Telecom operators find themselves in a dynamic environment nowadays. An environment that is characterised by rapidly changing customer demands, fast development of new technologies, and new competitors coming and going. Also, the role of operators in the value chain is changing from telco silos to cross-sectoral enablers of data-driven services. This new environment requires a new and transformational way of innovation, where flexibility, agility, quick development, and testing and adaptation via prototyping are key elements. Cross-department and customer-centric innovation is essential. Especially in the ever growing IoT market, where operators are looking for a ‘way to play’.
Today, we see connected devices everywhere, ranging from phones and cars to home appliances, electronics, sensors and so on. The number of connected devices keeps on growing. The interconnection of these ‘smart objects’ to create one solution integrated with the internet, is what we call the Internet of Things (IoT). The aim is to make these devices interact in a goal-oriented manner with the environment. Next to IoT, we have technologies that enable automated communication between devices to exchange information and perform actions without human assistance. This is what we call machine-to-machine (M2M) communication. Both trends drive the number of connected devices significantly and pose challenges, as well as opportunities for telecom operators.
Market forecasts vary in scope and definition, leading to vastly different estimates for how the IoT will grow. However, all forecasts agree that the IoT market is growing strongly. Typical delimitations of the market include the fact that devices should be uniquely identifiable and enable wired or wireless communication to exchange information without the manual assistance of humans. Divergent market estimates are caused by the inclusion of devices with no connection to a public network (cellular, satellite, etc.), fixed network connections, and human interface devices such as smartphones, GPS devices, etc.
IoT is expected to lead to a large global digital B2B market. Global estimated IoT industries are expected to be the largest in the area of Smart Cities. Additionally, mobile financial services and eHealth also seem promising. The estimated addressable part of the market for operators depends on their ability to play a significant value-adding role in specific industries. Telco’s are more likely to play a significant role in mobile financial services, eHealth and smart homes, and to a lesser extent in connected cars, smart cities, utilities and others. This is based on the traditional operator play in connectivity.
Large investments to date into the IoT space are mainly done by OEM manufacturers, ICT players and governments, and keep increasing while several ecosystems are taking shape, such as smart cities etc.
To be successful in the IoT market, operators must carefully manage a number of factors for IoT-based products and/ or services providers in the future. Ease of implementation, analytics and interoperability will be key factors to drive consumer adoption in homes, businesses and industry, whereas the careful management of expected data and energy demands, compliance standards for data privacy, and technical safeguards to protect internet infrastructure, will be crucial on the infrastructure side. Given these trends along the IoT value chain, we believe that operators need to decide on their position in the IoT value chain and develop their ‘way-to-play’ in the IoT market.
Operators need to answer certain key questions for themselves to figure out their ‘way to play’ in the IoT market. These include questions like: Which value chain elements to target? Who do I compete with? What are my differentiating capabilities? Do I need a partnering strategy? What are the market size, attractiveness and value pools? To what extent does IoT go beyond (cellular) connectivity? What are the technical implications?
And the increase of IoT across all these industries enables businesses to generate more consumer data and connections than ever. Consequently businesses get to know us better and better. Both as an individual and on an aggregated scale. This can have a large impact on the advertising industry. For example, out-of-home advertising can increasingly be linked to realtime circumstances, also in our own homes, so advertisers can promote their products and services based on our behaviour. That means a key strategic factor to determine a ‘way to play’ for operators should be the question of wich party in the value chain should own control and have access to this data.
Without trying to provide answers to these questions right here, we see several potential models for operators to play in the IoT market. Operators need to decide where and how to do business. The classic positioning for operators is the one of connectivity provider.
There are four potential models as a digital enabler or even service provider, moving operators more and more away from the classical core focus on connectivity:
Moving up in the value chain from a connectivity provider to a service provider will increase the need to build digital innovation capabilities. The point solution and E2E plays require deeper innovation capabilities and understanding of customer trends and needs. The critical success factor is to determine the market opportunity, as well as which commercial model and which required capabilities are needed to be successful.
B2B/B2C Platform Providers start with establishing a platform to leverage digital third-party services for B2B or B2C services, while enabling plug and play operations through APIs. The accompanying commercial model is a connectivity based revenue model. To come to such a platform, the provider should combine traditional telco capabilities with software capabilities.
The Ecosystem Driver goes a step further. This platform also starts with establishing a platform to leverage digital thirdparty services for B2Bor B2C services, while enabling plug and play operations through APIs. Yet, unlike the B2B/B2C Platform Provider, the Ecosystem Driver also includes the orchestration of third-party play and adds partner generated revenue share to the connectivity based revenue model. The benefits of this commercial model are churn reduction and an increase in the subscriber base. Apart from B2B/B2C Platform Provider capabilities, the required capabilities include partner management capabilities and ecosystem marketing capabilities.
Although Point Solutions are built on an ecosystem enabler play, they are also betting on self-developed solutions (in B2B and/or B2C) and can also be a digital vertical B2B play. The commercial model used in Point Solutions Provider is the same as in the Ecosystem Driver, but additionally includes direct revenue from Point Solutions Provider, which increases customer attractiveness as well. Besides the required capabilities of ecosystem enablers, Point Solutions Provider also require innovation capabilities with regard to service(software) development.
The approach of E2E Experience Provider is the same as Point Solutions Provider, but additionally focuses on becoming a preferred partner to manage the digital life of a consumer. A corresponding B2B play would be to play in more industry verticals. In addition to the commercial model of Point Solutions Providers, the commercial model of E2E Experience Provider includes direct revenue from all digital services offered, which also increases customer attractiveness. The specific required capabilities of Point Solutions Providers comprise a deep understanding of customer trends and a full mastership of digital innovation.
The ‘right to win’ in each vertical market will depend on the competitive dynamics in these markets. But also on the capabilities operators will be able to build in order to differentiate with clear value propositions in line with their ambition in markets and geography, as well as their position in the value chain. They need to evaluate their current partnerships for strategic fit and come to a conclusion on how to develop the necessary capabilities: optimise, build, buy, partner, or do nothing?
The current IoT/M2M capabilities and market dynamics of verticals need to be scanned to identify fields of play and the required capability system differs for each ‘way to play’. Initial hypotheses for IoT growth stories are generated and operators must decide whether to own or aggregate specific solutions and prioritise investments in select industries. There are a number of potential IoT pathways for operators: focus on selected verticals and partner with cloud players to offer connected services or focus on select embedded devices. Alternatively, they can focus on connectivity and offer a cross-vertical broad range of world class IoT connectivity. Or, they can move in the direction of becoming a leading provider of (co-developed) IoT solutions of full stack offering in primary verticals.
These are pathways that operators need to discover themselves and they need to define a clear strategy on ‘where and how to play’ if they want benefit from the ever growing IoT market.
Manager, PwC Netherlands
Tel: +31 88 792 73 80