IoT Might Be Very Big, But Few Can Say What the Business Models Will Be

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.

Of course, a recent survey of executives watching the market admit they lack a clear perspective on the concrete business opportunities. That isn’t as flaky or fuzzy as it might seem. Few would have been able to predict the many revenue models and businesses created by the Internet, either.

On the other hand, any predictions of IoT installed base are close to pure conjecture, if the actual business models cannot yet be fully defined.

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.

None of that is at all unusual. If IoT does wind up becoming a major technology with wide application, the impact will be as profound as observers predict. But big new markets typically grow far more slowly than expected, at first, before eventually becoming ubiquitous.

Of course, IoT hopes are so large because it would propel growth in a range of industries from semiconductors to sensor applications to fixed and mobile communication networks.

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.  

Global Mobile Revenue Growth Slows to 0.5%, Search for Industry Revenue Growth Intensifies

Though mobile services have been the clear growth driver for the global telecommunications industry over the past decade or two, and though mobile data has taken the growth leadership from voice and text messaging, mobile revenue growth rates are slowing, globally.

Global mobile service revenue in the first half of 2014 grew  just 0.5 percent, compared to the same quarter of 2013, to $385.5 billion, according to Infonetics Research.

At the same time, voice usage slightly slowed, caused by an increase in use of over-the-top communications alternatives.

Also, mobile Internet access overtook SMS as the largest revenue generator of mobile data, Infonetics Research reports.

Mobile Internet access revenue rose 26 percent in the first half of 2014, compared to the first half of 2013, and mobile Internet access now drives mobile data services revenue growth.

Despite the growth of mobile data revenues, average revenue per user continues to fall, but at a much slower pace in every region, including developing Asia Pacific, says Infonetics Research.

That is one reason why we now are hearing so much about the Internet of Things, machine to machine communications and connected cars. The next wave of revenue growth, beyond mobile, mobile voice, text messaging and mobile Internet access, must now be discovered and realized.

Does Apple Pay Have to Catch PayPal or Starbucks?

Apple Pay in November 2014  was responsible for one percent of digital payment transaction volume (measured by dollar amount), according to ITG Investment Research.

Google Wallet, which launched in 2011, accounted for four percent of digital payment transaction volume in November 2014.

Apple Pay could pose a major threat to market leader PayPal's current dominance of the mobile payment space, according to Steve Weinstein, ITG senior Internet analyst. PayPal was used by close to half of online consumers in 2012, so the trick is to leverage that position in the proximity payments business (retail store checkout).

In September 2014, excluding Starbucks, PayPal had about 60 percent share of mobile wallet share, followed by Google Wallet at 43 percent.  

In the near term, it is Starbucks that Apple Pay might have to displace, even though Starbucks presently is a “captive” system, while Apple Pay aims to be a general purpose payment system.

“In 2013, payment for purchases by use of all mobile devices in the US totalled $1.3 billion, that was the entire market,” said Starbucks CEO Howard Schultz. “With over 90 percent of those purchases taking place in a Starbucks store, that means we had 90 percent share of mobile payments in 2013 while brick-and-mortar commerce in 2013 totalled more than $4.2 trillion.”

That language suggests Starbucks might eventually leverage its mobile payment system on a larger scale. “Starbucks Coffee Company has cracked the code at tying mobile payments to loyalty and we are now receiving great interest in partnerships from mobile payment companies who see the value of our rewards program and the mobile payment behaviour we established,” said Schultz.

“I can assure you that Starbucks will have a major role to play, both inside and outside of our stores, as the nascent mobile payment industry evolves,” Schulz said.

About 60 percent of new Apple Pay customers used Apple Pay on multiple days through November.

New PayPal customers used the service on multiple days during the same time period just 20 percent of the time, ITG notes.

Apple Pay customers used the service roughly 1.4 times per week and used Apple Pay at the same merchant for future transactions roughly 66 percent of the time.

Apple Pay users employ the service for 5.3 percent of all card transactions and 2.3 percent of all future card transaction volume, the study found.

Apple Pay Retailer Share of Apple Pay Activity
Rank	Merchant	Transaction %	Dollar %
1	WHOLE FOODS	20%	28%
2	WALGREENS	19%	12%
3	MCDONALD'S	11%	3%
4	PANERA BREAD	6%	2%
5	SUBWAY	3%	1%
	Top 5	58%	45%

T-Mobile US Plans LTE over Wi-Fi, Possibly in 2015

Long Term Evolution over Wi-Fi represents one more way mobile and other service providers are combining licensed and non-licensed spectrum assets to underpin their businesses.

As planned, T-Mobile US will use 5-GHz Wi-Fi spectrum to complement its primary use of licensed 4G LTE spectrum, probably mostly in high-density areas, and primarily at peak hours of mobile usage in those areas.

LTE Advanced over Wi-Fi is seen as an approach well suited to small cells that mobile operators plan to deploy in high-density areas, primarily to support higher bandwidth in the downstream.

As mobile operators have learned to rely on offloading data demand to unmanaged Wi-Fi access, they also will be able, using LTE over Wi-Fi, to augment LTE operations based on use of licensed spectrum.

Other advantages include a more seamless end user experience, as users will not actively have to toggle back and forth between the mobile data network and local Wi-Fi. User experience also should be more consistent.

T-Mobile US is expected to add LTE over Wi-Fi as soon as 2015, a way of enhancing its LTE network bandwidth. You might call LTE Advanced over Wi-Fi an example of “Wi-Fi also,” a primary reliance on the mobile network, but augmented by managed Wi-Fi, compared to the way other service providers approach Wi-Fi.

France’s Free Mobile, U.S. mobile providers Republic Wireless and Scratch Wireless, for example, take an approach we might call “Wi-Fi first,” preferring that users connect to Wi-Fi as a first choice, then default to the mobile network only when Wi-fi is not available.

Eventually, firms such as Comcast are likely to follow that same approach when launching mobile service. Google also is said to have looked at the idea.

To be sure, whether public Wi-Fi can compete with mobile has been asked for a decade and a half. Until recently, the answer has been “not yet.” The question was asked of 3G networks and now is asked about 4G networks.

Arguably, two major hurdles will have to be overcome, first, ubiquity of public Wi-Fi access and second, the business model.

For the moment, ubiquity remains the biggest challenge, as it remains difficult to ensure coverage, let alone roaming, on public Wi-Fi today, outside the fairly limited universe of cafes, malls, hotels, airports and other areas where there is high pedestrian traffic.

So far, no service providers have been brave enough to try a “Wi-Fi-only” approach for mobile phone service. Also, virtually all mobile service providers now encourage use of unmanaged Wi-fi “sometimes” for Internet apps.

In other words, no service providers have tried to build a mobile service exclusively on untethered access (hotspot based). The “safest” model for a non-facilities-based provider is “Wi-Fi primary, mobile network secondary.”

T-Mobile US likely will be first in the U.S. market to implement an approach that might be called “mobile first, managed Wi-Fi second.”

In the future, there might be other possibilities. Content consumption already dominates real-time communications as a lead app for mobile and untethered devices. Many tablet owners find “Wi-Fi first” a quite acceptable connectivity choice.

As content consumption grows, on all devices, it is possible a new market niche could develop, even for “mobile phone” service.

One might argue such concepts have been tried before, as with the Personal Handy Phone System. There was some thinking such a service might also develop in the United States, around the time Personal Communications Service spectrum was awarded in the 1.8 GHz band.

As it turned out, PCS wound up being “cellular telephone service.” But all that was before the Internet, before broadband, before the rise of Internet-based content consumption.

It is hard to tell whether all those changes, plus the advent of smartphones and tablets, small cells and more public Wi-Fi, will finally enable a Wi-Fi-only approach to services that appeal to a large base of consumers.

Google Delays Next Google Fiber Decisions

Google is delaying any announcement of  the next possible Google Fiber markets until 2015, a move that is not necessarily unusual, for a firm new to the business of building expensive and laborious local access networks.

The delay affects Portland, Ore., in addition to other areas including  Atlanta, Charlotte, Nashville, Phoenix, Raleigh-Durham, Salt Lake City, San Antonio and San Jose.

To be sure, a number of other potential Google Fiber gigabit network deployments also seem to be on hold, at least until early 2015.

In February 2014, Google Fiber announced that it was exploring further expansion into nine metro markets, adding to operations in Kansas City; Austin, Texas; and Provo, Utah.

At least in part, Google might want to spend a bit more time figuring out how to efficiently build multiple networks at once. There is a learning curve, even for experienced suppliers of optical fiber access networks, and Google might want to ensure it has optimized its processes.

But there might also be other complications. In at least one of the potential markets--Portland, Ore.-- unfavorable tax laws might soon be revised.

Tax rate uncertainty or high tax rates almost always have the effect you would expect, namely a more-cautious attitude towards investment.

But scaling major construction projects efficiently, in jurisdictions with differing rules, also is an issue. Even veteran companies with a long history of local access network construction have found there is an experience curb for fiber-to-home projects.

“I joined AT&T in 2008 and I remember around 2012 looking at some charts and the cost of speed hadn’t really had a breakthrough, because 80 percent of your deployment in broadband is labor based,” said John Donovan, AT&T senior executive vice president for architecture, technology and operations.

“And then all of a sudden you have vectoring in small form factor stuff and all of a sudden a little bit of an investment by our supply chain a few standard things and we start to take a 25 meg on a copper pair and then we move it to 45 and then 75 and then 100 which is on the drawing board,” said Donovan.

The point is that the underlying technology used by cable TV operators and telcos has been continually improved, providing better performance at prices useful for commercial deployment.

Operating practices also are becoming more efficient. Google Fiber has been able to work with local governments to streamline permitting processes and other make-ready work in ways that can lower costs to activate a new Internet access network using fixed media.

Google Fiber also pioneered a new way of building networks, getting users to indicate interest before construction starts, and building neighborhood by neighborhood, instead of everywhere in a local area.

That changes gigabit network economics. As has been true for nearly a couple of decades in the U.S. market, for example, competitive suppliers have been able to “cherry pick” operations, building only enough network to reach willing customers, without the need to invest capital in networks and elements that “reach everyone.”

That makes a big difference in business models. A network upgrade that might not have made sense if applied across a whole metro network might well make sense in some parts of a city, where there is demand.

Also, every new supplier of Internet access goes through a learning curve, generally operating inefficiently at first, but improving as experience is accumulated.

“And then we are getting better at the deployment side of the business as well,” said Donovan. “So our average technicians and our best technicians are converging.”

It is possible Google simply wants to be sure it can build in multiple areas effectively and efficiently. But a favorable change in tax laws in Oregon might also be an issue.

Some might conclude that Google, perhaps under pressure to control costs and improve profit margins, might also be evaluating how much money it wants to spend on Google Fiber, as well.

IoT Market Won't Be as Big as Forecast, Near Term

Despite a recent change of terminology--”Internet of Things” being preferred over the original term “machine to machine,”--it is likely that most of the incremental application and access revenue generated in the broad IoT markets will be created by M2M applications such as sensors.

Perhaps notably, Gartner in 2014 named “Internet of Things” at the peak of the hype cycle, after noting in 2012 nd 2013 that the peak of  unrealistic expections was approaching.

What that suggests is that observers soon will become aware that progress is not as rapid as once believed, deployments occur much more slowly than expected and many even begin to doubt the size of the market opportunity.

Eventually--and that could mean a decade or more--IoT has a shot at being as transformational as many now expect. But it is almost certain a period of disillusionment is coming: it nearly always does, when new technologies appear.

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.”

That is no longer a serious problem, and the inflection point everywhere in the developing world seems to have happened between 2002 and 2003.

Before 2003, one could assume that most people in the developing world could not make a phone call easily.

A decade later, most people use mobile phones. That would have been impossible to envision, in advance of the reaching of the inflection point.

That likely will be the case for IoT as well.

On a global basis, manufacturers will invest $140 billion in Internet of Things solutions between 2015 and 2020, a study by Business Insider suggests.

Likewise, the Internet of things and the technology ecosystem surrounding it are expected to be an $8.9 trillion market in 2020, according to IDC.

Those forecasts, history suggests, will prove inaccurate, in the near term.

IDC said the installed base of connected things will be 212 billion by the end of 2020, including 30.1 billion connected autonomous things (devices and sensors working independently of any human interaction).  

IDC estimates IoT spending at $4.8 trillion in 2012 and expects the market to be $8.9 trillion in 2020 and have a compound annual growth rate of 7.9 percent.

Manufacturers will be the earliest adopters of IoT solutions and will invest heavily in new IoT solutions for factory floors, IDC predicts.

About 17 percent of automotive companies are using IoT devices in the production of their vehicles, for example.

IoT likely will be quite significant, eventually. But near term progress is likely to disappoint.

U.K. Mobile Investment in "Notspots" Also Not Profitable?

U.K. mobile operators have agreed to invest £5 billion to alleviate coverage "notspots" acorss the United Kingdom by 2017, ensuring voice and text messaging access on the part of the biggest four mobile operators across 90 percent of the U.K. land mass by 2017.

Had the voluntary agreement not been reached, the U.K. government was prepared to force mobile operators into mandatory roaming agreements.

The new investments will extend coverage from all four mobile operators to 85 percent of geographic areas by 2017, up from 69 percent at present.

As with most universal service requirements, it is not clear the new coverage actually will have a payback. That is generally why the notspots exist in the first place. Assume a rural tower with a transmitting radius of 1.5 miles, representing nine square miles of surface area, in an area with less than 20 homes per square mile.

At 10 homes per square mile, total addressable locations are 90 locations. Assume two persons per home, or 180 potential accounts.

Assume the four contestants decide to collaborate on tower sites, resulting in a situation where two mobile providers share a single tower, with a subsequent need for two new sets of towers to serve each rural area.

Assume market share winds up roughly split on each of the two new sets of towers. Assume 100 percent take rates, implying 90 accounts per tower, and average line revenue of about GBP21 (USD33).

That suggests per-tower revenue of about $2970 a month, a blended rate including both prepaid and postpaid accounts.

Assume monthly tower rents are $3800 ($1990 per carrier, two carriers per tower). You see the problem: revenues do not cover the cost of tower site leasing.

But perhaps 75 percent of U.K. mobile towers are owned, not leased. In that case the better comparison is the cost of building and operating a tower.

Assume a cost of about $150,000 to create a tower site. If that enables $35,640 in new revenue, the business model works, even at 10 percent interest rates. The problem, of course, is that the new investment will not produce that amount of incremental revenue.

Most customers already buy service, even if that service is affected by limited coverage, as the big problem is partial coverage, not complete lack of coverage. So it would not be unreasonable to assume single digit incremental customer revenues. In that case, the payback might never be obtained.

But that is true of most universal service investments. By definition, there “is no business model.” As always, service providers will rely on profits from urban cells to essentially subsidize rural cells that might actually lose money.