April 2014: A report by Rethink Technology Research Ltd...Telemetry, SCADA and M2M...

April 2014: A report by Rethink Technology Research Ltd

Beware the Five Myths of the Internet of Things

2 Copyright Rethink Technology Research 2014

Table of Contents 2

Diagrams and Tables 3

Introduction 4

1. Emergence of the IoT 6

2. Five myths about the IoT 8

Myth 1—It’s new 9

a) Don’t focus on consumers 10

Charging 10

Rivalry for consumer control 11

b) The real source of service provider riches 12

Myth 2—It’s all about toasters and spectacles 13

a) A note on wearables 15

Myth 3—It will be one unified network 16

Myth 4—It’s the next wave of the Internet

(connected everything) 17

Myth 5—Current operator models will work 20

3. The mobile operators in the IoT 23

a) MNO market share 25

b) Reduced market expectations 26

c) Challenges for MNOs in the IoT 27

Connectivity 27

Platforms 28

The upper layers 30

Contact Details 32

Table of Contents


Copyright Rethink Technology Research 2014 3

Fig. 1— The structure of connections in M2M applications 7

Fig. 2— Rise in M2M connections over cellular or Wi-Fi to 2018 8

Fig. 3— Percentage of operator IoT revenues coming from

various consumer and vertical segments 12

Fig. 4— M2M device map 13

Fig. 5— Industrial Internet data cycle 19

Fig. 6— 3GPP work to make LTE standards more

friendly to M2M activities 21

Fig. 7— Key contrasts between the fundamentals of the

mobile operator model, and those of IoT services 22

Fig. 8— The IoT revenue hierarchy 23

Fig. 9— Growth in service revenues from M2M applications

and from new service types driven by wearables 24

Fig. 10—Forecast market share for different types of

service provider in two key IoT areas:

Access and End-to-End Management Services 26

Fig. 11—IoT access and service revenues for MNOs in 2018

projected by Rethink, compared with average

figure projected by a group of over 40 tier one MNOs 27

Fig. 12—The diversifying groups of providers targeting

IoT management services 29

Diagrams and Tables



The numbers associated with the Internet of Things (IoT) are both huge (anything from 50 billion to 100 billion objects to be connected by 2020, generating, by some forecasts, $800bn in revenues) and tiny (sensors the size of dust particles). The extremes themselves make the subject compelling, as does the name, with its sense of a whole new future unfolding like a sci-fi movie in our own lifetimes. In many respects, the technologies are available to make this hap-pen. But without a firm commercial footing, the IoT will remain in the realm of research labs and PR companies. We know from many generations of connected technology – public Wi-Fi, 3G, even the In-ternet itself – that consumer uptake usually lags technology, and that sound profit models usually lag consumer interest. The Internet of Things will be no different. Before it really does start to change the way we live – and it does have the potential, bit by bit, to do that – there need to be some difficult questions answered, about who makes money from it, and how. This white paper will pose some of those difficult questions, and highlight data findings which may point towards some answers. The document marks the launch of Rethink Technology Research’s latest analyst service, focused on the Internet of Things and – like Re-think’s other well-respected research offerings – centered in partic-ular on the business models for service providers, and the technolo-gies that will enable those. The first step towards a more pragmatic approach to IoT as a busi-ness, is to address some of the many myths that are building up around the concept. Some of these are purely marketing hype, but some are based on false assumptions which could disastrously set expectations for the profit model and for end user services. In this paper, we aim to identify the most dangerous myths, and set out the landscape for IoT service providers, based on data and in-sights gathered from Rethink’s research base, and the broader wire-less and web ecosystem. In the IoT, the variety of service providers will be far wider than in traditional carrier businesses, and at this stage, the platforms and profit models are all up for grabs. In this first white paper, we look

Introduction



in particular at the challenges facing mobile operators in the IoT. They will have a role to play, but current indicators suggest they are greatly overestimating how big that will be – unless they start to behave very differently. The points in this framework will be addressed in more depth in future documents, which will be based on an entirely new model created by Rethink, and focused – like our other research services – on the business models and roll-out plans of network operators.



The Internet of Things sees all kinds of previously dumb objects acquire unique identifiers, and the ability to exchange data and access the internet, without human intervention. Though Carne-gie-Mellon University takes the credit for the first Internet ‘thing’ – an automatically connected Coke vending machine back in the early 1980s – the IoT did not get its name until 1999 and only now are most of the technologies in place to achieve a practical reality. These include the convergence of fast, ultra-low power connectivity with the evolution of low cost sensors and MEMS (micro-electromechanical systems), plus the appearance of IPv6 to support ‘Internet 3.0’. In terms of actual mainstream applications, there are three main trends:

‘M2M grown up’ – traditional use cases from machine-to-machine and telematics systems, such as automotive tracking and industrial control, but now able to harness higher data rates, deeper analytics and video.

The ability to apply M2M principles to a far wider range of devices and applications because of lower cost connectivi-ty and modules, and new back end platforms. This is driv-ing the appearance of super-IoT applications like smart cities.

The connected consumer, in which consumers move be-yond the connected devices they control directly, such as handsets, towards those which are automated, such as some wearables (fitness monitors, smart clothing) and smart home systems.

These trends are set to drive high levels of uptake across a wide range of sectors. There are many ways to count IoT devices, though the favorite ballpark figure is Ericsson’s ‘50 billion devic-es by 2020’. This would be about 10 times the current level of cellular connections, though of course, most IoT devices will not have cellular capabilities, but will be linked by short range con-nections, such as ZigBee, Bluetooth LE, Z-Wave, 6LOWPAN or low power Wi-Fi – to one another, and to hubs and gateways which will then use cellular, Wi-Fi or wireline to reach the internet and the back end data servers (often in the cloud).

1. Emergence of the IoT



Figure 1. The structure of connections in M2M applications. Source: ZDNet.com By 2020, if the 50 billion figure proves somewhere near accurate, it is likely that about two billion of those objects will be connected directly to the internet, over cellular, Wi-Fi or other options. The balance between cellular, particularly LTE/’5G’, connections and others will be a key factor in how far the mobile operators are able to play a leading role in the IoT business. A large proportion of the connections on their networks would be a strong foundation on which to layer higher value services (the percentage of revenues going to connectivity will drop sharply in the period).

1. Emergence of the IoT



Fig. 2. Rise in M2M connections over cellular or Wi-Fi to 2018. Source: GSMA, Cisco VNI, Ericsson

There are many myths about the Internet of Things, some frivo-lous, some taking root and distorting sensible thinking about business cases. In our view, the five myths that should be de-stroyed at once are:

It’s new It’s all about toasters and spectacles It will be one unified network It’s the next wave of the Internet

(everything connected) The current cellular and WiFi models will be readily

adaptable All these need to be taken into account by those entering this market. They are not negatives – indeed, the first four all high-light that many of the tools and business cases are already under-stood, and this may not be such a bewildering Wild West after all. IoT success will, in many cases, be about applying new technolo-gy enablers to enhance what has gone before, rather than waiting years for platform giants and standards bodies to create some-

2. Five myths about the IoT



thing brand new. That may come in future, but grand visions do not pay bills, and there are plenty of opportunities which can be pursued from this year. However, the fifth of our selected myths is the flip side of that point. While some elements are in place and just need enhancing (moving back end data from home servers to the cloud, for in-stance, to improve economies), the big difference will be scale. Far more devices will be connected, and the broadband web experi-ence will enable them to carry out far more tasks. That will not just require more powerful networks but a whole new approach from operators of all kinds. Just extending the con-ventional approach to managing and monetizing human-controlled devices will only go so far. For network operators of all kinds, avoiding the bitpipe fate will be even harder than in con-sumer and business broadband markets, and they will require a new way of thinking to carve out a profitable role in the IoT value chain.

Telemetry, SCADA and M2M (machine-to-machine) are not fash-ionable or glossy terms, but they are the basis of the Internet of Things, in terms of technology and application, and they will un-derpin the only profitable business models for some years to come. The ability to connect machines and embedded devices to one an-other, and to a central platform, automatically, by wired or wire-less modules, is at least 30 years old. Over those decades, the tech-nology and applications have widened from early use in point-of-sale and fleet management, to a wide variety of industrial automa-tion and tracking services. Key developments of relevance to the Internet of Things have been:

the need, in some cases, to exchange larger amounts of data, driving systems from narrowband to broadband con-nections

Myth 1—It’s new



enhanced ability to collect and analyze the data from ma-chines at the back end, driven by the evolution of cloud-based big data analytics

the development of M2M connectivity standards which sup-port IP and therefore the potential for some or all devices to access the internet

Further developments of these ongoing trends will create the future IoT. Of course there will be many new elements too, in devices and platforms, but many will build on these existing foundations. Profits from the IoT will flow to service providers which build on existing, proven models in vertical markets, and to the vendors which enable them to extend the usefulness of their systems. There will be plenty of new connected devices and applications grabbing the headlines and the R&D budgets (see Myth 2), and many will be exciting, but any consumer-focused IoT will struggle to deliver hard profits until user acceptance is far higher, and form factors far more evolved. a) Don’t focus on consumers: It is both threatening and reassuring for service providers to wake up to the low importance of consumers in the profitable IoT. They know that enterprise customers have higher ARPU (double in many countries), lower churn and greater predictability of usage. But they also know that they have less control over the enterprise and verti-cal bases, which have treated operators as providers of connectivity not added value. Mobile operators, in particular, have a deep one-to-one relationship with consumers, and may see the low hanging fruit in IoT as being the extension of that relationship to embrace many more home and mobile gadgets. But there are several barriers to that plan: Charging: The highest is finding a tariff structure which encourages consumers to add more devices to their wireless or quad play plan, while still adding to the operator’s profitability. The old model of encouraging uptake via subsidies is broken, and the popularity of WiFi-only tab-lets and digital gadgets shows how unwilling users are to add extra products to their monthly data plan.



Approaches such as shared ‘data buckets’ can help if there are just three or four connected items, but when there are more, the billing and charging complexities become prohibitive (for carrier and cus-tomer). A few operators, such as AT&T, manage to charge an additional data plan for an in-car hotspot or smart home hub, but this limits the market to a subset of affluent, highly digital customers, and will come under pressure when there is more competition. The alternative is for the connectivity to be embedded, and included in the cost of the device. This provides the operator with predictable revenue – particularly welcome with relatively low-bandwidth gadgets that will not flood the network with data. But they lose any visibility to the consumer in terms of being the smart home, smart car or wearables enabler. Rivalry for customer control: While some large operators are building strong platforms to deliver vertical and enterprise IoT solutions, in the consumer space they lag well behind over-the-top providers and other players, especially outside the US, Japan and Korea. Consumers’ mobile choices have increasingly been driven by applications and user experience, rather than operator, hardware or even price. The same will be true, to an even greater extent, in IoT, where the carrier’s long term ‘killer app’, voice/messaging, will not be there to tie the user to the network. The IoT is not a consumer concept – in-dividuals will adopt various connected devices for various purposes, because they see a use for a home automation hub or a pair of smart glasses, not as an overall framework. The platforms like Android Wear are attracting the developers of the software which will encourage people to buy new gadgets and connectivity, and the operators have little power here. In other words, the IoT is highly fragmented, as highlighted by the vast range of different devices and functions, and among those frag-ments, the consumer-focused ones may prove the least viable for mobile and broadband operators, because uptake is all about the app/experience, and very little about the network itself.



Rethink Technology Research’s IoT service will model and ana-lyze these business models and produce forecasts for uptake and revenues in different sectors, with particular focus on the re-search base of service providers which it has built up over more than a decade (mobile operators, broadband and cable opera-tors, WiFi and over-the-top service providers).

b) The real source of service provider riches: An initial survey of over 60 LTE operators globally offers some use-ful indicators of where the revenues will lie in the short to medium term, for operators providing wireless connectivity and, in many cases, management or big data services (see later section for more on the MNOs’ roles in the IoT value chain). As Figure 2 shows, IoT-related revenue – whether connectivity or services – will be heavily weighted to the traditional market seg-ments, in operators’ own view. In 2014, only 15% of the total will be from consumer applications, and though this percentage almost doubles by the end of 2018 (to 29% of a larger pie), the importance of the ‘old-fashioned’ vertical markets is still clear.

Figure 3. Percentage of operator IoT revenues coming from various consumer and vertical segments. Source: Rethink IoT LTE operator survey



In year one, oil and gas, public safety, smart city/transportation and fleet management are expected to be the top four revenue genera-tors, and by 2018 the big four will be unchanged, though in a differ-ent order - smart city will be at the top of that list.

Figure 3, above, leads us neatly to the second great myth of the IoT. Connected coffee makers and toasters make good demonstrations of otherwise invisible embedded technologies. And many hours and column inches can be devoted to dreaming up uses for smartwatch-es and smart spectacles, especially as these humble products start to acquire their own development platforms.

Figure 4. M2M device map. Source: Beecham Research/Deloitte University Press 2013 However, many of the most promising applications for wearables are actually in vertical markets – smart clothing for emergency ser-vices workers, for instance. And unless you are a wearables

Myth 2—It’s all about toasters and spectacles



developer or a venture capitalist, the more attractive opportunities lie in the hundreds of other types of devices that will connect to the IoT, from vehicles to street lamps, from implants to digital signage. The consumer Internet of Things will go through several stages, and the early ones will not be centered on wearables. Instead, the focus will be on:

internet connectivity for a broader range of portable consum-er electronics, such as digital cameras, though this will rarely be fully human-free

the smart home, where the primary applications will be me-dia, smart energy and home security – not so much about connected toasters and fridges

the connected car, already well on its evolution curve with in-vehicle safety and infotainment services

The consumer IoT comes with many barriers to profit, such as:

For module makers, there will be fewer connections than in industrial applications

For device makers, substantial R&D sums are being spent in playing the wearables game, without any real signs of con-sumers embracing the trend to the level that is required to make increasingly low-priced gadgets profitable

For operators, the data collected from consumers’ connected devices is less valuable, when monetized, than targeted en-terprise information, and is more restricted by privacy laws

Meanwhile, in the vertical and business spaces, there will be a far wider variety of devices, but the key added value will lie in areas that can be enabled, at least in part, by the network – quality of ser-vice, reliability, security, detailed analytics on performance and traf-fic, and so on. These are of far higher value in traditional M2M segments than in the consumer world, and become more important as connectivity starts to underpin more critical functions as well as higher data rates.



a) A note on wearables: Wearables should not be ignored. They are of limited functionality outside specialist verticals now, but they will be the platform for vendors and developers to experiment with experiences and form factors for the future, some of which will prove revolutionary. The real success will come when their inventions reflect changes that have occurred naturally, in how people consume data and content, and access the internet. We do not believe glasses fall into that cate-gory, but various wearable attempts do reflect a genuine attempt to consider how to break down the barrier of the screen, and what us-age that might enable. It is a very new field, and one subject to hype, half-baked ideas and false claims. But behind that is a serious challenge, to work out the behavior of the future and the devices that will support that. Some real breakthroughs will emerge over the coming years from all the current hit and miss activity. But the real power will lie not in in-creasingly disposable, fashion-driven gadgets (or, eventually, devic-es so embedded in items like clothing that they will be invisible), but in the software platforms that make the new products usable and encourage new applications and ways of working. Once users look for devices which are not anchored to the handset, they will end up using a large number of different form factors, and they will not expect to have to buy their connected jacket, jewellery, pet collar etc from the same vendor or applications base. So companies will seek out new ways to tie users into their business models and services. The most important developments center on the artificial intelligence engines being built in the cloud, to deliver increasing levels of granularity and responsiveness to web services such as search. The very early days of this important battle are seen in the rivalry between Apple Siri and Google Now, but so far both these personalized, enhanced search products are working within the traditional model. Siri, for instance, exists to make the iPhone more attractive and keep users linked into Apple’s software platform and services. But the re-al power of such engines will come when they feed vast numbers of different connected products, with their increasing intelligence drawing customers in new directions they had not previously imag-ined.



There has never been a single network technology underpinning the global internet, and there is no particular reason why there should be one for the Internet of Things, if only because the standards pro-cess involved would take so many years to play out. Some ‘things’ will be connected to one another, and the internet, by wireline con-nections, some by wireless (in licensed or unlicensed spectrum); some will use the same established technologies as other devices, others may require specialized systems; some will run on public net-works, some will demand the security and control of a private net-work. The idea that one technology will work for the whole 50 billion gadgets is neat but ludicrous. Most things will be communicating for specific and limited purposes that require a connection with certain characteristics – ultra-low power perhaps, or dense meshing ability – but do not require to interoperate or roam with all kinds of other IoT devices. The IoT will be global, but not a single network (any more than the current internet is). The consumer products which really need open standards will still be the handsets, which have just about converged on a single standard, LTE, after three disjointed generations. The IoT will embrace connected devices with different key priorities - massive broadband needs (future video systems), rapid mobility requirements (in-car platforms), ultra-low power (smart city or wearable safety sensors), very low cost. Some will only need to sup-port low data rates, or occasional usage. And there will be short range links between the meshes of ‘things’, and long range connec-tions to gateways and POPs and cloud servers. Just at the wireless physical layer there are Wi-Fi, LTE, GSM, Bluetooth, ZigBee, UNB, Weightless, 802.22, Z-wave and other emerging candidates with dif-ferent strengths and weaknesses. This is not to say that it won’t be useful to have standards, but there will be no need for a single network layer. Common interfaces and module specifications will help drive economies of scale across ver-tical market lines, and where interoperability is required, middle-ware will do the heavy lifting, not the physical network. Many com-panies, such as Ericsson and IBM, are investing huge sums in mid-dleware which would be able to translate between the connections and the languages of hundreds of different kinds of sensors (see lat-er section).

Myth 3—It will be one unified network



A group of standards bodies is also looking to create a common ‘service layer’ which would enable devices on different network pro-tocols to communicated seamlessly – ETSI, the Telecommunications Industry Association (TIA) and the Alliance for Telecommunications Industry Solutions (ATIS) in the US are the leaders, along with bodies in Japan, Korea and China (the full list of acronyms is ARIB, ATIS, CCSA, ETSI, TIA, TTA and TTC). The aim would be to embed the software in every sensor, making it compati-ble with M2M application servers hosted by any provider in the world and neutral to the actual connection type. This could address claims by high profile people like Verizon Com-munications’ CTO Tony Melone that proprietary approaches to M2M cannot scale, as each embedded device will need a separate and specific implementation in order to function. That will become unmanageable as wireless links find their way into the smallest sen-sors and the most universal objects.

The IoT connects the internet to the physical world via billions of sensors. That is not the same as saying that every device is directly connected to the internet – as many have pointed out, the closest many will get is support for TCP/IP protocols. In reality, most will be connected to a hub, such as a smartphone (in the consumer world), via a low power link like Bluetooth Low Energy. That hub will have the direct link to the internet, via a broadband connection such as LTE. One of the technically interesting developments, then, is not so much the technology to connect and manage huge numbers of devic-es directly, but to mesh all those endpoints intelligently to maximize efficiency and support granular data analytics. In the Internet of Things, the ‘things’ are identifiable objects with a digital presence. They fall into two categories. The first, connected devices, is already familiar to mobile users and is the reason many people think the IoT could be an extension of the mobile platform and business model, rather than something new. These devices have network connectivity built-in and usually require a power source. They range from handsets to connected lightbulbs and will gradual-ly form a huge digital grid, monitoring and reporting on every aspect of life.

Myth 4—It’s the next wave of the Internet (everything connected)



The second category, the identified object, is akin to current barcod-ed products. This is any item which can be identified using a ma-chine readable tag (such as RFID, new-wave barcode or NFC stick-er). These do not have to transmit data but can be used to track items and assemble data about them. A great deal of power, then, will lie in the technologies that allow the objects to discover one another and set up ad hoc connections, and the tools which can tap into the resulting data, That is very different from the power in the fixed and mobile internet eras, which rested far more heavily on the direct link between the device and the inter-net, and what could be delivered across that. An interesting example is Qualcomm’s AllSeen Alliance, an industry body gathered around its open source AllJoyn technology, which aims to be the standard for devices and sensors to discover each other, connect and share, at least in the consumer environment. The shift by Qualcomm, whose power base was firmly entrenched in the direct network connection, towards viral discovery approaches, in-dicates the new priorities of the IoT – to which operators, too, will need to adapt. Another example of the new priorities in IoT platforms is the Indus-trial Internet Consortium (IIC), which builds on General Electric’s inhouse initiative of the same name. Other leading members are AT&T, Cisco, IBM and Intel, and the aim is to establish standards-based interoperability for gadgets and sensors, particularly those embedded in machines, using various technologies including the MQTT M2M messaging protocol, originally developed by IBM. The new consortium will operate under the auspices of the Object Management Group, which focuses on creating modelling standards for enterprise integration, but is not a full open source body like the Linux Foundation (host of AllSeen). GE has already done much of the work of selecting technologies and standards to create its inhouse M2M cloud platform, Predix. It will be interesting to see how far the IIC is able to diverge from the tem-plate laid down by its founding member. That, in itself, will indicate how far the IoT is going to be run by a new set of masters – not the operators or the vendors, but the vertical market giants which actu-ally use M2M in anger, from utilities to industrial giants to transport companies.



Figure 5. Industrial Internet data cycle. Source: General Electric Other elements of the IIC framework will be more contentious, espe-cially as it broadens its remit. Cisco’s Smart City platform, and IBM’s Smarter Planet, have some elements in common, but also favour dif-ferent building blocks in others, while GE will no doubt push Pivotal, in which it is an investor, for analytics, but could face opposition from IBM or Intel. However, the technologies in pole position will be those included in GE’s Predix ‘framework in the cloud’. It developed this as an evolution of the original Industrial Internet project, set up in 2011 to provide services, such as energy manage-ment and remote diagnostics, to GE’s own customers in key sectors like energy. It then expanded its scope to a framework into which a wide ecosystem of providers, developers and device vendors could integrate, well beyond the GE client base. Last October, it invited In-tel, Cisco and AT&T to join the party and lend their weight to Predix. This is a platform for creating apps for vertical market ‘things’, from aeroplane engines to smart meters, and remotely managing them.



There are four elements – sensors, analytics, device management and developer APIs – all based on standards. However the politics of this initiative play out, it is a strong example of the new points where the IoT may eventually be unified – not via a common network, but at the points of sensor discovery, and of cloud-based ability to extract data from them regardless of their connection.

So we have an Internet of Things where traditional applications with established value chains will generate more revenue than exten-sions of the consumer smartphone platform; where there is no need for a single dominant network; and only a subset of devices need connecting to the internet anyway – in that situation, where is the role for the established operator? Every type of provider will have its challenges, but none more than the cellco. The greatest myth of all is that wireless operators, be-cause they have networks that reach far and wide, will necessarily be in pole position to profit from the IoT. There are several factors which speak against this cosy assumption. Some relate to the choice of network itself:

Mobile technologies are not keeping up. The data characteris-tics of IoT are not well matched to those of LTE, and that is unlikely to be addressed until Release 13 (to be completed in 2015), and not fully until ‘5G’ (see Figure 6).

While GSM is a strong network for low-data M2M, it is not

suited to new high capacity applications, and while some op-erators will preserve some 2G networks specifically for IoT, others are in a hurry to refarm all their 2G spectrum for 4G.

Many of the most potentially lucrative services for IoT net-

works are extremely sensitive in terms of privacy and securi-ty. Their providers, from utilities to public safety organiza-tions to home security systems, will often demand separate, highly secure segments of an operator’s network, increasing expense and reducing ROI for the cellco.

Myth 5—current operator models will work



Alternatively, they will turn to private network providers which guarantee the security and performance they need.

Conversely, for applications with high levels of data but less

criticality, Wi-Fi will be the dominant technology to link ‘things’ to the internet, with various short range technologies linking the things to one another or the user (Bluetooth, ZigBee etc). As in consumer applications, this opens the way for non-licensed operators of many kinds, including public sector bodies, over-the-top players like Google, device and cloud providers, and start-ups, which can offer connectivity bundle with their services or modules.

Despite the fuss around wearables, many IoT devices will not

be mobile and may access the internet over fixed connec-tions.

Figure 6. 3GPP work to make LTE standards more friendly to M2M activities. Source: Vodafone



Others relate to emerging business models and approaches to spec-trum:

The IoT, we believe, will be the market where dynamic band-width allocation ideas will really become relevant and practi-cal, enabling a whole new type of access providers. These can lease spectrum as and when they need, it probably using a marketplace system like that of BandwidthX in public Wi-Fi. This is particularly suited to vertical market operators which may want to provide access on an irregular basis (eg for spe-cific events or times of day).

There will also be a rise in IoT-specific operators, some act-

ing as MVNOs on LTE spectrum, but many using new sources of bandwidth such as Wi-Fi or UNB (ultra-narrowband). The latter is being harnessed by two early IoT operators, Sigfoxx in France, and Senaptic, which has launched in the UK and is providing a white label platform for IoT providers.

Some mobile operators will adapt to new flexible models, trading bandwidth and harnessing unlicensed spectrum, but they will have less freedom of movement in this respect. Current regulatory envi-ronments take little account of dynamic licensing or of models which rely on vast numbers of devices requiring small and irregular amounts of capacity.

Figure 7. Key contrasts between the fundamentals of the mobile operator model, and those of IoT services.

Mobile operator IoT service

SIM card instrument of control Embedded, automated or open SIM

Most revenues from connectivity Connectivity lowest value element

Main customers are individual humans Main customers are vertical industries

Primary network is 3GPP, optimized for their service needs

Mixture of networks used, 3GPP not opti-mized for IoT

Just two three global platforms Fragmented platforms with unifying point being outside the network (eg cloud hubs)

Each endpoint directly connected and manageable

Rising reliance on massive mesh, peer-to-peer and ad hoc, viral connections



Many regulators do not even allow spectrum trading or sharing. Companies which design their service models from scratch for IoT patterns and for unlicensed or shareable bands will have a signifi-cant headstart in flexibility, cost base and value proposition com-pared to established cellcos.

With all these factors in mind, there is a glaring disparity between what the mobile operators, as surveyed by Rethink, believe they will make from IoT services over the next few years, and the probable reality. Of course, all forecasts in this area are to some extent ‘fingers in the air’ at this very early stage, and there are many ways to define what is included in the IoT. Forecasts from major research houses range from total revenues (devices and services) of $500bn in 2018, to $800bn and even up to $3 trillion. Rethink is developing a comprehensive, granular and realistic fore-cast methodology covering services from connectivity to cloud man-agement to added value applications, and mapping the players which will generate revenues and profit. We will publish these fore-casts over the coming months.

Figure 8. The IoT revenue hierarchy.

3. The mobile operators in the IoT



As a top line starting point, we are being more conservative than some of the over-excited pundits, and we are focusing here on ser-vice revenues directly arising from M2M connections. There are four very broad layers of revenues in the IoT, each with its own technology platforms, ecosystems and standards. As we ascend the pyramid, each layer becomes less generic, more sector- or use case-specific, but more valuable. Mobile operators can play at all four levels, and Rethink will model and analyze all four within the IoT service. In this paper, we are taking a top level view of the lower two layers, where MNOs have the greatest existing experience, in particular. We are excluding, for this paper, existing consumer data revenue streams such as mobile messaging or home video, and focusing on two areas – service revenues driven by brand new embedded device types eg wearables; service revenues from pure M2M (non-human devices). The figures exclude device costs except where these are integral to the service revenue. Using our own and consensus industry estimates, the following growth can be seen for IoT service providers, with a compound an-nual growth rate of almost 29% to 2018 (and we expect that to rise sharply after 2020).

Figure 9. Growth in service revenues from M2M applications and from new service types driven by wearables (current home and mobile data services excluded, also device costs unless they are integrated with service).



This indicates a prize worth about $60bn is available for service pro-viders of all kinds, and this could grow exponentially after 2018 as the business models mature and new device and user interface tech-nologies make the experience more usable and more lucrative. By 2020, for instance, the first ‘5G’ networks are expected to be roll-ing out, based on a set of standards – as yet no more than R&D pro-jects – which will take specific IoT requirements into account for the first time, increasing the focus of bodies like the 3GPP on power effi-ciency, massive meshing and other important enablers. But the mobile operators will have to battle with many different types of service provider for a share of this $60bn pie – making their fights with the over-the-top and Wi-Fi players in the 3G/4G mobile data era look like playground tussles. By our forecasts, their current expectations are severely over-optimistic, and their share of IoT revenues will be constrained by all the factors outlined in the earlier sections. Once those myths are ex-ploded, a more realistic picture may emerge. Despite competition from Wi-Fi and others, MNOs will command the largest share of IoT access revenues in 2018, at 35%. This figure will have shrunk significantly however, partly because cellcos will be sharing more access revenue, even over 4G, with third parties than they do in the human internet. In the complex web of IoT providers, integrators, specialized MVNOs and others will ride on cellular networks, but will add much of the value, squeezing the amount the network owners can charge. And by 2018, access will represent only about 10% of total IoT ser-vice revenues. In the far larger area of end-to-end management and service delivery, mobile operators will only seize an estimated 20% of the total, overtaken by specialized cloud-based providers. This will be despite the creation of some very large and successful platforms by a few multinationals, such as Deutsche Telekom and Vodafone. The situation will look even worse at the analytics and applications layers.

a. MNO market share



Figure 10. Forecast market share for different types of service provider in two key IoT areas – access and end-to-end manage-ment services.

These market pressures mean many mobile operators will be forced to reduce their expectations over the coming years. In Rethink’s most recent survey of 78 tier one mobile operators, the consensus was that IoT access and management services revenues would account for 12% of total data revenues in 2018, and 20% of incremental LTE data revenues. That would equate to a figure of about $67bn in 2018, well ahead of our forecast of $12.5bn or less than 2.5%. The shortfall is down to several factors:

Entry of new IoT service providers, either specialized or from the over-the-top world, which we believe have been underes-timated in most MNO forecasts

Slower than expected mass roll-out of some IoT services, es-pecially those connected to wearables and changed consumer habits; or those which require significant bureaucratic input such as smart cities.

Significant pressure on IoT ARPU even on LTE.

b. Reduced market expectations



Figure 11. IoT access and service revenues for MNOs in 2018 pro-jected by Rethink, compared with average figure projected by a group of over 40 tier one MNOs. Source: Rethink Technology Research IoT service March 2014

Some of the more optimistic predictions will happen, but not until the next decade, and in some countries mobile operators will act nimbly to secure far larger market share than this top level predic-tion implies. But for most, there will be significant challenges, as well as brand new competition, in all four layers of the IoT model. Connectivity: Connectivity, or services enablement, has, until recently, been the area where the MNO had a virtual monopoly in wireless services. That has been eroded by Wi-Fi, but the cellcos have been successful in harnessing Wi-Fi, to some extent, for their own ends and keeping wireless connectivity firmly under their own control. That will be less achievable in the IoT, partly because so much of it will not require mobility or even wireless (hence the cellcos’ enthu-siasm for areas like wearables, which do).

b. Reduced market expectations

c. Challenges for MNOs in the IoT



In connectivity, there are two main challenges for the cellco:

their wireless networks may not be the connection of choice for many IoT systems (see Myth 3).

and even if they are, a whole new charging structure will be

needed to manage and profit from many millions of connec-tions, each generating ultra-low ARPU.

The ideal scenario for the MNO would be a flat rate deal with a utili-ty or vertical player, covering large numbers of endpoints which transmit small amounts of data and so have little impact on the net-work. In reality though, the low-burden dream of mobile IoT will not be realized. Many M2M applications will use increasingly large amounts of data (video in public safety or home security, for in-stance) as well as being always-on, creating a high signaling burden. But many question how much margin will really be left for the wire-less operator once it has signed a deal with a major utility, industrial body or auto maker. Even in the smart grid, carriers have come away with their fingers burned. Sing Nat, CEO of Portuguese opera-tor Zapp.pt, told a conference: “When you get to negotiating with the utility companies, the actual amount of revenue is very low.” The model is particularly risky if governments or partners insist on spectrum being dedicated to their application – something that is being demanded for smart grid projects in countries such as the UK. With utilities looking to pay “cents per meter per month, not euros”, he argued that it would not make sense for cellcos set aside band-width for M2M. Low frequencies, with their superior range and in-door penetration, will be essential for services, such as metering, which will need to reach every home, yet the sub-1GHz bands are considered beach-front spectrum for consumer and retail services. Platforms: The next level is platforms, used for end-to-end provisioning and management of all the things and their activities. This E2E manage-ment may be carried out by an IoT agency itself (a utility or local au-thority, for instance); or by a third party such as operator or integra-tor, often working in the cloud. In either case, the platform may be the provider’s own, or acquired from a vendor such as Cisco or Ora-cle. The platform ecosystem will be a complex one. For instance, Er-icsson has developed a platform, which it can use directly to offer



‘IoT as a service’ to customers such as carmakers or utilities, or can offer to its operator clients, which then white-label it, potentially to target the same carmakers or utilities. A few giant users will develop their own inhouse platforms, as GE has with its Industrial Internet program, which was originally con-ceived to manage all the appliances and machines manufactured by the US giant, but is now being put forward as a broader industry standard, for adoption by other integrators and operators. In this scenario, most large MNOs will need to create a strong IoT services play to generate the real profits. In many cases this will be tied to their own networks, as already seen in the platforms being developed by Verizon, AT&T, Deutsche Telekom, Vodafone, Telenor and other frontrunners. However, increasingly operators will also try to build services de-coupled from their own networks, building full IoT managed service businesses, especially where their direct network reach is small, as in South Korea.

Figure 12. The diversifying groups of providers targeting IoT management services.



Managed services for M2M may encompass a wide range of ele-ments, depending on the customer and business model. There are some where mobile operators do have a natural advantage, based on the experience of running and provisioning their own networks, for instance in mobile device management and micro-billing. In other areas, though, they will be up against competitors importing unfa-miliar skills from the enterprise and web worlds, particularly in as-pects such as data analytics. Of course, the competitive landscape will rarely be simple. Some mo-bile operators will try to be a one-stop shop, building their own back end platform and tying it to their own network, and their own mi-croSIM-based provisioning. Examples include AT&T, whose basic platform already supports its Digital Life and Industrial Internet programs, with more to come in future. The upper layers: The third and fourth layers of the IoT business are big data analytics and applications. The large mobile operators will certainly seek to include these two activities in their IoT service portfolios, but for this introductory paper, we have excluded them from the revenue scenarios. This is because these are areas where the cellcos either have limited track record, or have failed to capitalize in the past. There are certainly aspects of big data in which they should excel, with their expertise in collecting detailed data about large numbers of customers, their activity and charges. However, their attempts to apply big data and deep analytics tools to this mass of data are in their early stages and unproven as yet. The classic MNO tends to be understand limited number of consumers on which they hold loads of data, which is far away from big data on billions of things. Nonetheless, their biggest opportunity to differentiate will lie in the convergence of data analytics from the customer and from the net-work itself. Some MNOs are starting to build systems which combine both types of intelligence – for instance, identifying when a platinum customer is in an area of network congestion and taking proactive steps to improve their quality of service. Such approaches are imma-ture as yet, and there would be big challenges in adapting them for huge numbers of endpoints, but they indicate how mobile operators will only carve out a major IoT role if they can play to the strengths of their networks, the one piece of the jigsaw they still control (at least where the IoT system is running over LTE).



Helping them to achieve this differentiation will open up new deals for vendors which can combine network intelligence, big data and BSS/OSS – the magic combination for consumer and enterprise mo-bile services, and in future for IoT too. But always lurking will be the big web/cloud players. If the secret to IoT success will lie in convergence of big data analytics, user activity tracking and compelling applications for each segment, the name that springs to mind is not Vodafone or AT&T, but Google, with a combination of Android Wear and Glass at Work (for specific IoT apps and developer ecosystems); DeepMind and Google Now (for AI-driven analysis of endpoint behavior; and a wealth of cloud/big da-ta analytics tools (and that’s not to mention its recent interest, via its Nest acquisition, in the ‘things’ themselves). Other majors, from the web and the enterprise worlds, will assemble similar armories, but that list of Google assets sums up, right here in a few words, the real challenge for the conventional operator in the Internet of Things. This will be the focus of future Rethink IoT research, as will the IoT applications layer, and which provider types will excel there. Track record suggests the MNOs will have a particularly hard job of making an impact in applications, given the failure of a long series of apps stores, API platforms and developer initiatives by cellcos.



Contact Details

Rethink Technology Research Ltd, First Floor, 19 The Hundred, Romsey, Hampshire, SO51 8GD CEO: Peter White [email protected] Direct Line: +44 (0)1794 521411 Mobile: +44 7734 037414 Director of Research: Caroline Gabriel [email protected] Rethink is a thought leader in quadruple play and emerging wireless technologies. It offers consulting, advisory services, research papers, plus two weekly research services; Wireless Watch which has become a major influence among leading wireless operators and equipment makers, and which has pioneered re-search cov-erage of 4G and WiMAX; and Faultline, which studies disruptive changes in media due to emerging digital networks. Our new service RIoT (Rethink Internet of Things) has launched. Head to our website to view its archive, subscribe to the newsletter and find out more. Subscribe to RIoT here. Sales contact details Bergina Leka 44 (0)1794 521411 Email: [email protected] Report Author Caroline Gabriel [email protected]

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April 2014: A report by Rethink Technology Research Ltd...Telemetry, SCADA and M2M...

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