Service revenue growth for the carriers is no longer growing at the high single-digit or double-digit pace of the past (Figure 1).
The Dell’Oro Group Telecom Capex report suggests that worldwide carrier revenue was flat in nominal USD terms for the first half of 2018, recording a fourth consecutive year of stable, low single-digit growth. So it is no surprise that operators feel a tremendous sense of urgency to identify the next growth engine. With the near-term drivers for 5G NR focusing on capacity improvements and improved spectral and cost efficiencies for mobile broadband applications, operators are increasingly excited about the revenue upside with IoT.
Telecom Asia December 2018
We remain optimistic about the IoT opportunity and continue to forecast cellular IoT revenues for both the carriers and the infrastructure radio vendors to grow rapidly over the next five years - our baseline estimates assume carrier IoT revenues will grow ~2.5x over the forecast period, accounting for about 3% of total mobile operator revenues by 2022.
At a high level, the IoT market can be characterized by two coverage ranges: wide-area IoT and short-range IoT. Wide-area IoT uses cellular and low-power IoT technologies to cover devices with a coverage range of up to 50 km in some cases. Short-range IoT, on the other hand, typically has a range of 100 m or less, using technologies such as bluetooth, WiFi, and ZigBee. According to Ericsson’s Mobility Report, roughly 85% to 90% of the estimated 8.6 billion IoT connections in 2018 were connected to the internet via short-range technologies (Figure 2).
The Wide-Area IoT market is comprised of two key segments: Cellular IoT (CIoT) and Non-Cellular IoT (also referred to as unlicensed LPWAN). Due in large part to the pick-up of both NB-IoT and Cat-M1, CIoT accounted for the lion share or more than 90% of the Wide-Area IoT connections in 2018.
From a use-case perspective, it is common to divide the IoT market into two main use-cases: Massive IoT/Massive Machine Type Communications (mMTC) and Critical IoT/Ultra-Reliable Low Latency IoT (URLLC). Operators are increasingly dividing the URLLC use-case into two sub-segments to emphasize the tradeoffs and differing opportunities with extreme latency and reliability.
Excitement for IoT is growing
Massive IoT is driving the lion’s share of the CIoT market today. But there is excitement forming over the Critical IoT use case including Industry 4.0. Vendors are forming partnerships and creating special business units to prepare for this opportunity.
While there is no shortage of IoT and URLLC skeptics, vendors and operators are excited about the fact that the industry is moving from talking about various use-cases to solving real problems. Nokia recently announced it is working with ABB to demonstrate how URLLC can help to clear faults quickly for medium-voltage distribution networks. The leading suppliers are teaming up with operators and car manufacturers to carry out C-V2X demonstrations.
We spoke recently with a supplier that is working with an airline to improve connectivity to ensure vital data is transferred quickly from the plane to the cloud upon landing. The list goes on - Ericsson estimates there are more than ten million industrial and manufacturing sites and more than three million warehouses around the world. Nokia estimates the site opportunity for industrial IoT is roughly twice the size of the existing MBB macro site installed base.
Operators will rely on MBB
Extreme variations in end-user requirements and business models for all the possible use-cases will likely create the need for multiple access technologies. However, it is highly unlikely that all the Low-Power Wide Area Network (LPWAN) standards will play a significant role five years from now. Given that IoT is projected to account for around 3% of total mobile operator revenues by the end of the forecast period, operators will be compelled to utilize existing infrastructure as much as possible to justify their IoT investments - the Dell’Oro Group estimates RAN investments can be kept to a minimum to support the projected mMTC connections over the forecast period.
And just as operators can utilize their LTE and 5G networks to minimize and justify the investments for NB-IoT and LTE-M, operators can leverage their NR eMBB networks to minimize URLLC investments. One of the challenges with the URLLC networks is that they go significantly beyond the radio, and the capex envelope will be stretched. As a result, operators are trying to figure out how to best balance capex and latency/reliability for the various URLLC use-cases.
Even if the concept of connecting machines is not new, it is still early days. Operators are still trying to identify the best opportunities beyond automobiles, and there is excitement forming about the potential upside with particularly critical IoT and Industry 4.0.
At the same time, operators are heading towards unchartered territories and it will naturally take some time to understand this opportunity and fine-tune the impact it will have on both operators and RAN infrastructure vendors. With the right mindset and risk taking, ten to fifteen years from now, it is possible we will look back and conclude that Amara’s Law (humans tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run) is once again true.
Stefan Pongratz is senior director, mobile radio access network and telecom capex market research at Dell’Oro Group