The industry association for the GSM ecosystem, the GSMA, held a "Connected Living" summit in Sweden last week. Connected Living is GSMA's market development initiative aimed at unlocking the potential of connected devices and services. You'll probably be familiar with Connected Living under its other aliases - "the internet of things" in marketing speak or "machine to machine" (M2M) connectivity in telco jargon.
M2M is seen as a big opportunity for mobile operators, as the GSMA breathlessly explain:
According to the latest report published by Machina Research, in 2020 the total number of connected devices will grow from 9 Billion today to 24 Billion, with half of these incorporating mobile technology. This huge growth in devices will create a total revenue opportunity of 1.0 trillion USD for mobile operators (representing a seven fold increase on 2011 expected revenues for Connected Living Programme key market sectors)
Wow, 1 trillion USD up for grabs over the next seven years for mobile operators. Time to buy shares in European telcos right?
Let's zero in on two big targets, France Telecom and Telefonica Group. France Telecom have an continue to invest heavily in M2M, the internet of things being one of FT's seven areas they prioritise their R&I investment. Telefonica tout their M2M credentials with a wizzy M2M microsite and quotes from analysts approving of Telefonica's M2M strategy.
With such a big addressable market, coupled with strong leadership and focus from these two European telco giants, the financial markets must be clamouring to jump on board this story and overload their portfolios with FT and Telefonica shares. Remember, there's 1 trillion dollars in play!
Now take a look at FT and Telefonica’s 5 year share performance, during which time both companies have made big bets on M2M which they continue to double down on. Make sure you select the 5y view, this is the most illuminating perspective.http://www.marketwatch.com/investing/stock/TEF
It's pretty clear the financial markets don’t seem to be factoring in any significant upside for M2M opportunity for these companies.
So why is there such a disconnect between the potential revenue opportunity of M2M and the share price of telcos heavily invested in M2M?
1. M2M makes no money
Everyone buys into the vision of connected living and the internet of things. The market size opportunity is boggling. The potential opportunity for networks and the broader mobile eco system is massive.
But it makes no money. To be accurate, it makes a tiny bit of money that is dwarfed by the revenues made by the consumer mobile segment and the non M2M part of the business segment. That’s why networks focus on selling iPhones and giving away free movie tickets - those bits that actually make proper money for their company and can actually influence their financial perfromance.
So that begs the question, why doesn't M2M make any money?
2. There are few valid business case for major M2M projects
iPhones and Galaxys make money. You can easily follow the cash from the consumer, to the mobile network, to the manufacturer and then into Apple and Samsung's finance results. Consumers want these products, and make purchase decisions accordingly. The cash follows. Apple and Samsung invest in further product innovation, the people buy more of their stuff. And on it goes.
Let's contrast this with two major M2M initiatives aimed at kick starting the M2M revolution.
The UK Department of Energy and Climate Change are leading the European push for smart metering with an "ambitious" (their word, not mine) programme to roll out smart meters into every British home by 2020. That's 28 million households, and 2 million small businesses. The mass roll out will start in 2014. The anticipated cost for the roll out is £11.5b over the next 20 years. The programme is due to expected to generate benefits of £18.6b over the same time period, leaving the UK with a net benefit of £7.2b.
The cost of the programme is not being funded directly by the government (which is broke as you may have heard), but instead the government requires the energy companies to fund the roll-out of smart meters, and the energy companies are then allowed to recover the costs of the programme via consumers' energy bills.
Note that the energy companies see no business case in investing in smart meter roll-out in the absence of government requirement. Instead it's a government bet that future energy efficiencies resulting from consumers changing behaviour under smart meters will offset the cost of the scheme.
You could also be argued that the energy companies have no incentive to tightly manage the cost of the roll out, as they have a government mandate to recover all the costs of the roll out via consumer bills.
Which? magazine have raised concerns about both the ability of the energy industry to roll out the scheme on budget, and the projected savings that the scheme is expected to generate. They are calling for a pause on the programme prior to the mass roll out to review the business case in light of the escalating energy bills already being faced by UK consumers.
The key point is that consumers are not choosing to invest their money into the smart meter solutions, nor are the energy companies. It's a government bet on behaviour change resulting from smart meters.
We need to watch this space to see if this UK programme, or any other national smart meter programme, actually rolls out as planned, and if so, whether it delivers the promised financial benefit.
The projected M2M revenues from energy smart metering could be drastically reduced if governments (or electorates) lose confidence in the business case for smart meter roll out.
eCall connected cars
Meanwhile the EU are looking to roll out a programme called "eCall" designed to incorporate emergency services connectivity into European cars. The idea is that in the event of a crash, your car could automatically call 112, the pan European emergency services number. It would also identify your car's location and provide this detail to emergency services. You can see a little cartoon on how it works here.
The idea is that eCall equipment should be a compulsory feature of all cars sold in Europe from 2015, and by making the service compulsory, Europe can save both lives and money.
The key word here is “compulsory”. If the proposal is passed into legislation, European and non-European car manufactures will have to build the eCall equipment into cars whether their customers want them or not. There will be a cost per car for the hardware units and data traffic that will be recovered from European consumers in the form of higher car prices (estimated at around €150-€180 per car).
In theory, the beneficiaries of the scheme will be European drivers who get more rapid response to emergency services in the case of accidents.
The reaction to eCall in the UK has been mainly around privacy concerns - i.e. could it be some European plot to snoop on my car, but the main concern should be around cost and who benefits from the introduction of eCall.
If mandatory eCall installation is legislated, the guaranteed beneficiaries of the scheme will be the European mobile networks, who will get guaranteed boosts in M2M traffic - traffic that they have been unable been able win on their own merits to date. The fact that major European countries have large stakes in their incumbent mobile networks (e.g. France, Germany, Italy) and these same mobile networks could do with some new business won’t be lost on governments currently championing eCall.
Who else benefits from compulsory eCall? It also means guaranteed business for the Galieo European GPS satellite network - in fact it's planned to be Galieo’s launch application.
Galileo was due to be a public / private sector initiative. However no private sector investors saw any sort of investible business case in the project, and after much political haggling, it was decided best that the European tax payer was left to pay the whole €22b cost of building and running the project over 20 years
With the private sector and individual consumers quite happy to stick with the American GPS satellite navigation system, a major application was urgently needed to be found for Galileo to avoid it becoming at €22b Millennium Dome in the sky. Hello eCall!
This type of approach isn’t very clever. Forcing the cost of eCall onto European car buyers to help justify the tax payer money thrown at Galileo is approaching scam territory. Europeans should be cranky their taxes are being spent on another pan European grand project without their consent. The ability of the EC to deliver the project on time, on budget and with the project economic benefits is suspect given the EC's form on Galileo's launch, and the fact that the EU budget has failed to be signed off by auditors for the 18th year running.
Programs like Galileo and eCall are dressed up as desirable European digital innovation, but really it's regulated innovation - innovation designed by bureaucrats, funded by taxpayers and dished out to European consumers whether they want it or not. It’s also a crutch for European mobile networks who claim to be operating in the innovation space but can’t win business on their own merit.
Smart meters share a similar fate. There is no significant consumer enthusiasm for these solutions, hence there is no significant business case for the solution.
So what's the answer to unlocking M2M's potential?
3. Customers need to champion M2M for it to succeed.
I don’t want to sound too negative about M2M, because I do love vision of connected living. Here’s two M2M success stories I think show a direction forward for the technology.
I love my Tom Tom app on my iPhone. I have no navigation sense, and like all drivers in Britain, am susceptible to crippling traffic blockages. Tom Tom gives me the option to subscribe to its traffic service, which I find incredibly accurate in predicting traffic hotspots and then routing me around them. The traffic service is optional, but I will keep paying Tom Tom an annual fee for as long as I drive, because I value that service that much. Tom Tom invested in building this data stream, and quite rightly profit from selling it to individual consumers like me or major companies like Apple.
I also love my Kindle. I had a choice when buying it of getting the wifi version, or the wifi and 3G version. The 3G option is an interesting option, as the consumer pays a one off fee at time of purchase for the service, but then gets free global 3G access for the life of the device. The differential for the new US only Paperwhite models is $60 - $179 for 3G / wifi vs $119 for wifi only. This $60 is used in part as a one off payment to Amazon’s M2M partner - currently Sprint. Sprint have an interesting risk to manage. They need to negotiate a one off payment they feel is high enough to cover the open ended per MB cost charge they incur when their customers roam internationally with the device over its lifetime.
I chose the wifi only model - I can wait until I get home to sync my books. However I know frequent travelers who love their 3G model because they highly value the ability to buy and download books anywhere. The point being is that he consumer is empowered to choose to buy these M2M services or not, and they will only succeed if they can command sufficient consumer interest.
And that’s the secret to unlocking the potential of M2M. Until the services are relevant to consumers and are deemed valuable enough by consumers to pay for them, there is no business case for M2M investment and implementation, and no drivers of growth for M2M.
Except of course from government programs designed to force M2M consumption on reluctant consumers. And that’s not the type of mobile innovation we should be applauding in our quest for true opportunities for connected living solutions.