IoT Spending to Grow 15.4% in 2019

Worldwide spending on the Internet of Things will reach $745 billion in 2019, an increase of 15.4 percent  over the $646 billion spent in 2018, according to International Data Corporation. IDC expects worldwide IoT spending will maintain a double-digit annual growth rate from 2017 to 2022 and surpass the $1 trillion mark in 2022.

The United States and China will be the global leaders for IoT spending in 2019 at $194 billion and $182 billion respectively. They will be followed by Japan ($65.4 billion), Germany ($35.5 billion), Korea ($25.7 billion), France ($25.6 billion), and the United Kingdom ($25.5 billion). The countries that will see the fastest IoT spending growth over the forecast period are all located in Latin America: Mexico (28.3 percent CAGR), Colombia (24.9 percent CAGR), and Chile (23.3 percent CAGR).

The industries that are forecast to spend the most on IoT solutions in 2019 are discrete manufacturing ($119 billion), process manufacturing ($78 billion), transportation ($71 billion), and utilities ($61 billion).

source: IDC

IoT spending among manufacturers will be largely focused on solutions that support manufacturing operations and production asset management, IDC predicts.  In transportation, more than half of IoT spending will go toward freight monitoring, followed by fleet management. IoT spending in the utilities industry will be dominated by smart grids for electricity, gas, and water.

The industries that will see the fastest compound annual growth rates over the five-year forecast period are insurance (17.1 percent), federal/central government (16.1 percent), and healthcare (15.4 percent).

Consumer IoT spending will reach $108 billion in 2019, making it the second largest industry segment, IDC says. The leading consumer use cases will be related to the smart home, personal wellness, and connected vehicle infotainment, IDC forecasts.

The IoT use cases that will see the greatest levels of investment in 2019 are driven by the industry spending leaders: manufacturing operations ($100 billion), production asset management ($44.2 billion), smart home ($44.1 billion), and freight monitoring ($41.7 billion).

The IoT use cases that are expected to deliver the fastest spending growth over the 2017-2022 forecast period provide a picture of where other industries are making their IoT investments. These include airport facility automation (transportation), electric vehicle charging (utilities), agriculture field monitoring (resource), bedside telemetry (healthcare), and in-store contextualized marketing (retail).

IoT services will be the largest technology category in 2019 with $258 billion going toward traditional IT and installation services as well as non-traditional device and operational services.

Hardware spending will be close behind at $250 billion led by more than $200 billion in module/sensor purchases. IoT software spending will total $154 billion in 2019 and will see the fastest growth over the five-year forecast period with a CAGR of 16.6 percent. Services spending will also grow faster than overall IoT spending with a CAGR of 14.2 percent. IoT connectivity spending will total $83 billion in 2019, IDC predicts.

Will 5G Enable New Value Propositions?

Among the bigger questions for 5G service providers is whether the business model is going to be better than 4G and 3G, or worse. Perhaps that should not be a key question, but global service provider business models arguably have been getting more difficult, compared to 2G.

In brief, here is the thesis laid out by James Sullivan, J.P. Morgan head of Asia equity research (all of Asia except Japan): emerging market mobile now is revenue challenged, unable to generate new revenues at rates that justify current investments.

Since revenue cannot be increased, “asset restructuring” is necessary, to adjust the cost base. In emerging markets, that means surviving competitors will not be able to own their own facilities.

Emerging market mobile has faced several challenges, all based around limited revenue growth and higher capital investment that have grown faster than incremental revenue.

As mobile data revenues have grown, they have cannibalized voice revenues. Rapidly-increasing capital investment and operating expense have lead to declining earnings.

Growth without profits is the issue in many parts of Asia. The bigger issue for U.S. mobile service providers is the ability to create more value for 5G services, as that, in principle, allows service providers to earn more revenue.

There is an interesting bit of data from a survey conducted by HarrisX, and commissioned by T-Mobile US, about technology innovation and consumer attitudes about 5G networks and services.

Apple, by far, is top of mind for respondents, followed by Google and LG. Mobile service providers are lower on the perception of leadership. That might speak to some confusion on the part of consumers, since Apple has not yet committed to introducing 5G capability on its devices and Google benefits only indirectly.  

But those impressions might be key, eventually. If Apple can come up with something quite interesting in its 5G-capable devices--enough to entice service providers to subsidize its purchase, for example--5G adoption rates could get quite a boost.

A possible companion issue is whether service providers--working with Apple--can create something new in the value proposition. Perhaps a new retail sales model rebundling the device, apps and services could shake up retail market expectations.

HarrisX and T-Mobile 5 G Consumer Index Study from EniJucja

Apple Faces a Classic Telco Problem

Apple used to be viewed as a “technology” company. Many now view it as a consumer electronics company. But Apple faces an issue very common in the connectivity business, namely the challenge of finding a brand-new, sizable revenue stream to replace its lead product.

For telecom service providers, that problem has been the challenge of replacing voice revenues (actually long distance profits in the 1980s and 1990s, followed by access lines in the first decade of the 21st century).

A look at Apple’s revenue sources shows the magnitude of the challenge. At least so far, a growing services business is too small to move the needle. If any new hardware product is to emerge, it has not done so, yet.

source: ZDnet

U.S. Fixed Network Homes Passed Now Increasingly is Guesswork

With the caveat that there are wide areas of the United States where population density is exceedingly low, no single fixed network service provider has a geographic footprint that covers “most” of the landmass.

Here is Comcast:

source: Comcast

Here is AT&T:

source: AT&T

Here is Verizon:

source: Verizon

Here is CenturyLink:

source: Wikimedia

Here is Charter Communications:

source: Value Ventures

Of course, many will note that what really matters is not landmass but potential customer locations, such as homes and businesses. The Charter Communications network passes about 50 million homes, the number of potential customer locations it can sell to.

Verizon homes passed might number 27 million. Comcast has (can actually sell service to ) about 57 million homes passed.

AT&T’s fixed network represents perhaps 62 million U.S. homes passed. CenturyLink never reports its homes passed figures, but likely has 20-million or so consumer locations it can market services to.

Smart Speakers Might Set a Record for Adoption

It looks like smart speakers might be the fastest-adopted product in consumer electronics history. By some estimates it took about five years for smart speakers to be adopted by half of U.S. homes.

By other estimates, adoption reached 41 percent only in 2018. Either way, that is fast.

source: Xapp Media

The Science Behind the Definition of Broadband as 25 Mbps

Some criticize the Federal Communications Commission for wanting to keep a minimum 25 Mbps broadband definition instead of boosting it to some other figure.  Keeping in mind that figure is a minimum floor, not a ceiling, there is clear science behind the chosen definition.

After about 20 Mbps, there is little to no improvement in user experience when using webpages, for example. The key caveat, however, is that multiple users on any account make a difference, if multiple users or devices are used simultaneously.

source: FCC

Generally speaking, even in a household with multiple users, only 4K ultra-high-definition streaming will stress the connection.

source: High Speed Internet

That noted, even in many rural gigabit speed service is available at levels that would surprise many.

And typical speeds in cities routinely are far above the minimum. “The median download speed, averaged across all participating ISPs, was approximately 72 Mbps in September 2017,” according the most-recent Federal Communications Commission report on U.S. broadband service.

Platform continues to matter. “While cable and fiber providers had median speeds ranging from 78 to 120 Mbps (with only one outlier provider with 56 Mbps median speed); the DSL and satellite providers had median speeds that ranged from 2 to 20 Mbps,” the FCC notes.

source: FCC

Is It the "Year of X"?

It’s that time of year when some feel compelled to prognosticate on “what will happen next year,” while others remind us of what did happen “last year.” And there always are a brave few who will try to capture the essence in a single phrase: “the year of X,” whatever X is said to be.

At a high level, we might well look back at such highly-distilled “year of X” predictions and note that it almost never happens. “The year of X,” whatever X is said to be, nearly always occurs (in the sense of commercial adoption or inflection point of adoption) some future year.

My simple way of describing this situation is to say that “whatever is said to be the ‘year of X’ trend almost ensures it will not be.” Of course, some will argue that is not what they mean.

Instead, they tend to mean this is the year some trend is popularized or discovered. Okay, in that sense, there is firmer--yet still tenuous--ground to stand on. Rarely does a big new thing just burst on the scene, in terms of public awareness, in a decisively-new way,

What does happen is that some arbiter “proclaims” that this has happened. It’s arbitrary.

The point is that any truly-significant new technology, platform or commercial activity takes quite some time to reach commercialization, and typically quite long after all the hype has been crushed by disillusionment.

source: Gartner

The point is that even highly-successful new technologies can take decades to reach commercial ubiquity, even if today’s software-driven products are adopted faster than innovations of the past.

It still can take a decade for widespread consumer use of any product or service to reach 50 percent to 60 percent adoption.

source: Harvard Business Review

Also, recall that most new products, and most new companies fail: they simply never succeed as commercial realities. Also, we sometimes overestimate the actual time any innovation takes to reach 10 percent or some other level of adoption on a mass level.

There is debate about how fast smartphones were adopted for example. Was it seven years or something greater than a decade for usage to reach half of consumers? Some estimate it took just seven years. Others have argued adoption never reached 50 percent after a decade.

And depending on how one defines “smartphone,” adoption levels of 50 percent took a couple of decades to nearly three decades.

source: Xapp Media

source: MIT Technology Review

For all such reasons, some of us tend to discount the notion of a “year of X.” Truly-significant innovations which achieve mass usage often take longer than expected to reach mass adoption levels. On the other hand, there arguably are points in time when public awareness seems to reach something like an inflection point.

In most cases it is difficult to measure the actual year when a shift becomes significant. Is it the point where 10 percent of people recognize a term, or say it is important? Or when 20 percent, 30 percent or 40 percent say so?

More significantly, at what point of innovation purchase or regular usage has something “arrived,” in a commercial sense?

80% of Results from 20% of Actions, Firms, Products, Services

Only 20 percent of actions lead to 80 percent of results, in business, life or telecom.

It usually is surprising how often a Pareto distribution occurs in business or nature. Most underlying trends in any business follow a Pareto distribution, commonly known as the “80/20” rule, where 80 percent of results flow from some 20 percent of the instances. That applies for consumer manufacturer warranty claims, for example.

In the telecom and most other businesses, as much as 80 percent of the profit is generated by serving 20 percent of the customers, while 80 percent of the revenue is generated by 20 percent of the products.

Apparently equity market returns also show a Pareto distribution.

source: Longboard Funds

Most workers make tradeoffs between housing costs and commuting time and hassle that show a Pareto distribution.

In  the healthcare domain, the sickest 20 percent generate 79 percent of health care costs.

In the domain of athletic training roughly 20 percent of the exercises and habits have 80 percent of the impact

It is likely that similar Pareto distributions exist for all forms of internet access and communications infrastructure, where 80 percent of the value comes from 20 percent of the decisions or instances.

As a practical matter, Pareto means I have to spend more of my research time on the relatively few connectivity firms that generate 80 percent of the revenue in any particular market, even if much of my work has included managed services providers, distribution partners and others that are part of the 80 percent of firms that generate 20 percent of the revenue.

Why Low Cost Bandwidth Now is an Imperative

Low cost bandwidth always has been a prerequisite for commercial video networks, whether of the satellite, over-the-air TV or cable TV variety, and now for any internet service provider or telco (access or connectivity provider) that wishes to sell its own subscription video products.

The reason is simple and straightforward: video is the most bandwidth-intensive consumer application, by far. Text messaging and voice require use of almost no bandwidth, while video consumers nearly two orders of magnitude more capacity, for each minute of use.

H.264 Skype video conferencing, for example, uses four orders of magnitude (10,000 times) more bandwidth than Skype messaging, for example.

So revenue per bit and data consumption are inversely related: video consumes the most bandwidth, and produces the lowest revenue per bit for a connectivity provider, while text messaging and voice use the least bandwidth and produce the highest revenue per consumed bit.

source: Microsoft

Internet traffic is in between, with some apps consuming little capacity (email), some apps consuming a moderate amount of capacity (web browsing) while others are heavy capacity consumers (video).

Mobile networks have had cost per delivered bit an order of magnitude (10 times) higher than fixed networks, as well.

The point is that,  in an era where 70 percent of traffic is video, revenue per bit becomes a major issue. That is especially true when the video is supplied by third parties, generating no direct revenue for the connectivity provider.

source: FCC

There are both supply and demand drivers of lower cost-per-bit performance. On the supply side, there is a tendency for communications cost per bit to fall towards zero, resulting in near-zero pricing.

Over time, better technology has resulted in networks that can deliver far-more bandwidth at far-lower costs. Moore’s Law, optical fiber, satellite and microwave platforms, hybrid fiber coax, digital subscriber line, better codecs and radios, better modulation schemes, radios and compression algorithms are some of the drivers of better performance and lower cost per bit.

But there also are demand issues. In an era where transport and access economics are driven by entertainment video, networks and retail pricing must be optimized for delivery of video, including video that has to be delivered without direct revenue earned by the ISP (third-party video).

And that dictates very-low-cost bandwidth platforms, as consumer propensity to pay is sharply limited. Any given household or any single consumer will only be willing to pay so much on all communications and entertainment services. That figure typically is single digits worth of income.

Developed nation consumers generally pay about 0.7 percent of gross national income per person for mobile internet access. Fixed network internet access, in developed countries, costs less than one percent of GNI per person.

source: ITU

All U.S. household spending on entertainment of any sort represented about five percent of household spending in 2017, according to the U.S. Bureau of Labor Statistics.

If about 37 percent of entertainment spending is for video subscriptions, then perhaps two percent of household spending is devoted to video subscriptions.

source: BLS

The point is that consumer propensity to spend on communications and subscription video is limited to relatively fixed percentages of income that do not change much, year to year. And that puts a cap on potential supplier revenue.

The implications for networks are obvious: platforms can only afford to spend so much on infrastructure, as there are limits to consumer willingness to spend on communications and subscription video.

Cable and Telco Spend 4.4 to 5 Times As Much as Mobile Operators on Capex, as a Percent of Revenue

At least in the Canadian communications market, mobile networks are three to four times less costly than fixed (cabled) networks, based on capital intensity.

With the caveat that the mobile figures might be periodically higher when a next-generation network is under construction, ongoing capital investment is about nine percent of revenues.

Telcos tend to invest about 40 percent of revenues on their networks, while cable operators tend to invest about 45 percent of revenue. Those figures probably require some explanation.

In other words, telco networks spend about 4.4 times as much on capex as mobile networks, as a percentage of revenue. Cable operators spend five times as much as mobile operators.

Cable networks have historically been less capital intensive than telecom networks. But cable operators also are energetically investing in gigabit internet access, while most telcos are more measured in their spending. In part, that is because of the high cost of upgrading copper to fiber access facilities.

But telcos likely also are measured in their assessment of revenue upside from fiber upgrades. In other words, they might rationally conclude that there is no business case for rapid fiber upgrades, especially given revenue declines and a cable TV advantage in internet access and video services.

source: CRTC

Mobile services revenue generated 51 percent of all service provider revenue in Canada in 2017, the CRTC reports. Fixed network internet access generated 23 percent of total revenue.

Only mobility services and fixed network internet access sources grew; all others declined in 2017, CRTC says. And 34 percent of total revenue is earned by cable TV companies.

source: CRTC

source: CRTC

source: CRTC