Device connectivity unlocks value

ericsson white paper284 23-3146 Uen | January 2011

operator opportunity in an emerging business environment New revenue opportunities are emerging

for mobile operators through the delivery of

machine-to-machine (M2M) and consumer-

device connectivity services, which add value

for enterprises and consumers. Maximizing

revenues in this area demands a cost-efficient,

flexible approach that enables a high degree of

differentiation and customization.

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UNlockiNg valUe with device coNNectivity • serviNg a coNNected world

the world is already highly connected and it’s about to get even more so: today, there are about five

billion mobile subscriptions worldwide. as devices of all kinds become connected, there will be more

mobile subscriptions than people on the planet. ericsson envisions an increase in the number of

connected devices by a factor of 10 over the coming decade.

Market analysts strategy analytics[1] estimate that the mobile M2M communications market will

grow from the 2008 level of about Usd 16 billion to more than Usd 57 billion in 2014. technology

market research firm aBi research[2] forecasts that the overall mobile M2M connectivity market will

grow from just more than 70 million connections globally in 2009 to nearly 300 million by 2015 – a

compound annual growth rate of about 27 percent.

the device connectivity business opportunity is here, but what do operators need to do to serve

it successfully?

solutions for connecting devices have been available for many years, but now we are entering a

new phase of rapid growth in M2M services and consumer-device connectivity. the cost of connecting

devices is falling and the value of connectivity

is rising for individuals, businesses and society

in general.

consumers are becoming accustomed to

devices with built-in connectivity – devices such

as laptops, netbooks, e-readers, digital cameras,

printers, navigation aids, vehicles and sports

equipment. consumers understand the value

that connectivity brings to their lives, whether

it is in terms of convenience, safety or personal

health. the list of consumer electronics devices

offering connectivity continues to grow as new

ways of enhancing lifestyle and delivering value

are identified. the millennial generation will find it

hard to imagine a world where everyday devices

are not connected.

among enterprises, M2M connectivity offers

an increasingly attractive way of adding value,

improving productivity and reducing cost -

particularly opex - from a wide range of industrial

and business processes. M2M applications help

drive automation, improve product and asset

management, and enhance sustainability.

consumer and industrial equipment can be monitored and maintained through remote access and

electricity networks can be modernized into smart grids with the help of constant connectivity. whole

industries can be connected in new ways when universal mobile connectivity has been attained.

at the macro-socioeconomic level, connecting intelligent devices over highly efficient information

highways is one of the key priorities in the development of sustainable societies because of its potential

ability to reduce co2 emissions. connectivity also supports and strengthens the delivery of education,

health care, transport and public safety services.

as operations and services are automated using M2M connectivity, additional benefits are created

for consumers. For example, the introduction of smart grid technologies that optimize consumption,

production and delivery of electricity can help consumers to reduce their electricity costs by enabling

awareness and allowing the consumer to control low-rate energy use in their homes and home

appliances.

regulation is a strong driver of growth in connected devices. in europe, the ecall initiative[3] –

Serving a connected world

PeoplePeople

BusinessBusiness

Technology enablersTechnology enablers

Broadband ubiquityBroadband ubiquity

Openness and simplicityOpenness and simplicity

Cost of connectivityCost of connectivity

SocietySociety

Figure 1: device connectivity benefits people, businesses and society.

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expected to be implemented by 2014 – will see all vehicles fitted with a ‘black box’ that will transmit location

and other relevant information automatically to public safety services in the event of an accident or airbag

deployment anywhere in the european Union. in addition, many countries have introduced regulations for

remote utility metering. the Us government is using funds to stimulate the deployment of smart grids that

will rely on automated meter reading and, ultimately, demand management.

For mobile operators, delivering this connectivity represents a vast new revenue stream, not just from

connection charges, but also potentially as a key player in delivering new value-added services and building

sustainable ecosystems.

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the M2M market has to date been highly specialized; solutions are typically customized and vertically

integrated. excessive development costs have meant that M2M solutions have typically been created

for applications where productivity and efficiency gains have been significant.

this is changing. the cost of 2g mobile modules has reached a point where mass-market deployment

makes commercial sense, and 3g modules are following suit. the enormous economies of scale of

3gPP/3gPP2 standard technologies continue to drive down both the cost of modules and the solutions

required to connect them.

soon, the cost of connectivity will no longer be the deciding factor that it is today; if there is a benefit

to connecting a device, it will be connected.

an increasing number of business and industrial processes will be redesigned to introduce completely

new ways of working, as connectivity becomes cheaper to implement across a wider range of devices.

consumer-focused businesses will be able to create new services and delivery models that make use

of always-on connectivity.

operators, as the owners of the connectivity,

are in a strong position to profit from the new

ecosystem. New business opportunities lie

in finding ways to maximize the connectivity

business, monetize network and data assets, and

expand into new value chains.

the first challenge will be to enhance the

value of connectivity through horizontal service

enablement. an additional challenge will be

to address industry-specific solutions that

satisfy vertical industry needs, and so drive the

development of the ecosystem, as illustrated in

Figure 2.

traffic volumes generated by device connectivity

services across a range of applications will be

insignificant compared to volumes generated by

video, music and other data-heavy consumer

applications. however, device connectivity could

have a significant impact on the operator’s bottom

line. if operators can keep costs low, high-margin

device connectivity services will generate much

higher revenues per megabyte than mobile broadband services for smartphones and laptops. since

device management can be performed simultaneously across a large population of devices, revenue,

margin per contract or service is a more relevant metric than average revenue per user (arPU).

according to aBi research, current mobile operator systems and processes were designed to serve

mobile handset subscribers at a typical monthly arPU of Usd 50–60 (up to Usd 90 for smartphone

users). By contrast, the typical monthly arPU from device connectivity is Usd 5–15, and could be

as low as Usd 4 per year.

to be profitable at these low revenue levels the cost per connection must be kept down, which

demands a new approach to service packaging and provisioning. service packaging will need to

incorporate highly complex and multi-faceted business relations with customers and partners, as well

as being long-term sustainable, potentially for decades in the case of utility monitoring.

Making valuable connections

Industry specific solutionsIndustry specific solutions

HorizontalHorizontal

Addressing industry verticalsAddressing industry verticals

Enhancing the valueof connectivityEnhancing the valueof connectivity

Operator businessOperator business

RetailRetail

SecuritySecurity

Financial service

ManufacturingManufacturing

TransportTransport

GovernmentGovernment

Health careHealth care

UtilitiesUtilities

Expand into new value chainsExpand into new value chains

33

22

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Monetize network and data assets

Monetize network and data assets

Maximize connectivitybusiness

Maximize connectivitybusiness

Figure 2. three opportunities to address horizontal and vertical market needs.

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UNlockiNg valUe with device coNNectivity • adoPtiNg the right BUsiNess Model

the first challenge is to decide which business model is the most appropriate for the market. should

operators adopt a wholesale model and deliver connectivity exclusively to enterprises and value-

added resellers? or should operators develop their own value-added offerings and sell them directly

to the end customer?

essentially, there are three main business models for device connectivity that operators may use

in parallel.

ConneCtivity provider – the operator offers basic connectivity as well as more intelligent, smart pipe services, providing

wholesale airtime to its channel partners, who act as aggregators of the fragmented customer base,

and handle all aspects of sales, provisioning and support.

as a connectivity provider, the operator can sell directly, or indirectly via application service providers

(asP), to enterprise customers.

enabler provider – the operator offers ‘enablers’ to other enterprises improving the services delivered to customers.

these enablers could relate to access, usage, preference, location, presence, Qos or application.

the operator establishes service level agreement (sla)-based contracts directly with the enterprise

customer or asP.

value-added serviCe provider– the operator enters new value chains outside the traditional telecom domain by offering differentiated

solutions. the operator provides the application and sells it along with airtime directly to its enterprise

and consumer customers.

as a value-added service provider, the operator could co-sell and co-brand airtime and application

bundles in conjunction with one or more asPs, which typically specialize in handling specific application

types or vertical markets. the operator works with the asP to ensure that the application runs smoothly

on the network, and the operator’s sales force helps sell the application on behalf of the asP. the

customer is billed by the operator for airtime and by the asP for hardware and support services.

Adopting the right business model

*Connectivity sold in bulk

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UNlockiNg valUe with device coNNectivity • scale, diversity aNd coMPlexity

the device connectivity market will be a high-volume one – an order of magnitude greater than today

by 2020. in addition, there will be a huge diversity in device and subscription types.

a number of key market segments are already emerging for connected devices, each of which will

have quite different needs.

ConneCted homes – in addition to phones and computers that are already connected, there will be a multitude of other

connected devices including devices for home entertainment: connected domestic appliances also

known as domotics, which control, for example, the temperature, curtains and blinds; utility meters;

and security equipment, such as sensors and cameras.

personal deviCes – in addition to mobile phones, laptops, netbooks and e-readers, connectivity will increasingly be a

built-in feature in all consumer electronic devices.

intelligent transport – an already established segment for M2M technology, which will continue to grow in areas such

as remote vehicle monitoring and diagnostics, automated parking and tolls, in-vehicle infotainment,

logistics, fleet management safety and security.

smart utilities – large numbers of connected devices will be needed for metering, monitoring and management in

smart grids, and other utilities, such as gas and water.

tele-health – there is high growth potential in areas such as remote patient monitoring and products for elderly

people at home or in assisted-living accommodation.

automation, monitoring and asset traCking – a broad range of industries will deploy connected devices; everything from mining and agriculture,

to manufacturing and commerce (in areas such as point of sale, vending, remote information

displays and digital signage).

to serve the divergent needs of these different segments, operators will need provisioning systems

capable of handling very large numbers of connections, as well as infrastructure with Qos mechanisms

that can handle massive amounts of simultaneous, differentiated sessions.

there are a growing number of mission-critical applications that have new and differing requirements

for availability, reliability and resilience. operators will need to be able to offer a variety of slas and

connectivity profiles that can be enforced in the network. For example, a gaming device needs to

download new games quickly but infrequently, and usually only from one website. in this case, there is

an established model for game purchases, where connectivity becomes an add-on or revenue share. the

bandwidth needed to play the game is low, typically 64kbps, but the need for low latency is high.

in contrast, a digital camera with automatic backup to online storage will send large amounts of

data, but has no latency requirement. the data transfer can be scheduled for low-traffic periods.

Price management will be a complex challenge, with charging and billing required across a two-

sided business model with numerous charging parameters. attractive pricing for both national and

international roaming will be important to satisfy the need for continuous coverage for devices and

applications.

Scale, diversity and complexity

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UNlockiNg valUe with device coNNectivity • FlexiBility to Meet diFFeriNg Needs

a key requirement in the device connectivity market is flexibility. device platforms must allow operators’

marketing and sales people to package and sell network assets in a way that matches the needs and

expectations of different customer segments.

For example, a consumer who supplements a fixed broadband connection with a mobile broadband

one will have different needs, expectations – and willingness to pay – from a business user who travels

extensively and requires the highest mobile speed and best service available. similarly, a connected

washing machine will have needs that are different from a connected car.

to complicate matters further, user needs will change over time, meaning that operators need to

be able to package services for today’s customers, with the flexibility to develop their segments and

create new sales opportunities tomorrow. consider or example, vendor a that is today a book supplier.

tomorrow, vendor a might supply, books, films, music, the devices to download them and the service

model to supply and bill for customized content.

getting customers to sign up is just the first step. the next step is to provision the network so that

agreed communication services are delivered to the customer according to their expectations and

devices. the ability to control service delivery will be a decisive factor in meeting slas. critically,

solutions must be able to collect the correct payment for the service delivered, whether this is paid

for by the device manufacturer or by the consumer.

Flexibility to meet differing needs

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UNlockiNg valUe with device coNNectivity • kick-startiNg a coNNected device BUsiNess

to successfully break into and serve the rapidly

growing connected devices market, operators

will need new tools and models to efficiently

address end-to-end sales, delivery and invoicing

processes. this in turn demands a flexible end-to-

end delivery platform capable of serving a wide

variety of needs with customized and attractively

priced offerings.

the tools and technologies needed to build such

a platform are available, but require additional

adaptation and systems integration to deliver

solutions that will meet the different needs of

customer segments and commercial partners.

Figure 3 illustrates one cost-efficient approach to

implementing the extra adaptation. this horizontal

layer approach provides the functionality needed

to deliver a wide range of device connectivity

services, while at the same time enabling

customization to suit the diverse needs of vertical

market segments.

crucial requirements of this layered approach

are flexibility, in key areas such as business support

systems (Bss), simplified application development

and focus on operational cost reduction.

Kick-starting a connected device business

Industry-specific VAS and enablementIndustry-specific VAS and enablement

ApplicationsApplications

DevicesDevices

Service and application enablementService and application enablement

M2M/consumer device connectivityM2M/consumer device connectivity

NetworksNetworks

Figure 3: layered approach to device connectivity services.

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Bss are central to the operator’s ability to activate, manage and charge for new device connectivity

applications and services. they include functionality for business intelligence, revenue management,

service fulfillment, service assurance and customer relationship management.

Bsss today are often optimized for voice and sMs traffic. such systems will need to be extended

to handle the new applications, business models, device types and flexible pricing and billing that

the device connectivity market involves. they need to be able to offer efficient device activation, bulk

provisioning and management capabilities.

in addition to simplifying and automating key operator processes, the Bss should also enable

self-provisioning capabilities for enterprise customers and partners. this reduces opex and enhances

service value and flexibility for customers.

M2M and to some extent consumer electronics devices are typically referred to as unattended. this

means remote provisioning and intelligent management are important tools for device connectivity.

efficient tools will be needed to monitor, manage and maintain many thousands of devices. For example,

following a power outage, there may be several hundred thousand electricity meters simultaneously

attempting to reconnect to the network. another example is connected e-readers trying to simultaneously

download a new version of the operating software. good device management and event handling is

needed to handle such situations.

the goal is to have devices that require no manual intervention: no connecting of cables, sideloading

of data files, installation of gateways, and entering of encryption keys. Furthermore, a simplified siM

provisioning process will be key to reducing costs.

Simplify and automate

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as part of the layered approach to device connectivity service provisioning, applications are treated

separately from connectivity and management. this simplifies the solution and enables a greater

number and variety of application developers to enter the market. it also speeds up development and

enables reuse of functionality across applications.

ideally, service and application enablement should support industry standards, such as the european

telecommunications standards institute (etsi) M2M functional architecture and service capabilities. it

should also make use of widespread internet technologies, open aPis, web 2.0 and mash-ups. such

an open service creation environment will provide access to service enablers in the network, such as

location, sMs and charging to support applications that need it.

to enable end-to-end connectivity and leverage the enormous existing pool of competence in

internet-based development – including open source – devices need to be made fully present on the

internet. this requires an address translation workaround until iPv6 is introduced to the network.

in addition to an optimized, end-to-end solution for sales, delivery, invoicing and application

development, there are other factors involved in sustainable cost-efficiency of device connectivity

services.

one main factor is the cost of wireless modules. continuous technological advances, broad

deployment and huge economies of scale of 3gPP and 3gPP2 standards (both for modules and the

radio network) make them both affordable and attractive for many applications and very competitive

compared to other technologies. the geographical coverage and flexibility of 3gPP/3gPP2 mobile

connections will make them the dominant technology for connecting things to the internet, the cloud,

applications and enterprise networks.

Ease application development

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CONCLUSIONthe mass market for M2M and consumer device connectivity is here, growing fast and represents an

enormous opportunity for mobile operators who can address the challenge of delivering cost-effective

and customized connectivity with minimal process costs.

device platforms are becoming available that meet the needs for both broadly applicable horizontal

service capabilities and industry-specific solutions at different price and service levels. these platforms

can be integrated and grow with existing networks.

the use of globally available technology based on 3gPP/3gPP2 standards and internet-based

application development will be key to ensuring the long-term attractiveness and cost efficiency of

device connectivity services.

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UNlockiNg valUe with device coNNectivity • reFereNces

References1. strategy analytics, a Brave New world in Mobile Machine-to-Machine (M2M)

communications, 2008

2. aBi research, cellular M2M connectivity services –the Market opportunity for

Mobile operators, MvNos, and other connectivity service Providers, 2010

3. http://ec.europa.eu/information_society/activities/esafety/doc/ecall/faq.pdf

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UNlockiNg valUe with device coNNectivity • glossary

GLOSSARY3gpp third generation Partnership Project

3gpp2 third generation Partnership Project 2

api application Programming interface

arpu average revenue per user

asp application service provider

bss Business support systems

etsi european telecommunications standards institute

ipv6 internet Protocol version 6

m2m machine-to-machine

sla service level agreements

usd Us dollars