Are IoT Connectivity Providers Ready for the ‘$1 IoT’?

Even though IoT platforms provide CSPs a strong revenue opportunity, there is a recent trend towards the $1/year IoT model. Matt Hatton, founding partner, Transforma Insights, addresses what CSPs can do to address the prevailing market trend.

In recent years communications service providers (CSPs) such as AT&T, Orange, Telefonica, Verizon, and Vodafone have looked to the internet of things as a strong new revenue opportunity. However, downward pressure on the price of connectivity means that CSPs need to adopt new strategies to profitably address the growing opportunity. Let’s examine the options open to CSPs to cope with what we term ‘$1 IoT’, most significantly the need to pivot to being hyperscale IoT connectivity providers.

Transforma Insights has recently published a report, ‘IoT connectivity providers need a hyperscale approach to counter the ‘$1 IoT’ scenario’. That report considers the scenario that, within 5 years, pricing for cellular connectivity for IoT will, for large swathes of connections, decline to just $1 per device per year. That compares to typically around $1 per month for the existing installed base. 

To some extent, we already have $1 IoT today. IoT MVNO 1NCE hit the headlines in 2017 when it launched its €10 ($11.54) for 10 years connectivity, albeit limited to lifetime data usage of just 500 MB. Other MVNOs followed with similarly aggressive price discounting. Justworx has gone about as far as it’s possible to go in terms of extreme tariffing with its Data4Life SIM, which provides for 10 MB of data per month for 30 years at a price of $27. Rather more soberly, Blues Wireless has a $49 for 10 years connectivity offer in the U.S. 

In China, we already see the average revenue per connection for the three mobile operators sitting as low as $1-$2 per year. However, we need to be careful with the headline rate as the enormous volumes of connections are bolstered by many millions that are used only for the initial device activation, so-called ‘bootstrapping’. The real average revenue per device is still somewhat higher than that. Nevertheless, indications from China are that it is heading towards $1 IoT.

There are many positive aspects to more affordable connectivity. Falling barriers to entry mean that there are greater opportunities for new applications that use cellular or swapping in cellular in place of other technologies such as WiFi, Zigbee and others for existing applications. However, it is inevitable that this trend will necessitate a shift on the part of communications service providers in terms of their approach to the market. IoT connectivity needs to be right-sized for the $1 IoT age.  

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Best Ways CSPs Can Mitigate the Impact

The most obvious option is to look at the area of IoT that generates the majority of revenue, namely the vertical application that rides on top of the IoT connectivity. The lion’s share of revenue in IoT is related to the application, typically 50-70%, compared to just 5-10% for connectivity. However, an approach of moving ‘up the stack’ and delivering vertical applications in fleet management, building security or retail, is easier said than done. Vertical markets are highly fragmented, requiring specialist skills. They are also typically highly contested with existing incumbent players. There are, for instance, a plethora of specialist fleet management companies with which any CSP would need to compete. A simple ‘me too’ offering would struggle to gain market share. To succeed in this type of approach, CSPs need to find segments in which they have a ‘right to play’. CSPs can buy into a market, for instance, as seen with Verizon and Vodafone in fleet management or KORE in healthcare. Or, in some cases, CSPs have built expertise in a particular field, such as Telefonica in retail through its OnTheSpot subsidiary which has been supporting retail for 50 years. This approach offers a solution in a few specific circumstances.  

More broadly, CSPs can find continuing revenue opportunities in horizontal advisory and consulting services. Many have market-leading capabilities in this area already, such as Orange Business Services and Deutsche Telekom (via T-Systems). In other cases, CSPs have a strong capability in simply helping IoT adopters navigate the journey of deploying IoT. We call this type of support ‘knowhow-as-a-service,’ and it is not to be underrated. Some CSPs, such as Vodafone, have made very strong moves to scale this type of support services.

For part of the connectivity provider landscape, there is also the potential for consolidation. This won’t affect facilities-based mobile network operators (MNOs) such as AT&T or Vodafone, for whom IoT is just a few percent of revenue. For IoT MVNOs, however, we expect to see continued consolidation as a way to build scale. The current KORE was built on the consolidation of several predominantly U.S.-based MVNOs. The U.K.’s Wireless Logic has recently been on the consolidation trail, acquiring other MVNOs including, Arkessa (U.K.), Com4 (Norway), Data Mobile (Liechtenstein), Matooma (France), and Things Mobile (Italy). 

Some MNOs will rethink their whole approach to IoT, moving to focus much more on being wholesale providers of connectivity. They will operate the network, deal directly with some larger clients, and support large numbers of MVNOs. For smaller MNOs in smaller markets, this is already a standard approach, rather than having a complex IoT-related go-to-market. 

See More: How IoT-as-a-Service Platform Can Transform Industries

Closing Thoughts

The best solution for any CSP to deal with the challenges of price pressure is to adjust their processes, systems and technologies to more efficiently deliver connectivity, i.e., become a ‘hyperscale IoT connectivity provider’. By streamlining customer acquisition, onboarding, and ongoing connectivity, CSPs can scale to support the hoped-for billions of devices at the expected price points. To position themselves as hyperscale IoT connectivity providers (as we term them), CSPs need to focus on seven areas, as indicated below:

Characteristics of a Hyperscale IoT Connectivity capability
Source: Transforma InsightsOpens a new window

CSPs targeting IoT will use a blend of different approaches to better address the market. Whatever the strategy, it will be best to underpin it with this highly scalable, low-touch, lean approach to delivering the underlying connectivity.

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