Current Analysis Best Practices in M2M Operator Perspective

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Best Practices in M2M: The Operator Perspective

Advisory Report

Kitty WeldonPrincipal Analyst, Enterprise Mobility

July 2010

Contents

Introduction

What is the Revenue Opportunity for M2M services, and How Do Operators Participate?

Vertical Markets

All M2M Connections are Not Created Equal

Cost Model for M2M

Cost Model for Wireless Data Services

Best Practices Examples

Conclusions


Best Practices in M2M: the Operator Perspective

Best Practices in M2M: The Operator PerspectiveTh e market opportunity for wirelessly connecting machines, ranging from sensors, telemetry devices, ATMs/Point of Sale terminals, meter readers, vehicles, home healthcare devices, remote computers and peripherals, to consumer electronics devices such as digital cameras, picture frames, e-readers and Personal Navigational Devices, is the source of a lot of excite-ment and speculation in the wireless industry. While wireless operators, device OEMs, module manufacturers, and M2M solution providers have reason to be optimistic, the actual revenue potential, growth rates, and most importantly, the profi t margins associated with M2M deployments remain a source of some confusion. While operators are seeing a growth in activations across both business and consumer segments, the relatively low Average Revenue per User (ARPU) associated with many M2M deployments has led to worries as to whether these services can yield a profi table, self-sustaining business. Compared to the ARPUs of $40-50 a month that operators are used to seeing from their traditional high-end consumer and business subscribers using smartphones or laptops, a data service for an M2M connection often generates as little as $3-4 per line per month.

In spite of this, many operators are entering or becoming more aggressive in the M2M market, and remain optimistic that it is going to be worth their while. Not only are the volumes potentially so large as to off set the low revenues/connection, but there are other forces at play. Just like any telecoms service, the OSS/BSS stack that provides provisioning, billing, network management, trouble-shooting, and customer support has an analog in the M2M world in the form of connected device platforms that streamline and automate these processes. Th ese have the potential to bring down the costs of delivery so that they are in line with revenues, yielding a profi t margin that is acceptable or even high, and they also support high volume deploy-ments. Some of these platforms also allow the types of data plans associated with M2M to be adapted to better fi t the applications; rather than off er a bulk unlimited data plan or data pool, operators want to be able to allow enterprises (and the enterprise’s consumer customers) to pay by the book, session, bucket of photos, transmission speed, amount of data transmitted, or on a prepaid basis. Multi-country roaming is also a prerequisite for many global M2M deploy-ments, and aggregators and global operators are all vying to provide the most attractive rates with SIMs that provide in-country or fl at rate uniform pricing.

So how are wireless operators approaching the M2M market, how have they organized to off er M2M services, which segments do they see as most viable, are there solid indications of traction, and how they have chosen or internally developed platforms to streamline market entry and service delivery? Th ere are a variety of diff erent approaches to the M2M market, but regardless of their specifi c go-to-market strategy, the majority of operators that have entered the market are optimistic about their prospects.

What is the Revenue Opportunity for M2M services,and How Do Operators Participate?Operators providing M2M services clearly gain revenues from incremental data subscriptions, and many operators have disclosed that the number of M2M SIMs they have in active deploy-ment are already numbering in the millions. In the U.S, AT&T has stated that it expects to



be connecting over 20 million “machines” in 2011, including both consumer and industrial devices, citing 1.1 million new activations in Q1 2010, for a base of 5.8 million connections. Verizon Wireless claims about 7.3 million connections (a high percentage of which comes from its GM OnStar service, and T-Mobile claims it has had 100% growth in M2M connec-tions every year for the last four years. In Europe, Orange is on target to reach 2 million this year, and saw 40% growth in M2M connections in 2009, Vodafone provides approximately 5 million M2M connections, and Telenor cited 1.4 million in 2009. In Asia, NTT DoComo has stated that they have approximately 1.6 million SIMs in service. While this is only a representative sample (many providers such as Sprint, T-Mobile, Telefonica and KPN have not disclosed their connections) it provides a glimpse into the size of the installed base.

Beyond data connection revenues, operators can also generate M2M revenues from provid-ing end-to-end systems integration for key applications such as smart grid deployments and asset/fl eet management, from off ering managed/hosted M2M services at their data centers, or from data mining - i.e. the collection and analysis of data that can be turned into useful information for utilities, manufacturing companies, auto insurance companies etc., that want to off er value-added services to their end customers. Th e possibility of off ering tiered services for diff erent device types, at diff erent speeds, or with unique classes of service and prioritiza-tion schemes, or for bundling multiple devices associated with a single subscription are other options to grow revenues.

Operators diff er in their strategies to off er “beyond-data” value-added services; large opera-tors tend to off er project defi nition, design, deployment and support to enterprises looking to deploy M2M applications, becoming a kind of aggregation point for third party solutions vendors. Th ey do not necessarily provide end to end integration, but they bring together the often fragmented M2M ecosystem participants through alliance partnerships. Th eir role also includes empowering companies such as auto manufacturers, and consumer electronics providers to become de facto service providers. Many large operators such as AT&T, Sprint, Orange Business Services, Telefonica and Vodafone have formed dedicated M2M organiza-tions, which may be further segmented by industry vertical. Some operators have separated out consumer from business M2M, refl ecting the diff erence in the B2B and B2C segments’ distribution, support, revenue realization, and reporting requirements.

Forecasts for the revenue opportunity vary but most operators and analysts expect that compound growth rates over the next fi ve years will be in the 25%+ range, with estimates of the numbers of devices to be connected ranging from 200 million to 1 billion world-wide by the end of 2014. Th ere are some regional diff erences. U.S. operators are already seeing high demand from connected consumer electronics such as PNDs, netbooks/tablets and e-readers, while European operators note that the majority of connected devices tend to be in industrial segments such as equipment monitoring, fl eet management and supply chain optimization, with consumer (B2B2C) opportunities such as home health care, automotive telematics, home energy/security, and consumer electronics representing the next wave of growth opportunity. Many operators are participating in RFPs from large utilities that have either been mandated to implement smart grid/metering programs (as they have in EU countries) or who see smart energy usage as a key component of “green” initiatives for conservation or for eligibility for US federal stimulus money.



Vertical MarketsWhile most operators are targeting the same verticals today including fl eet management, au-tomotive telematics, remote equipment/asset monitoring, home health monitoring, consumer electronics, and smart energy/meter reading, the opportunities for future M2M applications are much more extensive. Th e build-out of 4G networks will also provide new opportunities for applications such as high-defi nition telemedicine and video surveillance. Th e following table depicts current and future opportunities in M2M with examples of customers that have deployed solutions.

Verticals M2M Apps Today M2M Apps Future Customer ExamplesManufacturing Machine Diagnostics and Telemetry

RFIDAsset, Container and Cargo Mgmt/TrackingInventory Control

Industrial Automation and ControlReal-time Monitoring

Konica MinoltaUSA Technologiese.l.m. leblancSNCBMichelinONAsset

Financial/Retail POS TerminalsATMs/KiosksVending MachinesWAN Back-up

Lottery MachinesLoyalty/Coupon programsSmart payment cards Parking and transportation ticketing

CCVParkeon, Selecta VeriFoneAxaltoBanksys

Automotive Concierge ServicesIndustrial fl eet MgmtRemote engine diagnostics

Intelligent Grid/connected carInCar EntertainmentPersonalized Insurance

OnStarBMWDaimler ChryslerHertzProgressive InsuranceDrivecamGuidePointTransicsCtrack/DigicoreTaxameter Centrale

Energy and Security Meter Reading PilotsHome/Industrial security monitor-ing/alarmsAutomatic Vehicle security

Comprehensive smart energy/smart Grid initiativesNext gen video-enhanced home and industrial security and energy servicesVideo Surveillance

Alarm.comLok8USecuritas DirectUnion FenosaPrimagazAMSPendumDTE Entergy

Healthcare Home Healthcare Monitoring Hospital patient and equipment monitoringRemote telemedicine

BL HealthcareVitalityCardionetOmnilinkSorin GroupSt Jude Medical

Consumer Electronics

PNDS, e-Reader, pet collars, netbooks

Cameras, gaming devices, con-nected home electronics, tablets/MIDs,Electronic Billboards/digital signage

Garmin TomTomAmazon Kindle PandigitalApple iPad

Table 1Vertical Markets for M2M



All M2M Connections are Not Created EqualEven when it comes to providing pure connectivity, the dollar per connection per month for an M2M application may vary considerably. While polling a meter several times a day to upload a short data burst of information on energy usage to a remote server does not require high speed connections and may only yield an ARPU of $3 a month to an operator, at the high end, applications such as wireless digital signage used in electronic billboards, real-time applications for monitoring medical devices, patient location and health status, or video sur-veillance for enhanced security applications may yield signifi cantly higher ARPUs. Telemedi-cine applications that require high quality images for X-rays, cat scans, and MRIs for remote diagnosis will also provide higher revenues and are likely to leverage 4G network capabilities coming on-line next year.

Regardless of the application, the basic categories of costs to an operator for off ering data connectivity to and from devices and remote servers are fairly consistent, and it is these costs that dictate potential profi ts.

Cost Model for M2MWireless operators off ering M2M have to deal with the following costs of delivering service:

• Customer Acquisition (marketing/advertising/promotion)

• Implementation and Management

o Device Certifi cation costs

o Subscriber provisioning costs

o Customer “on-boarding” costs (account creation, confi guration, rate-plan association)

o Pricing/rating platform costs (including creation and publication of new rate plans)

o Customer support: tech support calls, billing calls, escalation calls

o Bad Debt from charge disputes

• Network usage/depreciation/amortization of assets

Of these elements, the customer acquisition costs (which include marketing, distribution, and device subsidies, if applicable) make up approximately 40% of total costs; implementation and management (including device certifi cation, on-boarding, i.e. account creation and rate plan implementation, provisioning, technical/billing customer support, escalation, and dispute management) contribute an additional 30% of costs; and the costs associated with the radio and core network usage make up an additional 30% of costs. A good service delivery platform can signifi cantly decrease the costs associated with implementation and customer manage-ment.



Cost Model for Wireless Data ServicesUsing a similar analysis to look at traditional wireless services, with sample average revenues, costs and margins, it can be shown that it is possible to achieve high margins for M2M, with the use of a good platform. For example, although handset-oriented wireless services may yield average ARPUs of $50 and profi t margins of 44%, an M2M connection (even one which is conservatively pegged at $3 ARPU) can yield margins of 50% after service delivery and customer management costs have been brought down. Price, costs and margins in the model are illustrative only and are not associated with a specifi c service provider.

In addition to cost reductions from automated service management, operators off ering M2M services do not generally have to subsidize the cost of the end-device, which in the handset world historically lowers operating margins by several percentage points each quarter. On the consumer side operators are also sharing the burden of marketing and advertising M2M solu-tions with the device OEM and/or the retailer or other distribution channel partner. With both lack of subsidy and shared marketing, some portion of customer acquisition costs can therefore be eliminated, providing even higher margins for M2M services. Th e churn rate as-sociated with M2M services is also very low. On the industrial side, a SIM in a meter reader or other telemetry device tends to be in the fi eld for many more years than within a handset; on the consumer side a device OEM such as an e-reader or PND manufacturer is likely to remain with the same operator for a long time, although the consumer may swap out devices every 1-2 years. Th e integration with the operator of the customer’s back-end information systems, the volume discounts they enjoy and the co-marketing relationships make these partnerships quite “sticky”. M2M providers get the benefi t of low churn and simultaneous lack of device subsidy, which in the traditional wireless world are mutually exclusive.

Table 2M2M and Wireless Services Margin Model

Metric M2MWireless Service

Average Rev per sub $3.00 $50.00Customer Acquisition Cost/Additional Sub 0.75 13.00Service delivery and Customer Mgmt Cost/Sub 0.15 10.00Network Usage per sub 0.60 5.00Total Costs/sub $1.50 $28.00Profi t/sub* $1.50 $24.00Margin* 50% 44%

*Depreciation removed i.e. EBITDA Profi t and Margin



Best Practices ExamplesTaking a look at a variety of wireless operators and how they are approaching the M2M market provides further insight into the diff erent ways that they view the opportunity. Th eir M2M organization, vertical approach, service delivery automation capabilities, and the way they view their role in the marketplace are all somewhat unique. While it is still too early to say that operators are generating signifi cant revenues or profi ts in M2M, the SIMs in deploy-ment and projected growth rates cited by operators is encouraging.

AT&TOrganizationAfter over a decade of participating in the M2M market, but often going to customers indirectly through aggregators, AT&T revved up its activities in late 2008, seeing the potential to tap a larger opportunity. It launched a dedicated business unit, the Emerging Devices Organization, devoted to bringing to market a wide range of wirelessly connected devices, focused in particular on consumer electronics and embedded computing devices. While industrial M2M initiatives are managed separately, under the AT&T Business Solu-tions (ABS) group, in May 2010, the Advanced Enterprise Mobility Solutions group was launched by ABS to drive growth and innovation in enterprise mobility, including the B2B M2M segment. AT&T is ensuring that it has the right organization in place to focus on both B2C and B2B M2M opportunities and both groups have dedicated product market-ing, pricing, support, sales and operations teams under them that can respond quickly to changing market dynamics.

Connected Device Platform ApproachAT&T had already developed its own basic service platform, Enterprise On Demand, which provides SIM inventory management, self-activation, and simplifi ed billing, and had been certifying 3rd party devices to work on its network since 2005 (with approximately 750 devices now available). In May of 2009, AT&T joined forces with Jasper Wireless, and launched the AT&T Control Center, which enables rapid, highly automated, large-scale wireless deployments for personal and industrial devices, and can lower time and cost barriers, simplify the deployment lifecycle, and enable effi cient operational management and trouble-shooting of deployed devices. AT&T positions the platform as a competitive diff erentiator for its customers; not only is it bringing down the cost of its internal opera-tions, but the tools it provides to the enterprise customer such as analytics reports, fl exible plan and subscription generation, automated provisioning, custom alerts, and real-time diagnostics, essentially allows the enterprise or OEM to become a service provider, and are an integral component of the operator’s marketing messages. AT&T and Jasper launched a Connection Kit for Device Developers Developer Kit at CES in January 2010, which helps developers to kick-start their applications with test SIMs, a benchmark device, access to the Control Center, and accelerated device verifi cation.

Segments and Customer TractionWithin M2M, AT&T focuses on utilities, fl eet management solutions, and consumer elec-



tronics. Named AT&T M2M customers include BMW, Hertz, USA Technologies, a major security alarm monitoring provider, several utility customers, and on the consumer side, the Amazon Kindle (which AT&T took over from Sprint), and a number of home health care monitoring devices announced in March. Th e operator is focused on expanding to global customers and sees container, solar and remote patient monitoring as future vertical focus areas. AT&T brands its solutions as M2M 360, suggesting that its network assets, experi-ence and eco-system, innovative service platforms, and a decade of proven achievements provide it with a complete (i.e. 360 degree) set of capabilities. As of Q1, AT&T disclosed that its connected devices subscriptions had grown 58% from the previous quarter, with 1.1 million net additions, for a total base of 5.8 million connections. Th e growth rates in Q4 2009 and Q1 2010 suggest that the operator’s organization, service delivery approach, and vertical focus are paying off .

VodafoneOrganizationVodafone has been on a focused M2M path since 2009 when it launched an ultra-compact SIM chip, touted attractive tariff s for international roaming, and demoed a web-based cus-tomer portal at CEBIT. Later in the year it announced it had formed a 100 person team to focus on M2M. Its position as the largest wireless network operator in Europe has made it a likely go-to-provider of M2M services for European enterprises with pan-European facili-ties or customers. Its global compact SIM (as well as traditional M2M SIM form factors) can be mounted in the factory and works anywhere within the EU 27 countries as well as some countries in AP and Africa, off ering in-country local pricing, which is very competi-tive compared to tariff s associated with roaming agreements. In February 2010, Vodafone announced that it had joined the nPhase JV, which will allow it and off spring Verizon Wireless to theoretically provide cost-competitive global connectivity in both the US and Europe, although currently the two operators’ service delivery platforms remain separate.

Chart 1AT&T M2M Connected Devices Growth Q2 2008 – Q1 2010



Qualcomm’s Gobi chip will be used to bridge the CDMA to GSM network disparity that has made it diffi cult for the two operators to provide seamless global roaming.

Connected Device Platform ApproachVodafone has developed its own service delivery platform, launched in March 2010, which provides automated SIM provisioning, reporting/alerting with usage thresholds, API integration with customers’ systems, and on the fl y tariff charge management. Th e operator doesn’t position the platform as a competitive diff erentiator but sees it as providing essential capabilities for connectivity and remote SIM management.

Segments and Customer TractionVodafone is targeting automotive, smart metering, consumer electronics, and healthcare as key verticals. Named customers include AMS, a New Zealand provider of smart metering systems, bglobal, who implemented a smart metering program to manage energy consump-tion (where Vodafone itself was the customer), Technocon, a theft detection provider, Ctrack/Digicore a provider of ‘track and trace’ systems, for fl eets of vehicles, Taxameter Centrale, a provider of parking management systems, and CCV, who provides online authorization of fi nancial and loyalty card transactions. While Vodafone does not separate out M2M net adds in its quarterly earnings, it has stated publically that it has an installed base of about 5 million SIMs.

KPNOrganizationKPN began to focus on M2M in 2009 when it partnered with Jasper Wireless for its con-nected device platform and operator go-to-market advisory and implementation services. It initially deployed its M2M service (branded as the KPN M2M Corporate Service) in the Netherlands, while in May 2010 it formed a dedicated business unit for M2M and expanded the service to its German and Belgium operations.

Connected Device Platform ApproachKPN strongly positions the Jasper platform as a diff erentiator. Other key value propositions include its single SIM card, its European and global coverage (in 200 countries), including low-cost connectivity over its own and partners’ networks, and its robust cellular connectiv-ity options including GPRS, EDGE, UMTS, SMS and emergency voice. But most of all it touts the capabilities that the Jasper platform (branded the Control Centre) provides, including instant and automated provisioning, (including control of provisioning states), enterprise management of SIMs via APIs that integrate with their applications, real time billing statistics, access, trouble-shooting and diagnostics, and information sharing. KPN also touts its vertical solutions focus and customer support.

Segments and Customer TractionKPN is focused on smart metering, tracking and consumer electronics and has named wins with Garmin and Konica Minolta Europe.



Orange Business ServicesOrganizationOrange Business Services (a division of France Telecom Group) has been off ering M2M solutions to business customers since 2005. M2M activities are split: large national and So-Hos are serviced by domestic mobile networks such as Orange UK; international customers are managed by Orange Business Services, which also leverages a large professional services arm. Orange launched the International M2M Center (IMC) based at Belgian subsidiary Mobistar, in 2009, Th e IMC is a 25 person team, responsible for supporting international M2M projects with: pre- and post-sales support; custom pricing; international connectivity assistance; a self-service web portal and a new hardened M2M SIM card; it also tests devices on the Orange network. Orange acquired fl eet management solutions provider Data & Mobiles in 2009, and provides end-to end service and product integration in this vertical. Orange touts that it can provide low cost M2M connectivity across its own footprint of 29 mobile networks and at attractive rates through partners’ footprints, for a total of 151 countries. In 2009 Orange launched a new reinforced SIM card for M2M, which is suitable for use in extreme environmental conditions and industrial processes.

Connected Device Platform ApproachIn 2005 FT acquired Silicomp, a consultancy with a strong skill set in M2M and it was this organization that has developed OBS’ service delivery platform. Th e platform is acces-sible via a web portal and provides service management (SIM ordering, (pre)-activation, installed base management, order status, SIM and GSM numbering); incident management (case management, case history, custom value added services); billing information (online invoices, invoice analysis tool, and traffi c reporting); and customer administration (user rights, customer information). 2010 enhancements include simplifi ed roll outs (bulk SIM ordering, SIM life-cycle management, and testing facilities); simplifi ed operations (alerting and incident diagnostics and SIM directory); and advanced management (machine moni-toring, QoS and consumption reporting).

Segments and Customer TractionOrange sees opportunities for off ering connectivity in many verticals including meter reading, city monitoring, fl eet management, security monitoring, automotive networking, home automation, and health. It is especially well organized to off er capabilities beyond connectivity (i.e. for hardware, software, integration, applications or distribution) in fl eet management, security, automotive, home automation and health. Fleet management is the only vertical where it provides end-to-end integration. Orange is on target to connect 2 million active SIMs in 2010, with 40% growth over 2009. Named customers include: Union Fenosa (for smart metering trial in Spain); SNCB (asset tracking); e.l.m. leblanc (preventative maintenance); Sorin (healthcare); Securitas Direct (remote surveillance).



ConclusionsSo while operators diff er in their approach to the market, those that have launched dedicated M2M business units, have focused on verticals which stand to gain the most from wireless connectivity, and have invested in a connected device platform are clearly getting traction. Hot markets include: automotive (both for telematics and fl eet management), consumer electron-ics, and manufacturing/asset management, with ehealth solutions, smart grid and meter reading deployments in early deployments with tremendous upside potential.It is also clear that ARPUs may well be higher than $3-4 per line, especially for operators that provide value-added services or are planning to off er high bandwidth real-time, location-enabled or video-enhanced applications. Even with low ARPUs assumed, profi t margins can also stand up to those associated with handset-oriented wireless services, as device subsidies are largely absent and churn is likely to be much lower for many M2M solutions.

Current Analysis Best Practices in M2M Operator Perspective

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