, or “apps.”

These days, as apps are structurally separated from access, legacy communications providers are earning less revenue from fully-owned apps and lots more from data access (dumb pipe).

So the issue is how the revenue model might evolve over the next decade or two. Broadly speaking, it is clear that dumb pipe access and apps now are separate parts of the revenue stream. So the big question is how access providers can create viable and useful roles for themselves in the app part of the business.

Entertainment video is an early example of diversification. Other telco forays into new revenue sources have not been nearly that successful. Oddly enough, it is cable TV operators who have developed a model that should work for telcos, if telcos can create both the right internal mindset and consistently show a willingness to “make money without owning everything.”

The emphasis there is “making money,” not “owning everything.” All too often, new service initiatives seem to fail because the approach is too heavy handed and too controlling.

There is another approach, which is to “own some, but not all” of the apps used by consumers and end users of access services. No cable operator ever expects to own all or most of the relevant content being consumed by its video subscribers. But, where possible, it makes sense to own a few of those networks.

Some take matters even further. Liberty Global fully owns some assets--especially its access assets. But where it comes to app and content providers, owning parts of those operations, letting them run autonomously, and then participating in the equity upside, is a proven model.

The implications for former incumbent telcos, as their legacy revenue sources dwindle, is to cultivate a new approach based on maximizing total financial return, not return from internal branded services and assets.

In other words, owning--but not controlling assets--might provide a surer path to financial well being than controlling all the assets. To be sure, some mix of fully owned and minority investor models will likely be the path taken by most who can do so.

But the model of “owning access, but investing in apps” might be the most-logical way to create new asset value and revenue over the long term, compared to a strict “we own everything” model.

In that regard, the Internet of Things seems a promising area where partnerships, especially those where the access provider mostly has an ownership interest, but does not control IoT services and apps, seem logical.

For starters, there are simply too many market segments for a monolithic approach to work, too much domain knowledge required.

So even if “access” remains an obvious revenue generator, the volume of revenue still will lie in the apps. Better to own a small piece of that part of the business, than try and “own and control” very much of it.

Connectivity seems destined to a be a sliver of the total IoT market revenue.

By some estimates, there already are between six and 14 billion autonomous connected devices or “Things” that are connected via some form of communication mechanism, not including smartphones, tablets, computers and similar consumer devices. By way of comparison, there might be seven billion connected consumer devices in use today, including phones, PCs, tablets, TVs, game players and so forth.

As you might guess, the further out one goes, the more current estimates diverge. The number of connected devices by 2020 ranges between 18 billion and 50 billion devices. Some of us would argue the issue is not the number of devices in use, but the timeframe.

We will probably see less deployment up to 2020, then much more development after 2030.

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