Editor’s Note: RCR Wireless News has teamed with the Yankee Group to conduct a series of market surveys of RCR Wireless News’ subscribers to gauge their thoughts o technology issues impacting the wireless ecosystem.
Those of you who respond to the surveys will get an executive summary of the results and are eligible to win an American Express gift certificate. Congratulations to this week’s winner, Michael Albano of Communication Depot.
In an inaugural survey of M2M-minded companies, we asked the wireless communications vendor community about the M2M opportunity in North America. Questions focused on growth drivers, strategic focus, and industry challenges. The survey was conducted in partnership with RCR Wireless News and Yankee Group between March and April. Sized at 88 responses, the survey posed 12 questions to a portion of the RCR Wireless News readership in North America. Respondents included wireless operators, module manufacturers, systems integrators, telecom equipment manufacturers and other M2M value chain members. The results demonstrate a confidence companies have in this market’s ability to originate new revenue streams.
Nearly 83% of respondents are evaluating or providing M2M products and services; of which, 48% offer a product or service today and 13% will begin doing the same over the next 12 months. All this indicates what we have known for a couple of years: the communications industry is rallying to advance the momentum for new M2M services.
The numbers firmly indicate the wireless communications industry continues to cast a wider net into M2M waters. Of the total sample set, 19% of respondents earn more than 80% of revenue from M2M products and services. These companies can be considered M2M pure-plays by the fact the majority of revenue is tied directly to the M2M industry’s revenue.
Throughout the survey, pure-plays were convincingly optimistic about future growth prospects. The remaining 81% of the surveyed companies are diversified in their revenue streams, not considered pure-plays, and represent the new blood seeking growth opportunity through new investments in product and service introductions. Overwhelmingly this group has an eye toward future revenue streams coming online in the next few years. We take a closer look at how aligned the diversified companies’ expectations are, the challenges they see standing in their path, and what they need to consider to ensure they are best positioned to realize those gains.
Education and cost: A chicken or egg enigma
Opinions of current and future revenue streams from M2M products and services painted a picture of a growth-market opportunity. Excluding pure-play companies, the survey base pegs incremental sales growth by 2011 at 14 points on a weighted average basis. Consider companies with the lowest current sales contribution (less than 1%) from M2M products and services in 2008, and anything north of 10 points would be a solid gain. These companies (with less than 1% of revenue coming from M2M sources in 2008) accounted for 24% of respondents.
That means 18% of the companies suggested the M2M related portion of their business will grow at a rate of 141% CAGR over the next three years. Or said another way, these companies plan to outpace the industry average by eight times over the next three years when compared to the 19% CAGR for the aggregate cellular M2M industry in North America as computed by the Yankee Group M2M Index. This is a lofty goal when one considers the highest ranked responses to the business and technical challenges facing the M2M industry are a bugger to fix, but not impossible, in less than three years.
Respondents echoed a solid need for market education (40%) when citing the most pressing business challenge facing the M2M industry. The sentiment jives well with the receptivity sales teams experience when selling into the verticals. That is, ‘M2M’ is a not a term (well) understood or known outside of the communications industry. Because of this reality, the messaging friction lengthens the sales cycle, which adds to the cost of business. Ultimately the additional costs get passed to the customer and decreases affordability for the mid-market. A closer look at the results reveals that while market education received the highest frequency of responses, ‘identifying business models’ was the first choice for decision makers in the vendor community.
Both market education and identifying business model are correct observations of important business challenges to overcome. To create demand, the vertical markets need to be educated about the benefits M2M services can bear and the possibilities the industry is capable of delivering. And to create solutions, business models need to be identified, else the M2M market’s success relies on the tenets of effective marketing in the vacuum of a fundamental understanding of the industry/market/vertical. At the nexus, prospects, vendors, and partners need to engage in dialogue that accomplishes an exchange of ideas about capabilities and opportunities.
Technology challenges will continue to guide the market’s growth trajectory too. An overwhelming response (50%) cited low-cost communication hardware is the primary pressing technology challenge in need of a solution. On the surface, the response is an affirmation of a relatively tricky problem that is neither mutually exclusive from the business challenges nor a short-term issue. To achieve low price points, unit volume needs to increase. To increase volume, prices need to decrease. Classic chicken or egg enigma. History serves us well to observe that prices decline gradually over time rather than impacted by a watershed event. Yet, the degree that pricing is a challenge is relative.
The cost of a GPRS/EDGE module averages a list price around $45. In volume and with discounts sub-$40 is quite achievable. What then constitutes ‘low cost’? If we look at the market for enterprise M2M solutions, the cost of communications devices is less than 15% of the total deployment cost at $70+ price points. Hardly a pressing problem when one adds in the costs of integration and custom development work. Yet, when we consider the necessary price structures to deploy consumer M2M solutions in volume we may fall upon a very different answer. That is, communications capabilities need to work within the magic $300 – $400 price for consumer electronics, for example. Think of Amazon’s Kindle with its masked cellular service cost and hidden cellular modem. Sticking with the consumer electronics example, a bill of materials under $130 implies a sale price in the aforementioned range, and that includes the module cost. Let’s assume ‘low-cost devices’ implies a consumer service, and it is based on CE devices of some form. Module prices would become attractive at sub-$10. It will be several years before we see those numbers even from the most efficient Chinese module manufacturer.
The consumer M2M market may be implicitly top of mind for many respondents in the RCR Wireless News readership. In the alternative device survey conducted by RCR Wireless News and Yankee Group in the same April time frame, we can triangulate responses to identify where future revenue stream will originate. Almost 64% of respondents believed that more than 20% of North American cellular connections will be via alternative devices (non-laptop or cellphone) by 2011, e.g. the Kindle. Based on today’s connections, and conservative projections, 40 million-plus alternative device connections will be made by 2011. In the U.S. alone, Yankee Group forecasts 17 million-plus cellular enterprise connections by 2011. That leaves an implied balance of roughly 23 million new consumer cellular connections to be made over the next three years. Not insignificant considering the challenges that lie ahead, but clearly a large opportunity.
Conclusion
The service wrapper is the allure that makes the potential for M2M simply irresistible to the cellular industry. And it is for good reason. Churn rates are on average below 1% annually, active connections remain so for 7-plus years on average, and cash cost per M2M connection is a fraction of a subscriber’s cash cost per user. While the figures are mouth-watering to any red-blooded CEO, historical figures are based primarily on enterprise services. The volume potential of consumer services is a bigger revenue opportunity, but also carries with it the same bag of bones of the enterprise market.
The reproach heard in the industry is that the M2M industry has done a lackluster job in coalescing support for industrywide initiatives such as educating the marketplace. Part of the problem is the small relative size of the pure-play companies and the matching budgets for marketing. As the diversified companies that will make up the bulk of the players in the future M2M industry, they will need to be cognizant of the drag on growth a fragmented marketplace produces. To overcome that fragmentation companies need to do a significantly better job to educate and market effectively, outside of the communications industry and into the verticals. They must start by working together in a closer, mutually beneficial way. At the definitive North American industry event, M2M United, Tridium implored the industry to build an “M2M community coalition.” The industry would be wise to heed this well placed advice. It won’t be easy but then anything worth doing never is.
For more information, go to www.YankeeGroup.com.
