Moving ‘up the stack’ in IoT is easier said than done for CSPs

Matt Hatton

By Matt Hatton, Founding Partner at Transforma Insights.

A previous article on IoT Business News, shared a recent assessment by Transforma Insights of the trend towards ‘$1 IoT’, i.e. that price erosion means that there is a very real prospect of a prevailing pricing model, at least for low bandwidth IoT devices, of $1 per year for cellular connectivity. In the face of this trend, connectivity providers need to adapt their strategy. In October’s CSP IoT Peer Benchmarking Report much of the focus was on mechanisms for addressing, mitigating and perhaps exploiting this trend. In particular it focused on how CSPs can streamline their operations and pivot to becoming Hyperscale IoT Connectivity Providers. There are, however, other strategies that can be adopted to find new revenue sources. This article focuses on one of them: moving ‘up the stack’ to sell vertical solutions.

There are many industry commentators, including many of my analyst peers, who will claim that moving into selling vertical solutions is a universal panacea for CSPs. The logic is inescapable: if only 5-10% (and falling) of revenue for a solution is in connectivity, and 50-80% is in the application that rides over the top of it, surely the obvious thing to do is to pursue that bigger slice of the cake. Logical but flawed. The reality is that recommendations to move up the stack are easy to make and difficult to achieve.

Any vertical solution market will typically be highly contested by specialist service providers with years of experience and highly evolved products, channels and go-to-market strategies. Consider, for instance, fleet management. There are hundreds of solutions in the market from well-established providers. This compares with the connectivity portion of the IoT solution where any individual CSP has to compete only with a handful of its peers, and typically on an – at least – equal basis. Most CSP offerings in such a market will be ‘me too’ offers, with all the associated challenges of building market share.

To succeed in this strategy a CSP needs a sustainable differentiator which gives them a ‘right to play’ in the specific market. Typically this comes from M&A, i.e. acquiring a solution provider in the space. The work for the CSP IoT Peer Benchmarking Report flagged up several CSPs that have successfully built vertical capabilities through acquisition. These include Vodafone across a range of sectors including automotive (Cobra Automotive), fleet (Evotracking and Zellitron), industrial (Grandcentrix and IoT.nxt), agriculture (Mezzanine), and payment terminals (Xlink), Verizon in fleet management based on the acquisitions of Fleetmatics, Telogis and Hughes Telematics, and KORE in healthcare through the acquisition of Integron. Through these acquisitions CSPs have bought themselves the right to play in those verticals.

That is not the only approach, however. Expertise in verticals can come from long-term building of internal capabilities, such as Telefonica’s retail expertise in its OnTheSpot subsidiary, which in various guises has been running for decades, or Aeris Mobility in automotive. These capabilities are not, however, quick to build.

The obvious question is: where and how can CSPs add additional vertical capabilities to their offering? The last few years offer a few possibilities. Two verticals emerge from Transforma Insights’ research as new targets for the CSPs: smart buildings and industrial. Both, in their own way, have been stimulated by COVID.

An interest in smart buildings in particular has been triggered by a need to adapt the working environment for improved sanitation, and also to encourage workers who have been working from home for 18 months to switch back into the office. This will be a challenging market for CSPs to carve out a niche. There are well-established players in building automation and unless they build a credible differentiated offering CSPs will find the going tough. Having a line into every building, commercial relationships with every company, and a field force to install equipment will help.

The focus on industrial is slightly more complex and in large part is due to the need to find market opportunities for 5G. In IoT the major interest in 5G is in deploying mobile private networks (MPNs) in factories, ports and other industrial sites. This is triggered in part by the availability of the technology but also spectrum, such as CBRS in the US and similar elsewhere in Europe. Today around 50% of MPN sales are handled by CSPs (with the other 50% being by infrastructure vendors such as Ericsson and Nokia). Almost every CSP, including an impressive number of MVNOs, have an MPN offering. In many cases, CSPs are striking partnership agreements with industrial players, including the likes of Orange with Lacroix, Schneider Electric and Siemens. This market for campus and hybrid private networks is new enough and differentiated enough that it offers the potential for CSPs to find another niche. However, we at Transforma Insights expect that the market for MPNs will verticalize soon, with offerings aimed at connected factories, hospitals, ports and so forth. To thrive in this space, CSPs will need to carve out a niche for them in specific areas, or they will struggle against specialist service providers.

The ‘Communications Service Provider IoT Peer Benchmarking Report 2021’ is available to subscribers to Transforma Insights Advisory Service. A recent free webinar ‘Best practice for Communications Service Providers in delivering the Internet of Things’ covered the highlights of the report (registration required).
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