M2M Market for MNO

Report overview

The Machine-to-Machine Market:

A high-growth opportunity for MNOs

By Pyramid Research, October 2011

The machine-to-machine (M2M) market is dynamic, serving diverse vertical industries with a range of different devices across multiple networks. Growth is driven by a number of different factors including new regulations, a variety of business models, innovations, falling hardware costs and technological developments. Cellular networks are well-suited to offer the connectivity for a range of different M2M applications, and operators are increasing their focus on the M2M space, particularly in mature, saturated markets.

The diversity of the market makes it challenging to address, particularly for mobile operators geared to generating revenue from high volumes of subscriptions with relatively high usage requirements and a limited range of devices. Furthermore there are a number of focused M2M service providers, many with vertical market specialization, that are already addressing the market, some of which may also be existing partners, such as MVNOs and other airtime resellers.

Key findings

• The potential size of the cellular M2M market is enormous, providing operators with a sizable, long-term growth opportunity. We forecast that the volume of cellular M2M subscriptions will increase almost fourfold between 2010 and 2016, from 72m to 282m (CAGR 26%). This is equivalent to 1.4% of all mobile subscriptions in 2010, increasing to 3.6% in 2016. In other words, almost 9% of net additions between 2010 and 2016 will be M2M subscriptions.
• There are significant differences in adoption regionally, with mature, developed markets leading the way and many emerging markets still at a very nascent stage. An important factor here is simply the level of income, which in turn dictates the adoption of machines in general, such as vehicles, consumer electronics and utility meters. This will continue to be an important factor, but emerging markets will also be driven by regulatory factors and an increasing focus by operators as their traditional business matures.

o   North America is the largest market in terms of volume, accounting for a third of all M2M subscriptions in 2010. The percentage of mobile subscriptions that are M2M is by far the highest in North America, and will remain so through 2016 and beyond. Growth is picking up in relatively new applications such as consumer electronics and telematics, while more traditional markets such as fleet management also continue to develop.

o   Europe is the second largest market, accounting for just under a third of global M2M subscriptions in 2010. Smart metering is an important application segment, with regulations in many countries already mandated.

o   Asia-Pacific is forecast to become the largest market in 2013, and by 2016 we expect it will account for 37% of subscriptions. China is the key market in the region, where the government is driving the adoption of smart meters in order to better manage the growth in demand for energy. However, adoption in most other large, emerging countries in the region is more limited, with operators focused on cost reduction, capacity management and subscription acquisition.

o   Adoption in Africa & the Middle East (AME) remains overall low. In 2010, just 0.5% of mobile subscriptions were M2M. Fleet management is still the key application in AME, but there are also opportunities given limited fixed network coverage, creating demand for POS terminals, smart meters and remote monitoring.

o   Latin America is the smallest region but also is expected to be the fastest growing. The focus on M2M for most operators has been very limited to date, but new regulations in the important Brazilian market requiring new cars to be equipped with anti-theft capabilities, which have taken some time to finalize, have now been realized and will be the key market driver in the region.

• Government regulations and targets are key market drivers across different regions and applications. Smart metering is an important element of environmental policies to reduce the consumption of utility services and peak demand rates in many parts of the world. Car safety and anti-theft are driving regulations in telematics, in Europe and Latin America respectively. Traffic monitoring, particularly of heavy goods and commercial vehicles, is also likely to spread to other countries, and has already been implemented in parts of central Europe.
• Utilities, smart metering in particular, will remain the largest application in terms of volume. In 2010 28% of all cellular M2M subscriptions were in the utility sector, the vast majority of which are used for smart metering. Regulations will be the key driver, although there are a range of different technologies and network architectures. Furthermore, the volume of data sent by smart meters is low, resulting in low ARPS. Telematics is expected to be the fastest growing application segment and, with higher ARPS levels, will become the largest revenue opportunity in 2016.
• Demand for high bandwidth applications is limited, and for the vast majority of M2M subscriptions, a 2G connection suffices. Although higher bandwidth applications are growing, and LTE is also creating additional opportunities, adoption of 3G and 4G modules will be slow relative to usage for handset and PC access subscriptions. Mobile network operators must plan for the fact that many M2M subscriptions last for many years, which impacts 2G network discontinuation strategies.
• The M2M value chain is complex, including a broad range of different players. It can broadly be broken down into three: devices, connectivity and applications (other term is DNA: Devices, Network, Application). However, different applications typically require different business models and, as a result, different interactions between elements of the value chain. These three different elements must also be further broken down to fully understand the nature of the opportunity.
• Mobile network operators have historically taken a passive approach to the M2M market, given its complexities and small size. This has changed in developed markets where the opportunity has become more attractive, and traditional markets have become saturated. By becoming more active in the value chain, operators can both take a larger revenue share of it, as well as facilitate its growth.
• M2M subscriptions have different requirements compared with handset and mobile broadband subscriptions, and as such need appropriate support systems. Operators have to partner or invest to be able to address these requirements, which also provide the opportunity for selling value-added services.
• Operators with the best coverage, excellent international roaming agreements, strong platform partnerships and an established position in the business market are best placed to gain from the M2M opportunity. With these attributes, they can drive M2M subscription volume, in turn driving profitability. Some large operators in developed markets are further addressing the opportunity through investments to facilitate application development, module certification & testing as well as provide access to next- generation technologies. Less well-positioned operators must focus on having strong MVNO partnerships and/or focus on a competitive edge within certain vertical and/or local markets.