IoT will have little impact on revenue for most mobile operators

Michele Mackenzie and Tom Rebbeck/Analysys Mason

The IoT has become a persistent theme in telecoms industry conversations. Strategic plans for operators incorporate it, and for some operators (including Orange, Verizon and Vodafone), the IoT is of central importance.

The worldwide mobile telecoms industry is forecast to grow at a minuscule 1% CAGR between 2016 and 2025, but Analysys Mason calculates that revenue from IoT solutions enabled by mobile operators (total spend, including devices, applications and connectivity, on IoT devices with a SIM) will exceed $200 billion in 2025 at CAGR of 18%. This is equivalent to 22% of total spend on mobile services worldwide ($888 billion) for the same year.

However, IoT connectivity revenue will only reach $28 billion by 2025, representing just 3% of worldwide mobile telecoms revenue. If the IoT is to become a new growth area within the telecoms industry, it will need to contribute significantly more revenue than connectivity alone can generate. 

While connectivity represents a small proportion of total spend on IoT solutions enabled by mobile operators, by 2025, revenue from application development and enablement will represent $123 billion, and hardware will account for $50 billion. To capture a larger share of hardware or application revenue, mobile operators should consider the following strategies: 

Create an independent entity to target IoT opportunities independently of the legacy business. Its performance metrics should be commensurate with a new growth area, and it should be granted autonomy for investment decisions (for example, Bouygues Telecom and Vodacom have demonstrated how operators can use separate units to develop IoT solutions).

Build platforms and enablers to operate in new areas of the value chain. Some operators have separate R&D and ICT divisions that target specific industry sectors. Deutsche Telekom’s ICT business, T-Systems, developed a healthcare platform (e-Health Connect), which supports IoT applications such as remote patient monitoring. Verizon developed ThingSpace, and Indosat has developed NexThing: both are developer ecosystems.

Foster partnerships to bring IoT propositions to market. Even operators with an established IT division (like Deutsche Telkom) depend on partnerships for certain components. Most operators must build partnerships to enter new areas of the value chain, either in capabilities such as application enablement-platforms, or by bringing end-to-end solutions to market. 

Make bold moves in investment and acquisition. Mobile operators have been relatively cautious in terms of acquisition in the IoT space. There have been a couple of major exceptions: Vodafone acquired Cobra to compete in every part of the automotive IoT value chain. Similarly, Verizon made a spate of high-profile acquisitions totaling $3.5 billion to compete in fleet management. On a smaller scale, Telia has invested in Springworks to enable its connected car platform, and it recently acquired Faltcom to compete in smart-city applications. 

The IoT currently represents a tiny share of operator revenue-even for operators with a large IoT business. For example, Vodafone reported that the IoT accounted for only 1.3% of its revenue in 3Q 2016, and Verizon reported that the IoT accounted for only 0.8% of its revenue in 4Q 2016.

For the IoT to grow to a sizable share of revenue and be considered an important driver for growth, operators must capture some of the $123 billion application revenue or $50 billion hardware revenue that we forecast for 2025. Addressing these areas of the value chain will require significant investment and carries a higher risk of failure.

EBIT margins which are relatively high for connectivity at around 10% will likely be lower in these areas. However, if operators want to remain visible in IoT and develop strong revenue streams, they will need to increase their appetite for risk and invest accordingly.

Michele Mackenzie is a principal analyst and Tom Rebbeck is research director for enterprise and IoT at Analysys Mason

This article was first published in Telecom Asia May-June 2017 Issue

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