IoT will have little impact on revenue for most mobile operators

IoT will have little impact on revenue for most mobile operators

An article by Michele Mackenzie, Principal Analyst, and Tom Rebbeck, Research Director, Enterprise and IoT at Analysys Mason.

IoT has become a persistent theme in telecoms industry conversations. Few strategy plans for operators do not mention IoT, and for some operators (including, Orange, Verizon and Vodafone), IoT is of central importance. This focus is understandable: although the worldwide mobile telecoms industry is only forecast to grow at a 1% CAGR between 2016 and 2025, Analysys Mason has calculated that revenue from IoT solutions enabled by mobile operators (that is, the total spend – including devices, applications and connectivity – on IoT devices with a SIM) will exceed USD200 billion in 2025, representing a CAGR of 18%. This is equivalent to 22% of the total spend on mobile services worldwide (USD888 billion) for the same year.

However, IoT connectivity revenue will only reach USD28 billion by 2025, representing just 3% of worldwide mobile telecoms revenue. If IoT is to become a new growth area within the telecoms industry, it will need to contribute significantly more revenue to the overall business than connectivity alone can generate.

Figure 1: Total value of IoT revenue addressable by mobile operators (mobile and LPWA), total mobile telecoms spend and IoT connectivity revenue, 2025

Chart: Total value of IoT revenue addressable by mobile operators (mobile and LPWA), total mobile telecoms spend and IoT connectivity revenue, 2025

Operators will need to adopt new strategies to win a share of the USD173 billion spend on devices and applications

While connectivity represents just a small proportion of the total spend on IoT solutions enabled by mobile operators, by 2025, revenue from application development and enablement will represent USD123 billion, and hardware will account for USD50 billion. Mobile operators are seeking additional incremental value by offering other components. However, this may present challenges because mobile operators do not typically have the skills required to build a viable proposition. To capture a larger share of hardware or application revenue, mobile operators should consider the following strategies.

  • Create an independent entity to target the IoT opportunity. An IoT business unit should be able to make decisions independently of the legacy business. Its performance metrics should be commensurate with a new growth area, and it should be granted a fair degree of autonomy to make its own investment decisions. Investment in hardware and application services should be focused on growing the IoT business and should not be hindered by legacy business considerations (for example, Bouygues Telecom and Vodacom have demonstrated how operators can use separate units to develop IoT solutions).1
  • Leverage in-house capabilities to build IoT enablers and applications. Operators need to build platforms and enablers to operate in new areas of the value chain. Some operators have separate R&D and ICT divisions that focus on developing new capabilities and solutions that target specific industry sectors. For example, Deutsche Telekom’s ICT business, T-Systems, developed a healthcare platform (e-Health Connect), which supports IoT applications such as remote patient monitoring. In addition, Verizon has developed ThingSpace, and Indosat has developed NexThing to build the developer ecosystem to support their initiatives.
  • Foster partnerships to bring IoT propositions to market. Not all mobile operators have all the skills required or in-house expertise to develop hardware and application solutions. Even those operators with an established IT division (such as Deutsche Telkom) will depend on partnerships for certain components. Most operators will need to build partnerships to enter new areas of the value chain, either in capabilities such as application enablement platforms or by bringing end-to-end solutions to market.
  • Make bold moves in investment and acquisition. Mobile operators have been relatively cautious in terms of acquisition in the IoT space. There have been a couple of major exceptions: Vodafone acquired Cobra to compete in every part of the automotive IoT value chain. Similarly, Verizon has made a spate of high-profile acquisitions totalling USD3.5 billion to compete in fleet management. On a smaller scale, Telia has invested in Springworks to enable its connected car platform, and it recently acquired Fältcom to compete in smart-city applications.

Most operators are not well-positioned to capitalise on the IoT opportunity

IoT currently represents only a small share of operator revenue – even for those operators with a large IoT business. For example, Vodafone reported that IoT accounted for only 1.3% of its revenue in 3Q 2016, and Verizon reported that IoT accounted for only 0.8% of its revenue in 4Q 2016. For IoT to grow to a sizeable share of revenue – that is, 10% or above – and be considered an important driver for growth, operators will need to capture some of the USD123 billion application revenue or USD50 billion hardware revenue that we have forecasted for 2025. Addressing these areas of the value chain will require significant investment and carries a higher risk of failure. EBIT margins which are relatively high for connectivity at around 10% will likely be lower in these areas. However, if operators want to remain visible in IoT and develop strong revenue streams, they will need to increase their appetite for risk and invest accordingly.

Analysys Mason has produced extensive research on the role of operators in IoT as part of its IoT and M2M Services programme. Our reports include Operator approaches to IoT: from connectivity to platforms and full solutions, as well as a comprehensive forecast on the total addressable IoT market for operators published in the DataHub and summarised in our report IoT value chain revenue: worldwide trends and forecasts 2016–2025. We have also undertaken a number of projects for telecoms operators to develop their approach to IoT, including one-day strategy workshops and full strategy reviews.

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