Machine-to-machine (M2M) communication will account for a significant number of the 50 billion connections expected by 2020. Ericsson has worked to develop a solution that streamlines the process of creating M2M connections with a standardized, managed service, delivered over the cloud. The solution frees emerging M2M businesses from some of the initial problems and is already proving to be a market-changer.
Creating a profitable business around M2M communication is a challenge, because traditionally, operators haven’t been geared towards delivering large numbers of subscriptions on a very-low-revenue per-connection basis. Nonetheless, new growth areas are needed and this is one of the most promising. Despite the potential, M2M has been slow in taking off. It has been regarded as a risky proposition, due to unclear revenue prospects and the large up-front investment needed.
From a business-model perspective, M2M is the opposite of what the majority of operators have done up until now. Rather than centering on the delivery of universal services to a homogenous, large-scale consumer customer base, M2M involves supporting a wide variety of niche applications for enterprise customers who have very little in common. Naturally, this has held operators back.
Seeking to address the problem head on, Ericsson has looked for solutions that lower the threshold for network operators hoping to get started with M2M services. The company’s answer is a standardized and managed service delivered over the cloud. In a relatively short time, this initiative has begun impacting upon the market. Deals have already been signed with Telenor Connexion, Swisscom, MegaFon, TeliaSonera and Three UK.
The growth potential for M2M lies in it opening up possibilities for operators to charge in different ways and to interact with new kinds of customers – those who are not consumers, but enterprises. A prime example is AT&T delivering the connectivity for Amazon’s Kindle e-books. Here, Amazon pays AT&T for the connection. The consumer pays Amazon for the e-book, but doesn’t have to sign up with AT&T and become a subscriber. In this fashion, truck makers such as Volvo and Scania can offer their customers trucks with embedded connectivity, through which transport companies can run fleet-management systems. Similarly, security companies are able to offer monitors, burglar alarms and related equipment to households where connectivity is already taken care of.
To work in this new way, operators need tools that allow for commercial flexibility, and this is what Ericsson’s M2M solution is targeting. It enables operators to create tailored price plans; to utilize various times of the day for sending data; and to have the potential to set different QoS parameters for different applications, depending on their urgency or time requirements.
Revenue per user can be very low for M2M – as little as one-tenth of the average consumer subscription. For example, utilities can expect revenues as low as EUR 4 to EUR 8 per year for connecting a basic smart meter with very low data consumption. This makes it important for the operator to have extremely efficient processes for this type of subscription. In this way, M2M margins can still be quite high, potentially even higher than those in the consumer segment.
However, not all segments are as price sensitive. Take, for example, alarm systems, which are very highly valued and yet are only required to send large amounts of data when there is an incident. Or vending machines, which increase sales and customer satisfaction by ensuring they are always stocked with consumers’ favorite items.
One major market hurdle has been the lack of credibility and trust. Until now, the market has been fragmented and dominated by a handful of relatively small and niched vendors. Tailor-made, inflexible solutions have been the norm. Since credibility requires a long-term perspective – M2M solutions must have a long commercial-lifespan – the way forward is to build on standards. Standardized solutions lead to economies of scale. Establishing a cloud-service solution (as opposed to one that is systems-based and customer-specific) allows Ericsson to deliver a consistent product to all customers. This also means all customers benefit equally from software upgrades as the technology develops, ensuring a significantly faster pace of innovation than would be possible if upgrades were made on a case-by-case basis.