“The breaking down of the IoT value chain could create new opportunities for telecoms operators.”
AT&T owned the full value chain for its telecoms network during the company’s first few decades. Bell Labs did research and development (including pure research1), Western Electric manufactured equipment for both the network and end users, while AT&T itself managed the network and customers.2 Later technological developments meant that the telecoms network no longer needed full vertical integration and AT&T opened up to external suppliers. This pattern is common to new technologies: full vertical integration is initially required, but standards then develop, specialist players emerge and the value chain breaks down into its component parts. Television sets, computers and other technologies have followed a similar development path.
This process has now begun in IoT. Companies selling early IoT solutions often wrote the software, specified the hardware, supported customers and even built the network (for example, Telensa undertook many of these roles for its smart city solutions). However, this model is increasingly breaking down. An IoT solutions provider can now buy off-the-shelf hardware, develop applications using standard enablement platforms and sell through channel partners, due to a combination of standardisation and the increasing maturity of the technology.
A more-open value chain creates opportunities for operators, but also for other players
This breaking down of the IoT value chain could create new opportunities for operators. Each operator can focus on the activities (such as security or device management) that fit best within its current business and for which it has differentiators, rather than facing the choice of providing either only connectivity or full end-to-end solutions for different verticals.
Figure 1 summarises some of the activities in the IoT value chain. Each operator needs to map the component activities to assess the size of opportunities and identify the roles that it can play. This is inevitably a complex exercise, as the value chain will differ for each application within a vertical market. For example, the value chain for embedded connectivity in a car differs from that for a pay-as-you-drive insurance proposition, even though both are ‘connected car’ solutions.
Figure 1: Simplified mapping of activities within the IoT value chain
Operators have four possible approaches to IoT
We believe that operators should explore four approaches to IoT using this framework, as discussed in more detail in our recent report.
- Connectivity. This forms the basis of most operator IoT solutions and operators must ensure that they are well-placed to provide a range of connectivity options, such as NB-IoT. We forecast that the total value chain for IoT solutions supported by traditional cellular and LPWA connectivity will be worth USD200 billion worldwide in 2025, of which connectivity will represent around USD27 billion (14%).
- Generic platform. An operator provides basic tools and capabilities (such as device management) that developers can use to create IoT solutions. This approach could increase the addressable market for an operator to around USD20 billion in 2025 – 10% of the total.
- Vertical-specific platform. An operator offers platforms or capabilities tailored to a specific vertical market, such as healthcare. The size of the addressable market depends on the application area, but it could be worth as much as USD10 billion – 6% of the addressable market.
- End-to-end solution. An operator offers all components of a solution. The addressable market size again varies according to the application area, but this could be as much as USD19 billion (or 10% of the opportunity), which is the value of fleet management alone.
Connectivity builds on operators’ current business, but end-to-end solutions require operators to fundamentally change their operations, with implications ranging from sales commissions to organisational structure. The end-to-end approach may be justified for the largest vertical markets (such as fleet management), but not across multiple sectors, as it will be difficult to exploit synergies between these or with a platform offering. For example, the expertise gained in supporting fleet managers will be of little benefit in launching a healthcare solution.
In contrast, operators using the generic or vertical-specific platform approaches can focus on areas where their offerings have the strongest differentiators or on capabilities that are common across multiple applications.
The risk in providing capabilities is that operators will be competing against a range of providers. Operators should question their role in selling any capability for which they do not have a strong differentiator. Possible differentiators for operators to explore could include local hosting (for low latency and to meet any data sovereignty requirements), local language sales and support, and bundles (for example, of approved hardware, connectivity and security), which simplify the buying process for customers.
Operators also need to consider how to sell these capabilities. Currently, the process of selling IoT solutions for many operators involves a complex consulting engagement to understand a client’s requirements and to advise on the available options. This level of effort may be warranted for major contracts, but most operators are not able to provide this sort of support for many IoT customers. Each IoT solution cannot require a full consulting project, if the technology is to reach the billions of connections that are forecast. Operators should instead explore new ways of advertising, selling and supporting their capabilities, as AT&T is doing with M2X and Flow. Operators can keep the cost of sales and support low by providing developers with tools, typically via APIs. This reduction in costs is essential for solutions where the revenue per device will often be under USD10 per year.
Operators will need to work hard to justify their presence in services other than connectivity
The development of the original telecoms network gradually eroded the role of AT&T in the value chain, but developments in IoT will result in the opposite trend. It is becoming easier for AT&T and other telecoms operators to play larger roles in IoT, but they will need to work hard to justify their presence in the market.
2 For an excellent overview of AT&T’s early research and development work, see Jon Gertner’s The Idea Factory: Bell Labs and the Great Age of American Innovation, Penguin (London, 2012)