Current Analysis Best Practices in M2M Operator Perspective

Advisory Report
Best Practices in M2M:

The Operator Perspective
July 2010
Kitty Weldon
Principal Analyst,
Enterprise Mobility
Contents
 Introduction
 What is the Revenue Opportunity for M2M services,
and How Do Operators Participate?
 Vertical Markets
 All M2M Connections are Not Created Equal
 Cost Model for M2M
 Cost Model for Wireless Data Services
 Best Practices Examples
 Conclusions
© 2010 Current Analysis Inc. All rights reserved.

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Best Practices in M2M: the Operator Perspective
Best Practices in M2M:

The Operator Perspective
The market opportunity for wirelessly connecting machines, ranging from sensors, telemetry
devices, ATMs/Point of Sale terminals, meter readers, vehicles, home healthcare devices,
remote computers and peripherals, to consumer electronics devices such as digital cameras,
picture frames, e-readers and Personal Navigational Devices, is the source of a lot of excite-
ment and speculation in the wireless industry. While wireless operators, device OEMs, module
manufacturers, and M2M solution providers have reason to be optimistic, the actual revenue
potential, growth rates, and most importantly, the profit margins associated with M2M
deployments remain a source of some confusion. While operators are seeing a growth in
activations across both business and consumer segments, the relatively low Average Revenue
per User (ARPU) associated with many M2M deployments has led to worries as to whether
these services can yield a profitable, self-sustaining business. Compared to the ARPUs of
$40-50 a month that operators are used to seeing from their traditional high-end consumer
and business subscribers using smartphones or laptops, a data service for an M2M connection
often generates as little as $3-4 per line per month.
In spite of this, many operators are entering or becoming more aggressive in the M2M market,
and remain optimistic that it is going to be worth their while. Not only are the volumes
potentially so large as to offset the low revenues/connection, but there are other forces at play.
Just like any telecoms service, the OSS/BSS stack that provides provisioning, billing, network
management, trouble-shooting, and customer support has an analog in the M2M world in the
form of connected device platforms that streamline and automate these processes. These have
the potential to bring down the costs of delivery so that they are in line with revenues, yielding
a profit margin that is acceptable or even high, and they also support high volume deploy-
ments. Some of these platforms also allow the types of data plans associated with M2M to be
adapted to better fit the applications; rather than offer a bulk unlimited data plan or data pool,
operators want to be able to allow enterprises (and the enterprise’s consumer customers) to pay
by the book, session, bucket of photos, transmission speed, amount of data transmitted, or on
a prepaid basis. Multi-country roaming is also a prerequisite for many global M2M deploy-
ments, and aggregators and global operators are all vying to provide the most attractive rates
with SIMs that provide in-country or flat rate uniform pricing.
So how are wireless operators approaching the M2M market, how have they organized to
offer M2M services, which segments do they see as most viable, are there solid indications of
traction, and how they have chosen or internally developed platforms to streamline market
entry and service delivery? There are a variety of different approaches to the M2M market, but
regardless of their specific go-to-market strategy, the majority of operators that have entered
the market are optimistic about their prospects.
What is the Revenue Opportunity for M2M

services,and How Do Operators Participate?
Operators providing M2M services clearly gain revenues from incremental data subscriptions,
and many operators have disclosed that the number of M2M SIMs they have in active deploy-
ment are already numbering in the millions. In the U.S, AT&T has stated that it expects to

be connecting over 20 million “machines” in 2011, including both consumer and industrial
devices, citing 1.1 million new activations in Q1 2010, for a base of 5.8 million connections.
Verizon Wireless claims about 7.3 million connections (a high percentage of which comes
from its GM OnStar service, and T-Mobile claims it has had 100% growth in M2M connec-
tions every year for the last four years. In Europe, Orange is on target to reach 2 million this
year, and saw 40% growth in M2M connections in 2009, Vodafone provides approximately
5 million M2M connections, and Telenor cited 1.4 million in 2009. In Asia, NTT DoComo
has stated that they have approximately 1.6 million SIMs in service. While this is only a
representative sample (many providers such as Sprint, T-Mobile, Telefonica and KPN have not
disclosed their connections) it provides a glimpse into the size of the installed base.
Beyond data connection revenues, operators can also generate M2M revenues from provid-
ing end-to-end systems integration for key applications such as smart grid deployments and
asset/fleet management, from offering managed/hosted M2M services at their data centers,
or from data mining - i.e. the collection and analysis of data that can be turned into useful
information for utilities, manufacturing companies, auto insurance companies etc., that want
to offer value-added services to their end customers. The possibility of offering tiered services
for different device types, at different speeds, or with unique classes of service and prioritiza-
tion schemes, or for bundling multiple devices associated with a single subscription are other
options to grow revenues.
Operators differ in their strategies to offer “beyond-data” value-added services; large opera-
tors tend to offer project definition, design, deployment and support to enterprises looking
to deploy M2M applications, becoming a kind of aggregation point for third party solutions
vendors. They do not necessarily provide end to end integration, but they bring together
the often fragmented M2M ecosystem participants through alliance partnerships. Their role
also includes empowering companies such as auto manufacturers, and consumer electronics
providers to become de facto service providers. Many large operators such as AT&T, Sprint,
Orange Business Services, Telefonica and Vodafone have formed dedicated M2M organiza-
tions, which may be further segmented by industry vertical. Some operators have separated
out consumer from business M2M, reflecting the difference in the B2B and B2C segments’
distribution, support, revenue realization, and reporting requirements.
Forecasts for the revenue opportunity vary but most operators and analysts expect that
compound growth rates over the next five years will be in the 25%+ range, with estimates of
the numbers of devices to be connected ranging from 200 million to 1 billion world-wide by
the end of 2014. There are some regional differences. U.S. operators are already seeing high
demand from connected consumer electronics such as PNDs, netbooks/tablets and e-readers,
while European operators note that the majority of connected devices tend to be in industrial
segments such as equipment monitoring, fleet management and supply chain optimization,
with consumer (B2B2C) opportunities such as home health care, automotive telematics, home
energy/security, and consumer electronics representing the next wave of growth opportunity.
Many operators are participating in RFPs from large utilities that have either been mandated
to implement smart grid/metering programs (as they have in EU countries) or who see smart
energy usage as a key component of “green” initiatives for conservation or for eligibility for US
federal stimulus money.

Vertical Markets
While most operators are targeting the same verticals today including fleet management, au-
tomotive telematics, remote equipment/asset monitoring, home health monitoring, consumer
electronics, and smart energy/meter reading, the opportunities for future M2M applications
are much more extensive. The build-out of 4G networks will also provide new opportunities
for applications such as high-definition telemedicine and video surveillance. The following
table depicts current and future opportunities in M2M with examples of customers that have
deployed solutions.
Table 1
Vertical Markets for M2M
Verticals M2M Apps Today M2M Apps Future Customer Examples
Manufacturing Machine Diagnostics and Telemetry Industrial Automation and Control Konica Minolta
RFID Real-time Monitoring USA Technologies
Asset, Container and Cargo Mgmt/ e.l.m. leblanc
Tracking SNCB
Inventory Control Michelin
ONAsset
Financial/Retail POS Terminals Lottery Machines CCV
ATMs/Kiosks Loyalty/Coupon programs Parkeon,
Vending Machines Smart payment cards Selecta
WAN Back-up Parking and transportation ticketing VeriFone
Axalto
Banksys
Automotive Concierge Services Intelligent Grid/connected car OnStar
Industrial fleet Mgmt InCar Entertainment BMW
Remote engine diagnostics Personalized Insurance Daimler Chrysler
Hertz
Progressive Insurance
Drivecam
GuidePoint
Transics
Ctrack/Digicore
Taxameter Centrale
Energy and Security Meter Reading Pilots Comprehensive smart energy/ Alarm.com
Home/Industrial security monitor- smart Grid initiatives Lok8U
ing/alarms Next gen video-enhanced home Securitas Direct
Automatic Vehicle security and industrial security and energy Union Fenosa
services Primagaz
Video Surveillance AMS
Pendum
DTE Entergy
Healthcare Home Healthcare Monitoring Hospital patient and equipment BL Healthcare
monitoring Vitality
Remote telemedicine Cardionet
Omnilink
Sorin Group
St Jude Medical
Consumer PNDS, e-Reader, pet collars, Cameras, gaming devices, con- Garmin
Electronics netbooks nected home electronics, tablets/ TomTom
MIDs, Amazon Kindle
Electronic Billboards/digital signage Pandigital
Apple iPad

All M2M Connections are Not Created Equal

Even when it comes to providing pure connectivity, the dollar per connection per month
for an M2M application may vary considerably. While polling a meter several times a day to
upload a short data burst of information on energy usage to a remote server does not require
high speed connections and may only yield an ARPU of $3 a month to an operator, at the
high end, applications such as wireless digital signage used in electronic billboards, real-time
applications for monitoring medical devices, patient location and health status, or video sur-
veillance for enhanced security applications may yield significantly higher ARPUs. Telemedi-
cine applications that require high quality images for X-rays, cat scans, and MRIs for remote
diagnosis will also provide higher revenues and are likely to leverage 4G network capabilities
coming on-line next year.
Regardless of the application, the basic categories of costs to an operator for offering data
connectivity to and from devices and remote servers are fairly consistent, and it is these costs
that dictate potential profits.
Cost Model for M2M

Wireless operators offering M2M have to deal with the following costs of delivering service:
• Customer Acquisition (marketing/advertising/promotion)
• Implementation and Management
o Device Certification costs
o Subscriber provisioning costs
o Customer “on-boarding” costs (account creation, configuration, rate-plan association)
o Pricing/rating platform costs (including creation and publication of new rate plans)
o Customer support: tech support calls, billing calls, escalation calls
o Bad Debt from charge disputes
• Network usage/depreciation/amortization of assets
Of these elements, the customer acquisition costs (which include marketing, distribution, and
device subsidies, if applicable) make up approximately 40% of total costs; implementation
and management (including device certification, on-boarding, i.e. account creation and rate
plan implementation, provisioning, technical/billing customer support, escalation, and dispute
management) contribute an additional 30% of costs; and the costs associated with the radio
and core network usage make up an additional 30% of costs. A good service delivery platform
can significantly decrease the costs associated with implementation and customer manage-
ment.

Cost Model for Wireless Data Services

Using a similar analysis to look at traditional wireless services, with sample average revenues,
costs and margins, it can be shown that it is possible to achieve high margins for M2M, with
the use of a good platform. For example, although handset-oriented wireless services may yield
average ARPUs of $50 and profit margins of 44%, an M2M connection (even one which
is conservatively pegged at $3 ARPU) can yield margins of 50% after service delivery and
customer management costs have been brought down. Price, costs and margins in the model
are illustrative only and are not associated with a specific service provider.
Table 2
M2M and Wireless Services Margin Model
Wireless
Metric M2M Service
Average Rev per sub $3.00 $50.00
Customer Acquisition Cost/Additional Sub 0.75 13.00
Service delivery and Customer Mgmt Cost/Sub 0.15 10.00
Network Usage per sub 0.60 5.00
Total Costs/sub $1.50 $28.00
Profit/sub* $1.50 $24.00
Margin* 50% 44%
*Depreciation removed i.e. EBITDA Profit and Margin
In addition to cost reductions from automated service management, operators offering M2M
services do not generally have to subsidize the cost of the end-device, which in the handset
world historically lowers operating margins by several percentage points each quarter. On the
consumer side operators are also sharing the burden of marketing and advertising M2M solu-
tions with the device OEM and/or the retailer or other distribution channel partner. With
both lack of subsidy and shared marketing, some portion of customer acquisition costs can
therefore be eliminated, providing even higher margins for M2M services. The churn rate as-
sociated with M2M services is also very low. On the industrial side, a SIM in a meter reader or
other telemetry device tends to be in the field for many more years than within a handset; on
the consumer side a device OEM such as an e-reader or PND manufacturer is likely to remain
with the same operator for a long time, although the consumer may swap out devices every 1-
2 years. The integration with the operator of the customer’s back-end information systems, the
volume discounts they enjoy and the co-marketing relationships make these partnerships quite
“sticky”. M2M providers get the benefit of low churn and simultaneous lack of device subsidy,
which in the traditional wireless world are mutually exclusive.

Best Practices Examples

Taking a look at a variety of wireless operators and how they are approaching the M2M
market provides further insight into the different ways that they view the opportunity. Their
M2M organization, vertical approach, service delivery automation capabilities, and the way
they view their role in the marketplace are all somewhat unique. While it is still too early to
say that operators are generating significant revenues or profits in M2M, the SIMs in deploy-
ment and projected growth rates cited by operators is encouraging.
AT&T
Organization
After over a decade of participating in the M2M market, but often going to customers
indirectly through aggregators, AT&T revved up its activities in late 2008, seeing the
potential to tap a larger opportunity. It launched a dedicated business unit, the Emerging
Devices Organization, devoted to bringing to market a wide range of wirelessly connected
devices, focused in particular on consumer electronics and embedded computing devices.
While industrial M2M initiatives are managed separately, under the AT&T Business Solu-
tions (ABS) group, in May 2010, the Advanced Enterprise Mobility Solutions group was
launched by ABS to drive growth and innovation in enterprise mobility, including the B2B
M2M segment. AT&T is ensuring that it has the right organization in place to focus on
both B2C and B2B M2M opportunities and both groups have dedicated product market-
ing, pricing, support, sales and operations teams under them that can respond quickly to
changing market dynamics.
Connected Device Platform Approach

AT&T had already developed its own basic service platform, Enterprise On Demand,
which provides SIM inventory management, self-activation, and simplified billing, and had
been certifying 3rd party devices to work on its network since 2005 (with approximately
750 devices now available). In May of 2009, AT&T joined forces with Jasper Wireless, and
launched the AT&T Control Center, which enables rapid, highly automated, large-scale
wireless deployments for personal and industrial devices, and can lower time and cost
barriers, simplify the deployment lifecycle, and enable efficient operational management
and trouble-shooting of deployed devices. AT&T positions the platform as a competitive
differentiator for its customers; not only is it bringing down the cost of its internal opera-
tions, but the tools it provides to the enterprise customer such as analytics reports, flexible
plan and subscription generation, automated provisioning, custom alerts, and real-time
diagnostics, essentially allows the enterprise or OEM to become a service provider, and are
an integral component of the operator’s marketing messages. AT&T and Jasper launched a
Connection Kit for Device Developers Developer Kit at CES in January 2010, which helps
developers to kick-start their applications with test SIMs, a benchmark device, access to the
Control Center, and accelerated device verification.
Segments and Customer Traction

Within M2M, AT&T focuses on utilities, fleet management solutions, and consumer elec-

tronics. Named AT&T M2M customers include BMW, Hertz, USA Technologies, a major
security alarm monitoring provider, several utility customers, and on the consumer side, the
Amazon Kindle (which AT&T took over from Sprint), and a number of home health care
monitoring devices announced in March. The operator is focused on expanding to global
customers and sees container, solar and remote patient monitoring as future vertical focus
areas. AT&T brands its solutions as M2M 360, suggesting that its network assets, experi-
ence and eco-system, innovative service platforms, and a decade of proven achievements
provide it with a complete (i.e. 360 degree) set of capabilities. As of Q1, AT&T disclosed
that its connected devices subscriptions had grown 58% from the previous quarter, with 1.1
million net additions, for a total base of 5.8 million connections. The growth rates in Q4
2009 and Q1 2010 suggest that the operator’s organization, service delivery approach, and
vertical focus are paying off.
Chart 1
AT&T M2M Connected Devices Growth Q2 2008 – Q1 2010
Vodafone
Organization
Vodafone has been on a focused M2M path since 2009 when it launched an ultra-compact
SIM chip, touted attractive tariffs for international roaming, and demoed a web-based cus-
tomer portal at CEBIT. Later in the year it announced it had formed a 100 person team to
focus on M2M. Its position as the largest wireless network operator in Europe has made it a
likely go-to-provider of M2M services for European enterprises with pan-European facili-
ties or customers. Its global compact SIM (as well as traditional M2M SIM form factors)
can be mounted in the factory and works anywhere within the EU 27 countries as well as
some countries in AP and Africa, offering in-country local pricing, which is very competi-
tive compared to tariffs associated with roaming agreements. In February 2010, Vodafone
announced that it had joined the nPhase JV, which will allow it and offspring Verizon
Wireless to theoretically provide cost-competitive global connectivity in both the US and
Europe, although currently the two operators’ service delivery platforms remain separate.

Qualcomm’s Gobi chip will be used to bridge the CDMA to GSM network disparity that
has made it difficult for the two operators to provide seamless global roaming.

Vodafone has developed its own service delivery platform, launched in March 2010, which
provides automated SIM provisioning, reporting/alerting with usage thresholds, API
integration with customers’ systems, and on the fly tariff charge management. The operator
doesn’t position the platform as a competitive differentiator but sees it as providing essential
capabilities for connectivity and remote SIM management.

Vodafone is targeting automotive, smart metering, consumer electronics, and healthcare as
key verticals. Named customers include AMS, a New Zealand provider of smart metering
systems, bglobal, who implemented a smart metering program to manage energy consump-
tion (where Vodafone itself was the customer), Technocon, a theft detection provider,
Ctrack/Digicore a provider of ‘track and trace’ systems, for fleets of vehicles, Taxameter
Centrale, a provider of parking management systems, and CCV, who provides online
authorization of financial and loyalty card transactions. While Vodafone does not separate
out M2M net adds in its quarterly earnings, it has stated publically that it has an installed
base of about 5 million SIMs.
KPN
Organization
KPN began to focus on M2M in 2009 when it partnered with Jasper Wireless for its con-
nected device platform and operator go-to-market advisory and implementation services.
It initially deployed its M2M service (branded as the KPN M2M Corporate Service) in
the Netherlands, while in May 2010 it formed a dedicated business unit for M2M and
expanded the service to its German and Belgium operations.

KPN strongly positions the Jasper platform as a differentiator. Other key value propositions
include its single SIM card, its European and global coverage (in 200 countries), including
low-cost connectivity over its own and partners’ networks, and its robust cellular connectiv-
ity options including GPRS, EDGE, UMTS, SMS and emergency voice. But most of all
it touts the capabilities that the Jasper platform (branded the Control Centre) provides,
including instant and automated provisioning, (including control of provisioning states),
enterprise management of SIMs via APIs that integrate with their applications, real time
billing statistics, access, trouble-shooting and diagnostics, and information sharing. KPN
also touts its vertical solutions focus and customer support.

KPN is focused on smart metering, tracking and consumer electronics and has named wins
with Garmin and Konica Minolta Europe.

Orange Business Services

Organization
Orange Business Services (a division of France Telecom Group) has been offering M2M
solutions to business customers since 2005. M2M activities are split: large national and So-
Hos are serviced by domestic mobile networks such as Orange UK; international customers
are managed by Orange Business Services, which also leverages a large professional services
arm. Orange launched the International M2M Center (IMC) based at Belgian subsidiary
Mobistar, in 2009, The IMC is a 25 person team, responsible for supporting international
M2M projects with: pre- and post-sales support; custom pricing; international connectivity
assistance; a self-service web portal and a new hardened M2M SIM card; it also tests devices
on the Orange network. Orange acquired fleet management solutions provider Data &
Mobiles in 2009, and provides end-to end service and product integration in this vertical.
Orange touts that it can provide low cost M2M connectivity across its own footprint of
29 mobile networks and at attractive rates through partners’ footprints, for a total of 151
countries. In 2009 Orange launched a new reinforced SIM card for M2M, which is suitable
for use in extreme environmental conditions and industrial processes.

In 2005 FT acquired Silicomp, a consultancy with a strong skill set in M2M and it was this
organization that has developed OBS’ service delivery platform. The platform is acces-
sible via a web portal and provides service management (SIM ordering, (pre)-activation,
installed base management, order status, SIM and GSM numbering); incident management
(case management, case history, custom value added services); billing information (online
invoices, invoice analysis tool, and traffic reporting); and customer administration (user
rights, customer information). 2010 enhancements include simplified roll outs (bulk SIM
ordering, SIM life-cycle management, and testing facilities); simplified operations (alerting
and incident diagnostics and SIM directory); and advanced management (machine moni-
toring, QoS and consumption reporting).

Orange sees opportunities for offering connectivity in many verticals including meter
reading, city monitoring, fleet management, security monitoring, automotive networking,
home automation, and health. It is especially well organized to offer capabilities beyond
connectivity (i.e. for hardware, software, integration, applications or distribution) in fleet
management, security, automotive, home automation and health. Fleet management is
the only vertical where it provides end-to-end integration. Orange is on target to connect
2 million active SIMs in 2010, with 40% growth over 2009. Named customers include:
Union Fenosa (for smart metering trial in Spain); SNCB (asset tracking); e.l.m. leblanc
(preventative maintenance); Sorin (healthcare); Securitas Direct (remote surveillance).

Conclusions
So while operators differ in their approach to the market, those that have launched dedicated
M2M business units, have focused on verticals which stand to gain the most from wireless
connectivity, and have invested in a connected device platform are clearly getting traction. Hot
markets include: automotive (both for telematics and fleet management), consumer electron-
ics, and manufacturing/asset management, with ehealth solutions, smart grid and meter
reading deployments in early deployments with tremendous upside potential.
It is also clear that ARPUs may well be higher than $3-4 per line, especially for operators
that provide value-added services or are planning to offer high bandwidth real-time, location-
enabled or video-enhanced applications. Even with low ARPUs assumed, profit margins can
also stand up to those associated with handset-oriented wireless services, as device subsidies are
largely absent and churn is likely to be much lower for many M2M solutions.


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Advisory Report

Best Practices in M2M:

© 2010 Current Analysis Inc. All rights reserved.

Best Practices in M2M:

What is the Revenue Opportunity for M2M

© 2010 Current Analysis Inc. All rights reserved.

© 2010 Current Analysis Inc. All rights reserved.

© 2010 Current Analysis Inc. All rights reserved.

All M2M Connections are Not Created Equal

Cost Model for M2M

© 2010 Current Analysis Inc. All rights reserved.

Cost Model for Wireless Data Services

© 2010 Current Analysis Inc. All rights reserved.

Best Practices Examples

Connected Device Platform Approach

Segments and Customer Traction

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© 2010 Current Analysis Inc. All rights reserved.

Connected Device Platform Approach

Segments and Customer Traction

Connected Device Platform Approach

Segments and Customer Traction

© 2010 Current Analysis Inc. All rights reserved.

Orange Business Services

Connected Device Platform Approach

Segments and Customer Traction

© 2010 Current Analysis Inc. All rights reserved.

© 2010 Current Analysis Inc. All rights reserved.

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