Vodafone’s The IoT Barometer 2017-2018 reports that the number of companies implementing large-scale IoT networks with 50,000+ connected devices doubled between 2016 and 2017. In China, 20% of cellular connections are IoT, with nearly 1 million connected devices already used for shared-economy mobile payments such as bike-sharing services. We expect an explosion in the IoT market so that by 2020, IoT will account for the majority of mobile connections.
But IoT is a Drip Feed
Carriers must expand their focus from connecting people to connecting things, but challenges abound. Competition with providers of unlicensed-spectrum technologies (“small wireless”) such as LoRa is fierce. And telcos looking to move up still face the perception of being mere pipe/SIM providers. They aren’t being helped by the plethora of operators perfectly comfortable doing just that.
Attracting large clients and a high market share is the only viable option carriers have. An IoT SIM card delivers only 10% of the revenue that a consumer would, while the value of pipe connections represents just 2% of the IoT industry value chain.
IoT Doesn’t Scale
The Internet of Things is extremely fragmented, and doesn’t benefit from economies of scale. Incubating applications requires deep integration with many industry- and enterprise-level production and service processes, meaning that telcos need expertise in many verticals. Before operators can develop large-scale industry-wide applications, they must resolve the thorny questions of which industries to choose, and how to apply what they learn from one client to another.
New Business Models Are Taking Shape
Leading operators usually break into the upstream and downstream ends of the value chain first with application services and devices, extending from the two ends to tap value from ICT industry customers and avoid pipefication. The typical model for this is “1+N+X”, where:
1 = Infrastructure-as-a-Service (IaaS) + Connectivity Management Platform (CMP): Infrastructure and connection management services, where operators have inherent expertise.
N = Device Management/Application Enablement Platform (DM/AEP): Construction of enablement platforms with partners.
X = Software-as-a-Service (SaaS): Opening up capabilities and tapping value from ICT industry customers.
IaaS and CMP are the basis of 1+N+X, with Platform-as-a-Service (PaaS) capabilities enabling the connection and management of devices in scenarios with a high number of connections or high concurrency, which is then expanded to enablement platforms, SaaS applications, and industry solutions. At each successive layer, value from IoT increases.
Six Telecom Business Models for IoT
There are six standard connectivity-based business models for telco IoT, with each successive model providing more services provided and greater value.
IaaS: This is the traditional M2M model, where carriers sell SIM cards, but don’t know where or how they’re used, providing general network guarantees, data packages, and billing functionality only.
PaaS: Carriers construct a CMP for the IoT market, providing SIM card management services and customer-facing services such as self-service allowance queries and top-ups, and volume activation/shutdown. At this stage, the operator can also adopt a message-based billing method, as well as a traditional data-usage model. Because CMP provides a link to industry customers, operators can package cloud services on top of connectivity services, and move into the module market.
PaaS+: This typical platform model includes building an AEP, letting carriers integrate comms capabilities such as Voice, SMS, Video Calls, and Data Storage with third-party capabilities such as Voice Semantic Identification/Control, Image Recognition, and Mapping, and opening them to developers and industry customers via Cloud API. In addition to a billing model based on data usage or messages, customers can be billed according to API invocations or function packages.
SaaS: Telecoms build general-purpose industry suites by refining solutions for common industry requirements. Customers need only do a small amount of development and customization of the suites for specific scenarios such as Smart Homes, Smart Metering, or Warehouse Management. The billing model can be based on either the number of connected devices or the industry suite.
SaaS+: This is basically the previous model with an extra layer. Carriers provide connectivity as well as device and upper-layer application platforms, integrating the upstream and downstream ends of the chain from end to end, while enabling back-end O&M. By generating value for industry customers, operators can acquire even higher returns, while distributing value through revenue sharing. This model suits new application scenarios in smaller industries that are easy to enter yet valuable.
Business-as-a-Service (BaaS): This is the most advanced model, where telcos obtain a business license and operate across sectors.
The first three models are horizontal models; operators need only offer standardized products or services and not differentiated ones for diverse verticals. Profits derive from economies of scale. The last three models are increasingly vertical, expanding from connectivity/platforms to either end of the chain. As involvement increases, so does service complexity and value.
After assessing some of the early successes and failures in telco IoT, we believe PaaS, PaaS+, and SaaS+ as the best options moving forward. Let’s have a closer look at what each of these models looks like.
Connection Expert (PaaS): Connectivity and cloud are the core here. Operators provide basic bundled cloud services, meeting industry cloud service requirements while increasing service stickiness, avoiding price wars, and increasing Average Revenue Per Connection (ARPC). This model suits newbie IoT carriers who have a strong network foundation but lack IT service capabilities and experience. SingTel is a good example.
Platform Provider (PaaS+): This model offers rapid integration and TTM as well as the cross-selling of products such as carrier cloud and big data. Through open APIs, an IoT ecosystem is created with development tools, operating environments, device management, data aggregation and processing, business analysis, and smart decision-making. There’s vast potential with this model, hence its currently popularity among operators with ecosystem capabilities, such as AT&T and Telefonica.
Solutions Integrator (SaaS+): This model is basically SaaS and devices, with value shared with industry players. Operators choosing this model need diverse competencies and package solutions that include terminals, software apps, and integrated services. They also need strong network and IT capability, and a deep understanding of their target industry. Vodafone and DT are two of the leaders here.
IoT Service Development
Typically there are three steps in carrier IoT service development. The first involves providing connectivity services for verticals and then quickly scaling up. The second is where platform services are provided to companies that want to build IT capabilities, with step-by-step enablement of industry players on the IoT platform. And at the third step is that operators provide E2E solutions for three to five vertical industries after refining, then optimizing, and finally standardizing their solutions.
Connectivity is where operators are strongest, and platforms are key to their IoT success. Initially, many industries and application developers demand reduced development costs and fast TTM. The first carrier to provide open cloud-based platforms, low-cost IaaS (connections and cloud), open access management, and extensive pre-integration capabilities will lead the way in ecosystem building, obtain a wealth of applications from industry partners, and acquire massive amounts of accompanying data.
But how should operators leverage IoT platforms bring together ecosystem partners and tap value from industry and applications based on existing connections? There are three models to follow:
CMP and Industry Enablement Platforms: This model focuses on a Connectivity Management Platform where multiple industry enablement platforms can coexist. Industry DM or AEP is operated with partners, with revenue shared. China Telecom, for example, focuses on public services, IoV, and home appliances, with cloud and/or infrastructure cloud services and CMP at its core. China Telecom has also built an IoV cloud enablement platform with its partners using IaaS and a CMP that provides services for automakers and after-market companies. They’ve also developed the market by working with partners to expand into pre-installation and after-sales services, sharing revenue and value.
CMP + SI: This involves CMP building, G-PaaS capability decoupling, and multi-vendor co-construction, focusing on SaaS and integration services. Deutsche Telekom built its multi-IoT service platform with open, universal platform capabilities, bringing in a raft of platform providers such as Huawei, SAP, and Microsoft. DT also focuses on its own SaaS, providing rapid integration service capabilities, IoT ecosystems, and consultancy services for industry players.
Centralized CMP + SaaS Operations: China Mobile’s IoT subsidiary, OneNet, carries out top-down planning, service standardization, and full network centralization operations. Underpinned by its network, it has moved into downstream development, launching its own brand of communications modules to carry out upstream development, build an IoT platform, (also called OneNet) and collaborate with others to provide vertical industry applications. At present, China Mobile has sold close to two million own-brand IoT modules that are used in areas like public utilities, cars, and consumer electronics.