Who Pays for IoT Communications?

One pesky and important detail we have yet to fully work out is the business model for IoT appliance business models, for consumer appliances.

If you assume a world where nearly every in-home consumer appliance, and probably lots of other stand-alone sensors to track everything from motion to soil moisture to light levels, often on a “stick it on” basis (put a tracking sensor anywhere you want by peeling off the adhesive), and if you assume connectivity has to be provided, the issue is how that connectivity is supplied, and “who” pays for it.

Amazon provides one model, where the appliance supplier pays for connectivity (mobile network) if Wi-Fi is not available, and then uses Wi-Fi as the preferred connection. In that model, connectivity somehow is build into the use of an appliance (does a purchase become a rental?).

Wi-Fi might be an easy choice, as it shifts payment to the owner of the appliance (user pays for the internet access connection). In a few cases perhaps a third party pays (advertising).

That same model could hold for multi-device IoT plans sold by mobile operators, just as they now sell “multiple-device” plans. That has the user paying.

There are exotic possibilities, such as collaboration between a refrigerator manufacturer and one or more large grocers, where an appliance maker works with the retailer and gets a percentage of automated grocery orders. Those might be relatively complex deals for almost anybody but an Amazon.

  

source: Business Insider

source: Business Insider

No End in Sight for Margin Compression or Revenue Shrinkage?

When observers say the “cost” of supplying telecom services is “too high,” and must be made more affordable, the obvious and direct implication is that somewhere in the supply ecosystem, some participants are going to see a reduction in value and revenue, allowing the final end product--internet access--to be provided to “everyone,” at prices they can afford.

As one example, “open source” network elements already have been developed by the Telecom Infrastructure Project (TIP), a consortium led by Facebook to develop open source transmission products that, in turn, reduce the cost of building and operating transmission networks.

Voyager, a long-haul optical transmission system, already been tested by Facebook and European telecom company Telia over Telia’s thousand-kilometer-telecom network. ADVA Optical Networking is manufacturing the device, which also is being tested by other carriers.

By definition, open source  telecom technology is designed to lower networking costs, which means it will shrink the size of telecom equipment markets. Of course, the buyers of such gear--the communications companies--want lower-cost gear and platforms. And some equipment suppliers see an opportunity to disrupt current market leaders and seize a larger role for themselves.

TIP’s OpenCellular project likewise is working on an open source 4G LTE/LTE base station, the hardware and the software.   

So here’s the point: the global telecom industry now is said to be a $350 billion market, including software, hardware and services.

Ericsson and Huawei, among other leading suppliers, have not joined, though Nokia, Cisco, Juniper and others have joined.

The point is that, whatever you think internet access presently costs, it is going to cost less in the future. Of course, there is a corollary. Some participants in the telecom ecosystem are going to represent less value, and earn less revenue, than before. In most segments of the ecosystem other than the application portions of the business, that has been the case for some decades.

The total value of the internet value chain has almost trebled from $1.2 trillion in 2008 to almost $3.5 trillion in 2015, a compound annual growth rate of 16 percent, according to A.T. Kearney estimates published by the GSMA. About 17 percent of that total value is captured by connectivity providers of all types.

Many would argue it is possible, perhaps likely, that that percentage will shrink over the next decade or two. Margin compression is a problem all too familiar in the service provider and platform supplier parts of the networking value chain. But some problems are worse, especially gross revenue shrinkage. The problem is that margin compression virtually always is a sign of shrinking value and gross revenue contraction.

source: GSMA

AI is About "Insights"

Artificial intelligence is an “exponential” technology that will be harnessed in lots of ways, argues futurist Rohit Talwar. Most of those ways will involve application of AI to develop better insights from mountains of raw data.

Forrester Research, for example predicts that “insights-driven” businesses will represent about $1.2 trillion a year in revenue growth by about 2020, essentially representing market share taken from competitors.

There is another potentially-important angle. Over time, virtually all larger companies--and more people within those companies--will be able to use AI to harvest information in a direct way.

While in 2015 only 51 percent of data and analytics decision-makers said that they were able to easily obtain data and analyze it without the help of technologist, Forrester expects this figure to rise to around 66 percent in 2017.

Some observers think that sort of spreading capability also will eventually lead to something we might call “artificial intelligence as a service,” where virtually every business will be able to use AI-driven algorithms to extract business value from data. So eventually, contestants with more data to mine might gain advantage over competitors who have less data to mine, and hence can derive fewer insights.

There might be other analogies. Most of the value of internet of things might well come from the analytics and insights, not the communications function linking sensors with servers.

source: Forrester Research

Value Contribution of "Connection Services" is Dropping

The total value of the internet value chain has almost trebled from $1.2 trillion in 2008 to almost $3.5 trillion in 2015, a compound annual growth rate of 16 percent, according to A.T. Kearney estimates published by the GSMA. About 17 percent of that total value is captured by connectivity providers of all types.

Many would argue it is possible, perhaps likely, that that percentage will shrink over the next decade or two. Where connectivity might today represent something less than 17 percent of total internet ecosystem revenue, that portion could drop to 14 percent by 2020 or so.

More than half the value of the total ecosystem will lie in the app provider realm, while 22 percent is earned by device suppliers.

source: GSMA

source: GSMA

Enterprises Think "Cloud Computing" Very Important

A survey of enterprise executives finds nearly-universal opinion that cloud computing is “very important” for “digital transformation,” a study released by 451 Research indicates. On a scale of 1 to 10, 80 percent of respondents ranked cloud's importance at 7 or above, and 20 percent gave it a 10.

Additionally, enterprises with a mature digital transformation strategy ranked the importance of cloud services 15 percent higher than companies in the early stages of a transformation, the study suggests.

source: 451 Research

Precisely what “digital transformation” means is debatable, but the 451 study emphasizes “competitive differentiation,” especially in four areas:

• business agility
• managing business risk
• Improving operational efficiency
• Improving customer experience

Back to the Future: Narrowband Will Drive Revenue Growth and Use Cases

For virtually all of the last 30 years, networking technologists and business leaders in the information and communications industries have rightly assumed that “faster speeds” and therefore higher data throughput rates were virtually directly related to financial outcomes.

In other words, the ability to send data faster increased the value of communication networks, made more use cases viable, and therefore drove revenues for suppliers of networking platforms, service providers.

So it is noteworthy that in the next phase of value creation and industry development, narrowband platforms might drive the next big wave of revenue.

That could well be the case if internet of things use cases develop as widely as expected. Look at the direction of standards extensions of Long Term Evolution, for example. Standards bodies that traditionally have worked to wring more performance out of networks now are working to create networks that feature less bandwidth.

Cat-1 for LTE networks tops out at 10 Mbps in the downlink, 5 Mbps in the uplink. But Cat-M1, the next development, will feature just 1 Mbps peak data rates, upstream or downstream. The Cat-NB1 standard will support just 20 kbps in the downlink and 60 kbps in the uplink.

Those developments are related directly to the expected use cases for sensor reporting, which quite often entails only uploading small amounts of data, but also communications cost and battery life.

The shift to perceived business use of narrowband platforms is a huge shift. All the direction has been towards broadband (faster speeds, more data throughput) in communications, for decades.

So 5G will be the first networking era in quite some time where, despite use cases for higher speeds, the real use case and revenue upside will come from narrowband platforms.

source: Sequans

5G Might be an Unwanted Watershed

We normally expect that each successive mobile network generation will also produce higher gross revenue or new services. That belief is held because it always has been the case in the past.

So 5G should not be different. We should see incremental revenue growth from new use cases. What we might not see is enough of that "new stuff" to keep pace with declines in revenue from legacy sources.

In that case, we might very well see 5G as a watershed, the first next generation platform that actually leads to lower total revenue, a contraction of suppliers and a reshaping of business models.

There is growing consensus that 5G could well mark a fundamental turning point in telecom industry history. If matters develop as hoped, a huge new wave of revenue growth, apps and services will be enabled.

And the biggest change of all is that the growth will come because computing actually becomes pervasive or ubiquitous, precisely as futurists have been predicting would eventually happen.

But 5G might also mark a historic change in industry dynamics for other reasons, perhaps not so welcome. It already is possible to argue that mobile data revenues and profits will follow the same path as earlier mobile services, such as voice and text messaging.

That is to say, gross revenue eventually will peak, while profit margins contract. If that happens with 4G, and if 5G represents only “more of the same,” clear problems could develop.

The biggest problem is that mobile data increasingly features a market requirement for supplying faster speeds and greater consumption, with incremental revenues that lag the increased supply.

For decades now, we have seen that average revenue per megabyte or gigabyte has fallen, dramatically. That will not change in the 5G era. Not a problem, some might argue. We will simply sell more units. Up to a point, that argument has merit.

It is the same argument suppliers have used in the voice business, and in the capacity business. It works for a while. Eventually, though, the revenue per unit sold does not compensate for the fact that consumers simply require fewer units. In other cases, usage quotas rise, while prices remain flat.

In the voice business, that shows up as declining minutes of use, declining numbers of fixed network subscriptions and declining prices per unit as well. In the capacity business, that shows up as higher usage allotments or higher speeds, at the same or lower prices.

And if that problem shows up in the 4G business, it arguably will get worse in the 5G era, in part because 5G is a more expensive network, and in part because the incremental new revenues do not justify the incremental new cost.

In other words, t is conceivable 5G actually will mark the end of a profitable business model for many mobile operators whose only real option is “access” services.

The problem is that we already can foresee a time when all current revenue streams (voice, text mesaging, mobile internet access) have past their peak, in terms of users, accounts and revenue generation. 5G is not automatically going to fix that.

For many mobile operators,, 5G will be a more-expensive platform that helps supply much-higher data consumption for human users, but at rates that lag unit growth. And though new revenue opportunities should develop in the area of machine communications, much of the upside will be reaped by platform, app, device or system suppliers, not connectivity suppliers.

So 5G is not just “the next generation of mobile.” It might be a generation of mobile that sees much of the industry disappear.