Telecom operators over the world are experiencing testing times thanks to declining ARPUs, high churn rates and competition from OTT players such as Microsoft and Google. As connectivity becomes increasingly commoditized and price pressures squeeze bottom lines, the industry’s need of the hour is an opportunity that offers new revenue streams.
With the number of connected devices likely to surpass the number of mobile handsets in the near future, the internet of things (IoT) - with a forecasted market size of $59 billion by 2020 in APAC alone - might just prove to be the panacea the telcos have been looking for. However, IoT represents a whole new ball game and hence requires telecom players to revisit their existing business models and design new strategies in order to maximize their share of the value pie.
In order to ascertain how telecom players can capitalize on this opportunity, it’s important to understand the IoT value chain and the profit pools in them. The IoT value chain comprises seven distinct entities, each having a critical role to play and vying for a share of the pie. These include the gateway, the smart object, the network operator, the “intelligence” provider, the integrator, the service provider and finally the customer.
Now, the basic premise of IoT is seamless connectivity and communication between devices. For that reason, it might seem apparent that the entity that enables this communication - in this case, the network operator - would enjoy the largest portion of the pie. However, this is not true. Tariffs for communication between objects are subject to the same price pressures as those between handsets, resulting in wafer-thin margins. This, along with low switching costs, makes the traditional network operator role less lucrative than desirable.
The question then begging to be asked is: how can telecom operators vie for a larger portion of the pie and what should they do to get into that enviable position?
In order to capture a larger slice, telecom operators would have to extend their influence across the value chain by moving away from their traditional business model and offering platforms for businesses to launch their IoT offerings and providing end-to-end integration. In other words, to make the most of this opportunity, telcos would have to think beyond just connectivity and look to play the role of the enabler, integrator and service provider.
Furthermore, in order to design a compelling value proposition, deep industry expertise would be necessary. Such expertise may not be available in-house and hence an inorganic approach to acquiring vertical expertise may be required. Telefonica’s partnership with Tesla, Vodafone’s acquisition of Cobra Automotive and Maxis’ partnership with Embedded Wireless Lab (EWL) to bring to market a new machine-to-machine (M2M) health monitoring solution are all examples of such inorganic strategies, and could well be a sign of things to come in 2015.
Arvind Arun is an industry analyst for ICT at Frost & Sullivan Asia Pacific
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This article first appeared on Telecom Asia Vision 2015 Supplement December 2014 edition