Mobility Development Group Newsletter

July 2015
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Featured Article

IoT (M2M)Opportunities and Challenges
By Matthew Tasooji, Nexus Engineering Solutions

As the world becomes smaller and the “Internet of things” becomes larger, mobility and global services, i.e., provisioning, connection management, security, control and monitoring (roaming) of Machine to Machine (M2M) devices have become essential. For instance, many modules purchased and provisioned in one location/country need to operate in other countries.

The deployment dynamics of M2M modules and applications differ from traditional, high-end consumer and business subscribers using smart phones and laptops; operators now have to consider low ARPUs, adapted data plans, and permanent roaming solutions to stay competitive in the M2M market.

In this article we will look at some of the opportunities and challenges facing this industry.

Market Opportunities
Despite the fact that the market opportunity for wirelessly connected machines is surrounded by speculation, there is no doubt that the growth and revenue potential in this market is enormous. ABI Research, for instance, has predicted China’s Cellular M2M Connection Revenue to exceed $2.7 billion in 2016. GSMA forecasts that the M2M market could surpass 4.2 trillion dollars by 2020 while Smart meter revenue in Europe is expected to grow from $318.4 million in 2010 to $1.93 billion in 2017 at a compound annual growth rate (CAGR) of 29.3 percent, according to a new analysis from Frost & Sullivan.

As the chart below shows, the largest projected market growth is expected in Europe, closely followed by Asia-Pacific. In Europe, the need for efficiency is fueling regulatory bodies to pass and enforce legislative regulation requiring the use of M2M devices and applications. However, in Asia-Pacific the size of the market, coupled with the lack of financial, healthcare, automatic meter reading, automotive, security, tracking, point of sale, emergency telephone systems, information displays and mass transit systems, makes this an ideal market to enable M2M services.

iot-1Figure 1 – Total Cellular M2M connections by Region, Forecast: 2007 – 2016
Source: ABI Research – M2M market data

GSMA predicts that the major growth areas for the IoT market will be in the automotive and health industries.  The table below is a breakdown of the key industries in IoT in the next few years.

Top Ten Connected Applications in 2020 Market Size
Connected Car US$600 billion
Clinical Remote Monitoring US$350 billion
Assisted Living US$270 billion
Home and Building Security US$250 billion
Pay-As-You-Drive Car Insurance US$245 billion
New Business Models for Car Usage US$225 billion
Smart Meters US$105 billion
Traffic Management US$100 billion
Electric Vehicle Charging US$75 billion
Building Automation US$40 billion

Table 1 –  Source: GSMA

Cost Model for M2M
Studies provided by Current Analysis Inc. describe the following costs for delivering service to M2M devices and applications:

  • Customer acquisition such as marketing, advertising and promotion
  • Implementation and management
    • Device certification costs
    • Subscriber provisioning costs
    • Customer “on-boarding” costs such as account creation, configuration and rate-plan association
    • Pricing and rating platform costs
    • Customer support such as tech support, billing and escalation calls
    • Bad debt from charge disputes
  • Network usage, depreciation, and amortization of assets

Assuming the same percentages and the same market scenarios apply, if we suggest customer acquisition costs make up roughly 40% of ARPU, implementation and management contribute to roughly 30% and the costs associated with the radio and core network usage make up the remaining 30% of revenues, then the following cost model results in a greater margin for M2M services over traditional wireless services.

Metric M2M Traditional Wireless Service
Average Revenue per Sub $3.00 $50.00
Customer Acquisition Cost $0.75 $13.00
Service Delivery and
Customer Management
$0.15 $10.00
Network Usage per Sub $0.60 $5.00
Total Cost per Sub $1.50 $28.00
Profit per Sub $1.50 $24.00
Margin 50% 44%

Table 2 – M2M and Wireless Service Margins Model
Source: Best practices in M2M: The Operator Perspective, Current Analysis

In comparing M2M services directly to traditional wireless services, contributing factors that will increase this percentage include customer acquisition costs, device subsidies and network usage that will be marginalized resulting in an even greater operating margin for M2M services. While the average M2M application may result in low monthly ARPUs, the deltas between the numbers are expected to be so significant that the margins make this business model profitable. Once device certification and the length of time to certify devices diminish, this delta will be even greater.

Clearly if one looks at the absolute margins in dollar terms rather than the percentages, the business opportunities initially may not look too enticing.  Nonetheless, operators such as Aeries Communications, which has dedicated its business almost entirely to IoT services, has been very successful and on a consistently growing trajectory. It is noteworthy that Aeries owns very little spectrum of its own and has developed their network on an MVNO model. It is our belief that in the short run the majority of M2M growth will be based on MVNO models.  This also introduces a very unique opportunity for regional operators to deploy M2M services as a potential new revenue stream, since opportunities that may not be appealing to big operators could be attractive to regional operators.

Technology Selection
While many M2M applications have very low data throughput requirements that can be served by 2G/3G systems, most operators have opted to transition their networks to 4G (LTE) to better serve their traditional customers’ ever-increasing data usage needs. Verizon Wireless recently announced that they plan to complete the transition from their CDMA network to LTE within the next couple of years.  Many regional operators are also following the same path and are upgrading their 2G/3G systems to LTE.

This transition creates certain challenges because many M2M devices that have been deployed have life expectancy of 10 to 15 years.  Furthermore, while the 2G speeds are sufficient for most M2M devices, the price of the 4G modems is significantly higher than 2G modems.

However, as more applications become available —such as electronic billboards, real-time applications for monitoring medical devices, patient location and health status, telemedicine (which requires high-quality images for X-rays), CAT scans and MRIs for remote diagnostics, and video surveillance for enhanced security applications — more 4G network capabilities may become necessary.

The chart below is a prediction of the M2M market per technology.

iot-2Figure 2 – Total Cellular M2M connections by Air Interface, Forecast: 2007 – 2016
Source: ABI Research – M2M market data

Global Connectivity and Roaming
Many M2M applications are mission critical whether they support vehicle or fleet tracking, eHealth applications, or power delivery. Being able to access M2M devices, applications and services globally from gateways and control centers is imperative.  Providing global services or roaming to M2M devices can be challenging, since these devices rely on partner networks for communication back to the home network. The challenges include identity management and security, configuration management, service layer, and connection management for M2M roamers.

M2M devices may have a need in the life cycle of the device to change provisioning/credentials of the device and/or to change the configuration when the device is in a visited network or is roaming. This requires a trusted environment.  One way is to have a secure tunnel to access the device from the Control Center in the home network or a third-party server in a different location. The need to change the credentials on the USIM could arise because the IMSI of the local service provider needs to be populated along with a new APN from the remote server.

Typically, the third party who manages Remote Subscriptions (USIM) may have access to different operators globally, along with a block of IMSIs for each of those operators which could be a solution for M2M roamers. However, M2M devices that appear as incoming roamers to a visited network need to be able to get packet data services at local rates or near local rates instead of at high roaming rates.  This is because M2M devices provide frequent bursts of data traffic. A third party for global USIM management could become a common practice in the industry, since traditional roaming models involve several bilateral roaming agreements which include lengthy negotiations, timelines, and resources, which can then manage the large traffic volumes and small marginal gains of M2M roamers. A large number of M2M roaming devices requiring local IMSIs and their monitoring and control could be challenging in visited networks.  An alternative proposal is to provide a single agreement with a third party who also provides remote USIM services.

Roaming Challengers
While it is generally agreed that not all M2M devices would need to address roaming requirements, there are certain verticals/segments that are deemed as roamers and in some cases permanent roamers. The definition of M2M roaming is somewhat different than in traditional wireless communication. In the case of these M2M devices, the services over their lifetime are truly global, which means:

  • The SIMs/devices can be sold without configuration/provisioning
  •  The SIMs will be embedded modules in many instances and will be provisioned in the home network where the devices are manufactured
  • The SIMs/devices will move globally or work in a remote location in a different network
    • Arising from the need to either reconfigure/re-provision during their life cycle
    • The need to monitor and control the devices from the home network
    • The SIM provider could be a third-party to securely access and change credentials in a trusted environment
    • This need may arise because the M2M devices, like tablets and PCs, may need to get data services at local or near local rates

Coupled with these aspects, there are currently no globally agreed on standard implementations of service layer with interfaces on the network side which can manage and provide a similar suite of services as in the home network. Multimode M2M devices will present other challenges as well such as:

  • No agreement on provisioning a global unique user ID or an M2M application ID
  • Device reachability without IP connection
  • Special requirements of Electric Vehicles on universal charging and rates
  • Location and battery life of containers/fleet management tasks
  • Healthcare M2M devices needing standard application protocols like Hl7 and IEEE 1703
  • M2M remote batch deployments with high chance for roaming
  • Many different M2M third parties to manage
    • SIM management
    • M2M services
    • Connectivity services
  • No entity can manage all aspects of M2M devices over the life cycle

While the challenges in realizing the market potential of M2M services are many, significant progress has been made in addressing these challenges. Activities in standard bodies such as OneM2M are keen to harmonize the service layer which is a key in allowing seamless roaming.  Another key point is to solve and agree to solve the cost of operating the service in a roaming environment, since the ARPUs, even in home networks, are too low to sustain efficient management and control. Industry may need a shift in paradigm to adjust for a high margins but low ARPUs business model for M2M services.