2015 – A Tipping Point for the Internet of Things

2015 will be remembered as the year of the Internet of things.  The tipping point when IoT went from the back rooms of the technology world to become mainstream.  

 

The consultancy McKinsey estimates that the Internet of Things - a world where up to 50 billion things (or devices) will be connected to the Internet – could create up to $11 trillion per year of new economic value to business and society.  The term Internet of Things traces its origins to 1999, but it is only over the last year or so that the realization of its transformational potential has reached the business community and the general population.  The number of research reports, conferences and media articles devoted to the topic has exploded.  With the media making the connection between the smart home and the connected automobile IOT has begun to become part of the popular parlance.  In fact, a Google search for Internet of Things reveals 725 billion results.

Google Trends also reveals that 2014 and 2015 were pivotal years in the dawn of the IoT revolution, as evidenced by the explosion in the number of IOT related searches.  Over the past two years there have been big announcements from all of the major car manufacturers of their connected car initiatives, lots of M&A activity in the technology industry as they race to supply the revolution, and major global alliances of telecom providers being formed, to provide the underlying connectivity and infrastructure.  But, most of all, we are actually starting to see some of the promised transformational benefits of the Internet of Things becoming a reality.

Companies like GE have connected sensors to their jet engines to provide near real-time monitoring of the health of their engines, reducing airline spending by 10-40%.  In shifting from rules-based maintenance to more predictive driven intervention, GE has fundamentally shifted its business from one of selling jet engines to airlines to providing a comprehensive, engine-as-a-service offering.  Using GPS and vehicle monitoring sensors many utility companies are now able to more accurately monitor the performance of installation and repair personnel.  General Motors uses sensors to monitor humidity to optimize painting; if the conditions are unfavorable, the work is routed to another part of the factory, thereby reducing repainting and maximizing plant uptime. 

The oil and gas industry is probably one of the most advanced users of IoT technology with new production platforms containing more than 30,000 sensors, connected through a sophisticated central control and data management systems.  IoT is also creeping into our everyday lives, with home security, thermostats and monitoring connected to data analytics and all controlled through our smart phones.  With an estimated 130 million consumers worldwide using fitness trackers today, the reality of more efficient, and personal effective health care is starting to become a reality.

It is not just businesses that are reaping the benefits of the IoT revolution.  Cities around the globe are beginning to build out new digital services such as smart lighting, traffic, waste management and data analytics to reduce costs, tap new sources of revenue, create new innovation business districts and improve the overall quality of urban life. Real-time bus information is now available in New York City, Chicago, Singapore, and many other cities, significantly improving, not only the wait times for riders, but the operations of the transit authority.  Similarly, by using real-time data to adjust the timing of traffic lights to improve traffic flow Abu Dhabi has been able to speed traffic flow in the city by up to 25 percent.

Telecom companies have realized that the IoT revolution holds for them the promise of new found revenues in connecting the projected 50 billion things.  The number of cellular machine-to-machine connections grew 28 percent in 2014 and is estimated to reach to 1 billion connections annually by 2020.  AT&T reported that it has more than 22 million IoT devices connected to its network.  Recognizing the huge opportunity afforded by the IoT revolution, the large French telecom operator Orange recently announced that €600 million ($670 million) of its revenues will come from the Internet of Things related businesses by 2018.  Leading technology companies like Cisco, IBM and Ericsson have all realized the opportunities of the next technology revolution by creating IoT business units, new product lines and extensive marketing campaigns.  Industry analysts, consultants and other technology services companies have similarly organized to benefit from the Internet of Things.

The dawn of the IoT revolution may have begun but it will still be some time before its transformational powers will be fully felt.  There are a number of technical, business, regulatory and perception obstacles that must first be overcome.  We are still very much in the early days of the IoE revolution with many companies knowing that they need to do something but not sure, what or how. 

Recent Cisco research of enterprise IT and business decision makers revealed that their top 3 challenges with implementing IoT initiatives in their businesses were: 1) security of business data; 2) standardization of IoT infrastructure and compatibility with business systems; and, 3) cost of implementation.  The critical issues of security and data privacy are critical elements that are being addresses, but we still have a long way to go to allay these justified fears around IoT implementations.  Equally, there are organizations and committees that are working hard on establishing IoT standards to ensure compatibility between all of the different IoT components. 

The current IoT technology and solutions environment is very much a Tower of Babel when it comes to interoperability and compatibility.  Government regulation will no doubt play an important part in shaping security and privacy, driving standards and forming the legal framework for such leading-edge innovations as self-driving cars and autonomous machinery.  The IoT supplier market is currently very fragmented with a multitude of big and small companies providing single pieces of the IoT implementation – devices, application, point solutions, different platforms, etc. 

Now that the Internet of Things has gone mainstream these challenges will be resolved and IoT will become a fact of life for businesses and society alike.  In fact, one day IoT will cease to exist.  In the future, it will be hard to imagine that all things weren’t connected and that the extraordinary benefits of IoT hadn’t always been with us.

I welcome the Internet of Things to 2016 and beyond.  I can’t wait to see how this new technology revolution continues to transform our lives.

The Internet of Things Revolution Has Only Just Begun

We are in the early days of another transformative technology revolution.  The consultancy McKinsey estimates that the Internet of Things - a world where up to 50 billion things (or devices) will be connected to the Internet – could create up to $11 trillion per year of new economic value to business and society.  The term Internet of Things traces its origins to 1999, but it is only over the last year or so that the realization of its transformational potential has reached the business community and the general population.  The number of research reports, conferences and media articles devoted to the topic has exploded.  With the media making the connection between the smart home and the connected automobile IOT has begun to become part of the popular parlance.  In fact, a Google search for Internet of Things reveals 725 billion results.

Google Trends also reveals that 2014 and 2015 were pivotal years in the dawn of the IoT revolution, as evidenced by the explosion in the number of IOT related seraches.  Over the past two years there have been big announcements from all of the major car manufacturers of their connected car initiatives, lots of M&A activity in the technology industry as they race to supply the revolution, and major global alliances of telecom providers being formed, to provide the underlying connectivity and infrastructure.  But, most of all, we are actually starting to see some of the promised transformational benefits of the Internet of Things becoming a reality.

Companies like GE have connected sensors to their jet engines to provide near real-time monitoring of the health of their engines, reducing airline spending by 10-40%.  In shifting from rules-based maintenance to more predictive driven intervention, GE has fundamentally shifted its business from one of selling jet engines to airlines to providing a comprehensive, engine-as-a-service offering.  Using GPS and vehicle monitoring sensors many utility companies are now able to more accurately monitor the performance of installation and repair personnel.  General Motors uses sensors to monitor humidity to optimize painting; if the conditions are unfavorable, the work is routed to another part of the factory, thereby reducing repainting and maximizing plant uptime.  The oil and gas industry is probably one of the most advanced users of IoT technology with new production platforms containing more than 30,000 sensors, connected through a sophisticated central control and data management systems.  IoT is also creeping into our everyday lives, with home security, thermostats and monitoring connected to data analytics and all controlled through our smart phones.  With an estimated 130 million consumers worldwide using fitness trackers today, the reality of more efficient, and personal effective health care is starting to become a reality. 

It is not just businesses that are reaping the benefits of the IoT revolution.  Cities around the globe are beginning to build out new digital services such as smart lighting, traffic, waste management and data analytics to reduce costs, tap new sources of revenue, create new innovation business districts and improve the overall quality of urban life. Real-time bus information is now available in New York City, Chicago, Singapore, and many other cities, significantly improving, not only the wait times for riders, but the operations of the transit authority.  Similarly, by using real-time data to adjust the timing of traffic lights to improve traffic flow Abu Dhabi has been able to speed traffic flow in the city by up to 25 percent.

Telecom companies have realized that the IoT revolution holds for them the promise of new found revenues in connecting the projected 50 billion things.  The number of cellular machine-to-machine connections grew 28 percent in 2014 and is estimated to reach to 1 billion connections annually by 2020.  AT&T reported that it has more than 22 million IoT devices connected to its network.  Recognizing the huge opportunity afforded by the IoT revolution, the large French telecom operator Orange recently announced that €600 million ($670 million) of its revenues will come from the Internet of Things related businesses by 2018.  Leading technology companies like Cisco, IBM and Ericsson have all realized the opportunities of the next technology revolution by creating IoT business units, new product lines and extensive marketing campaigns.  Industry analysts, consultants and other technology services companies have similarly organized to benefit from the Internet of Things.

The dawn of the IoT revolution may have begun but it will still be some time before its transformational powers will be fully felt.  There are a number of technical, business, regulatory and perception obstacles that must first be overcome.  We are still very much in the early days of the IoE revolution with many companies knowing that they need to do something but not sure, what or how.  A study by Harvard Business Review and Verizon found that less than ten percent of enterprises had deployed IoT initiatives.  And, of that small minority only 56 percent of those had an IoT strategy.  What does that say for the 90 percent of companies who have yet to implement IoT initiatives? 

Recent Cisco research of enterprise IT and business decision makers revealed that their top 3 challenges with implementing IoT initiatives in their businesses were: 1) security of business data; 2) standardization of IoT infrastructure and compatibility with business systems; and, 3) cost of implementation.  The critical issues of security and data privacy are critical elements that are being addresses, but we still have a long way to go to allay these justified fears around IoT implementations.  Equally, there are organizations and committees that are working hard on establishing IoT standards to ensure compatibility between all of the different IoT components.  However, the current IoT technology and solutions environment is very much a Tower of Babel when it comes to interoperability and compatibility.  Government regulation will no doubt play an important part in shaping security and privacy, driving standards and forming the legal framework for such leading-edge innovations as self-driving cars and autonomous machinery.

The IoT supplier market is currently very fragmented with a multitude of big and small companies providing single pieces of the IoT implementation – devices, application, point solutions, different platforms, etc.  The same Cisco end user research found that customers are not only looking to suppliers to provide them with end-to-end solutions but are looking for a broader array of services to help them successfully navigate this new technology revolution.  Specifically, the top things that businesses are looking for from an IoT provider include: 1) full solutions; 2) services (strategic planning, install, design, technical support); 3) solutions that leverage existing infrastructure; and, 4) the ability to scale with organization’s needs.  It could be some time before a number of key IoT suppliers emerge from the current fragmented market to successfully address all of the businesses needs and help them to fully realize the promised benefits of the IoT revolution.

What does the future have in store for IoT and how will this revolution unfold?  The following are my ten predictions of what we have to look forward to: 

1. The platform is the key to success – The “things” will get increasingly cheaper, applications will multiply and connectivity will cost pennies.  The real value will be created in the horizontal platform that ties it all together – the new OS.  This platform will be composed of 3 different layers: management, infrastructure, and data analytics and insights.
2. The industry will look completely different than it does today – Like in the early days of the Internet, IoT is a greenfield market.  New players, with new business models, approaches, and solutions can appear out of nowhere and overtake incumbents.   
3. Business is the key market - While there is lots of talk about wearables and connected homes, the real value and immediate market for IoT is with businesses and enterprises.  The adoption of IoT will be much more like the traditional IT diffusion model (businesses to consumers) than the Consumer-led adoption of social media and personal mobility. 
4. It will be about much more than the “things” – The currency of IoT will be “data”.  But, this new currency only has value if the masses of data can be translated into insights and information which can be converted into concrete actions that will transform businesses, change people’s lives and effect social change.
5. The “Connected Car” will be all about the car – There is currently a lot of hype about turning your car into a mobile entertainment center – music, video, social media and all of the apps that we currently enjoy on our smartphones.  However, the real value and transformation is in connecting the car operations (e.g., service updates, advanced notifications of failures) and drastically improving safety (e.g., inter-car communications, semi-autonomous driving).  These services will most likely be paid for by the manufacturer or through new, alternative business models, rather than directly by the driver.  
6. IoT will force business transformation – Businesses which connected to the Internet saw the real value when they re-designed their businesses models and processes for a connected world, and found new online products and services to offer.  Some companies immediately embraced the Dot-Com world, many had false starts and many others took a long time to jump on, or the revolution passed them by completely.  The same will be true of IoT.  Businesses need to develop strategies and plans for how they can leverage IoT to transform all aspects of their businesses and capture the real value of this revolutionary technology.  
7. Trading mobile dollars for IoT pennies – Mobile operators are salivating at the new revenues to be earned from connecting all of these things to the Internet.  However, it is not that straight forward.  While some of the traffic will flow over mobile networks, the majority of the connections will be made over wireline or unlicensed wireless networks, and much of it will be very low bandwidth traffic. Mobile operators will need to do more than just sell mobile connectivity to inanimate objects to reap the full rewards of IoT. 
8. There will be a battle for IoT application mindshare – With billions of devices projected to be spewing out petabytes of data, application developers will have a field day launching thousands, or even millions, of new and cool apps.  But, like the smartphone world, all of these apps will be fighting for mindshare and only a few will rise to the top to be valued by businesses and consumers. 
9. All cities will be smart – With more than one-half of the world’s population living cities innovative new IoT solutions, such as smart parking, connected waste, and traffic management, hold great promise for combatting the major challenges of rapid urbanization.  We are unlikely to see many Jetson-like smart cities of the future appearing overnight.  However, like in the past with the adoption of revolutionary technologies such as sewers, electricity, traffic lights, and the Internet, mayors will slowly implement IoT solutions to save money, shape the future and make their cities better places to live.  
10. IoT will cease to exist – Terms like “eCommerce”, “the Net” and “WWW” are all quaint reminders of how the Internet has ceased to be an exciting and mysterious new thing, and, like electricity, is now just part of our daily lives.  The Internet of Things will go the same way.  One day soon, it will be hard to imagine that all things weren’t connected and that the extraordinary benefits of IoT hadn’t always been with us.

Who Will Be the Winners in the IoT Revolution?

Every new technology revolution creates new technology company powerhouses and relegates others to the ashes of history.  The PC revolution gave us the likes of Microsoft and Intel, the Internet revolution created companies like Cisco, Google, and Amazon, and lately the mobile revolution has created market giants like Apple, Samsung and Facebook.  

We are in the early days of another transformative technology revolution – The Internet of Things.  Connected everything to everything in a smart, data-rich world will fundamentally transform businesses, generate enormous economic wealth and create immeasurable social value.  There is immense opportunity for suppliers to help businesses to achieve these tantalizing new benefits.  But, who will be the winning suppliers in the IoT revolution?   

Despite the Internet (connectivity) and Things (devices) being the key terms in the title of the next technology revolution, this is not where the money will be made.  It is estimated that there could be up to 50 billion connected devices in the next five years.  But, these will be largely low cost, low power devices with long replacement cycles.  We have all seen what happens in the device and hardware business – a steep declining price curve.  For example, the cost of semiconductors on a per-transistor has plummeted 50 percent in the last 3 years.  Effectively, lots of volume but a low margin business. 

Service providers are salivating at the thought of connecting the estimated 50 billion inanimate objects to the Internet.  However, the vast majority of these devices will require very low bandwidth as opposed to the demands of chatty and data hungry mobile users.  Equally, most of these connections will be over unlicensed networks, like Wi-Fi, rather the lucrative cellular networks.  Chasing value from connectivity effectively becomes a game of “trading mobile dollars for IoT pennies.” 

While there might not be huge value from chasing catchy IoT term itself, there are good opportunities to generate good money from supplying the IoT revolution.  Success will result in the creation of the next tech giants of this new era.  There are three key areas for value creation: 

1. Platform.  Successful IoT implementations require a comprehensive business and technical architecture – the IoT Platform – to provide the building blocks of the underlying infrastructure.  This platform is comprised of 3 broad areas: 1) Technical – cloud storage and compute, security, etc.; 2) Data Management – capture, management, analytics, etc.; and 3) Management – policy, device, API and application framework. These platforms are horizontal plays that can be leveraged across multiple industry verticals, allowing suppliers to reap the benefits of economies of scope and scale.
2. Solutions.  Implementing effective IoT systems is complicated and often requires considerable customization.  Providers who can provide end-to-end solutions (hardware, software, data insights, implementation and services) will be clear winners.  Successful solutions will have an industry vertical wrapper to make them relevant to the customer’s particular needs.  These solution providers will create new business models to deliver “IoT as-a-service” and outcomes-based financial models.  For example, IoT-enabled machinery as a service, or payments based on energy savings will be new models that will reduce the risk to businesses and ensure successful IoT implementations.  Providers who can successfully deliver solutions, vertical expertise and new business models will create deep and enduring relationships with their customers.
3. Business Integration.  IoT is only as good as its successful implementation and adoption by the business.  As we saw in the Internet revolution, there is a big need for outside providers to help companies to make this transition and to realize the promised benefits of the new technology.  Key business integration needs include: 1) Business Consulting –identifying opportunities, creating the business case, re-engineering the business and change management; 2) Systems Integration – integrating IoT systems with existing systems, data and processes; 3) Management – program management, ongoing operations and outsourcing of key operation

Helping to deliver the IoT revolution presents huge opportunities for business and technology suppliers.  The winners will be those companies that bring distinctive technologies, innovation, new business models and deep industry knowledge to the three key areas of IoT value creation.

Is Big Data the Eyeballs of the Dot-Com Era?

Remember the halcyon days of the Dot-Com era?  A frothy stock market, venture capital money flowing like water and famous sock puppets characterized the exuberance of the day.  One company (Boo.com) spent $188 million in just six months to create an online fashion store.  And 16 start-ups spent over $2 million each for a 30 second advertising slot during Superbowl XXXIV to crow of their existence.  But, all of the money didn’t matter – the mantra was all about capturing “eyeballs.”

The business theory of the day was that if you could get people to your website (the eyeballs) then somehow the money would come gushing in.  You were a heretic if you questioned how that would happen.  Eyeballs were a very monetizable item, so the more of them the better.  Of course, we know what happened.  The Dot-Com era came to a crashing end when the market finally realized that these companies really needed to have a viable business model, rather than waiting for the eyeball prophecy to be fulfilled.

I can’t help wondering if the exuberance, and some might say blind faith, in big Data is similar to some of the fallacies of the Dot-Com era?  Much of the Big Data mantra is all about creating and collecting as much data as possible because it has to be valuable.  The more of it you have, the more value you can create. 

Don’t get me wrong.  There is huge business and social value to be derived from Big Data.  There are numerous examples in medicine, education, business and government where data analytics has added huge value to the services and customer experience.  There countless opportunities to use data analytics to drive ever new sources of value.  The thing that I am challenging is the belief that by collecting huge amounts of data that it can be directly monetized – or turned into money.

Mobile users, public Wi-Fi, smart city deployments and user-centric applications are generating huge amounts of data.  Typically, huge streams of personal data like location, preferences, application usage, and device type are being generated by these uses.  The operators of these services believe that they are now sitting on a goldmine.  Their dream is to turn this valuable personal data into mounds of cash by selling it to advertisers and others who want to better reach and target end users.  There seems to be great excitement and expectations about how much this data is worth.  Many business cases now seem to use data monetization as a kind of “Factor X” to justify otherwise questionable business cases.

Like the eyeballs of the Dot-Com era, data monetization is all about advertising.  Advertising is a well-known business with well-established governing business principles.  At its simplest, advertising is a function of the ability to target a customer times the number of advertising impressions, or potential customers, that you can reach.  For example, a golf club manufacturer is willing to pay more to advertise to an avid golf player than the general public.  This is why big data is so valuable.  Personal information like location, device and app usage can be used to provide a much better target customer than general mass advertising.

We looked at the potential value of this data in considerable detail for a prospective large smart city deployment.  We discovered that we could definitely make money by selling the data generated on our smart city network, but it wasn’t that different than traditional advertising models.  Our proposed digital signage solutions generated roughly the same revenue as traditional billboards on the sides of bus shelters.  Similarly, pushing ads to mobile user devices generated marginally more advertising revenue than handing out flyers to pedestrians.  In total, we calculated that we could generate roughly $1.5 million in new annual advertising revenues.  To put this in perspective, that is just 5 percent of the total revenues that could be generated from delivering the total smart city solution.  The data can definitely be monetization, but it is unlikely to generate the mounds of cash that is eagerly expected from many operators.

As with Dot-Com eyeballs, once the hype and the naïve assumptions are wiped away, there is no real magic to big data monetization.  While there is money to be made from data monetization, it is highly unlikely to be a major revenue generator.  And, by no means should the promise of monetizing data be used to prop up weak smart city and Internet of Things business cases. 

Big Data has been described as the “New Oil.”  That may be a very attractive and compelling metaphor in a world where a barrel of oil sells for $100 or more.  But, remember oil can equally drop to $40 to $50 a barrel as we are currently witnessing.

10 Predictions for the Future of the Internet of Things

We are in the early days of another transformative technology revolution.  Wired magazine described a new era where “the most mundane items in our lives can talk wirelessly among themselves, performing tasks on command, giving us data we’ve never had before.”  The Internet of Things (IoT) is a world where up to 50 billion things (or devices) will be connected to the Internet by 2020; or, the equivalent of 6 devices for every person on the planet.   

We are already starting to see the emergence of smart cities, connected utilities, connected railways, connected factories, connected cars, and even connected mines, to name but a few.  The Internet of Things will fundamentally transform businesses, generate enormous economic wealth and create immeasurable social value.     

What does the future have in store for IoT?  The following are my ten predictions of what we have to look forward to: 

1. The platform is the key to success – The “things” will get increasingly cheaper, applications will multiply and connectivity will cost pennies.  The real value will be created in the horizontal platform that ties it all together – the new OS.  This platform will be composed of 3 different layers: management, infrastructure, and data analytics and insights.
2. The industry will look completely different than it does today – Like in the early days of the Internet, IoT is a greenfield market.  New players, with new business models, approaches, and solutions can appear out of nowhere and overtake incumbents. 
3. Business is the key market - While there is lots of talk about wearables and connected homes, the real value and immediate market for IoT is with businesses and enterprises.  The adoption of IoT will be much more like the traditional IT diffusion model (businesses to consumers) than the Consumer-led adoption of social media and personal mobility.
4. It will be about much more than the “things” – The currency of IoT will be “data”.  But, this new currency only has value if the masses of data can be translated into insights and information which can be converted into concrete actions that will transform businesses, change people’s lives and effect social change.
5. The “Connected Car” will be all about the car – There is currently a lot of hype about turning your car into a mobile entertainment center – music, video, social media and all of the apps that we currently enjoy on our smartphones.  However, the real value and transformation is in connecting the car operations (e.g., service updates, advanced notifications of failures) and drastically improving safety (e.g., inter-car communications, semi-autonomous driving).  These services will most likely be paid for by the manufacturer or through new, alternative business models, rather than directly by the driver.
6. IoT will force business transformation – Businesses which connected to the Internet saw the real value when they re-designed their businesses models and processes for a connected world, and found new online products and services to offer.  Some companies immediately embraced the Dot-Com world, many had false starts and many others took a long time to jump on, or the revolution passed them by completely.  The same will be true of IoT.  Businesses need to develop strategies and plans for how they can leverage IoT to transform all aspects of their businesses and capture the real value of this revolutionary technology.
7. Trading mobile dollars for IoT pennies – It is no wonder that the mobile operators are salivating at the prospect of a windfall of new revenue to be earned from connecting the projected 50 billion devices, or things, to the Internet.  However, it is not that straight forward.  While some of the traffic will flow over mobile networks, the majority of the connections will be made over wireline or unlicensed wireless networks. And, many of the IOT devices require very low bandwidth - simply conveying their status on an occasional basis and then remaining dormant until this status changes.  Mobile operators will need to do more than just sell mobile connectivity to inanimate objects to reap the full rewards of IoT.
8. There will be a battle for IoT application mindshare – With billions of devices devices projected to be spewing out petabytes of data, application developers will have a field day launching thousands, or even millions, of new and cool apps.  But, like the smartphone world, all of these apps will be fighting for mindshare and only a few will rise to the top to be valued by businesses and consumers.
9. All cities will be smart – With more than one-half of the world’s population living cities innovative new IoT solutions, such as smart parking, connected waste, and traffic management, hold great promise for combatting the major challenges of rapid urbanization.  We are unlikely to see many Jetson-like smart cities of the future appearing overnight.  However, like in the past with the adoption of revolutionary technologies such as sewers, electricity, traffic lights, and the Internet, mayors will slowly implement IoT solutions to save money, shape the future and make their cities better places to live.
10. IoT will cease to exist – Terms like “eCommerce”, “the Net” and “WWW” are all quaint reminders of how the Internet has ceased to be an exciting and mysterious new thing, and, like electricity, is now just part of our daily lives.  The Internet of Things will go the same way.  One day soon, it will be hard to imagine that all things weren’t connected and that the extraordinary benefits of IoT hadn’t always been with us.

Trading Mobile Dollars for IoT Pennies

Jeff Zucker of NBC Universal coined the prescient expression “Trading analogue dollars for digital pennies” in 2008 to describe the huge gap that he was observing between the lucrative promises of online and digital advertising and the reality of the meager revenues that it was in fact producing.  Could the same be true of the Internet of Things revolution?  Are we trading the hundreds of dollars that we are generating from mobile users for the pennies that providers get for connecting “things”? 

Connecting the 50 billion projected devices, or things, to the Internet is the cornerstone of the Internet of Things.  Given the challenges of remoteness, mobility and the cost of wiring up these devices, many of these connections will be made over mobile networks.  In fact, Beecham Research estimates that the number of cellular machine-to-machine connections will grow to 1 billion by 2020, up from 172 million in 2013.  It is no wonder that the mobile operators are salivating at the prospect of all this new revenue to be earned from connecting inanimate objects.  This windfall is especially at a time when there traditional mobile business is under attack.  Changes in voice usage and bundled minutes are causing voice revenues to decline and data revenues are under attack from Wi-Fi connections and over-the-top providers (see The Mobile Paradox).  

Like the analogue to digital advertising shift, the shift in IoT connectivity is not a straight substitution.  Let’s look at the economics.  The average mobile user in the U.S. spends $589 annually for his mobile phone service ($381 per year in Europe).  Connecting things is a lot different than connecting chatty or data hungry mobile users.  In the IoT world, many devices simply convey their status on an occasional basis and then remain dormant until this status changes.  For example, I am familiar with an interesting company that provides a compelling solution to cities to better manage their public trash.  Each of the trash bins that are located on sidewalks, parks and other public venues is connected to the Internet, communicating its status to the city operations so they know when the bins need emptying.  As a result, the city only has to empty them when they are actually full, saving considerable money from not having to send out crews to collect half-empty trash bins. 

Because these bins are conveying very little information (“I am full; “I am empty”), at infrequent intervals they do not require the fast 4G LTE connectivity that allows us to quickly browse the web and stream videos on our smartphones.  In fact, they get by with a decade’s old technology – SMS.  The same technology that we use to send each other messages on our phones.  For that, the mobile operator charges the company 50 cents per bin; or, annual revenues of just $6.  That means that a mobile operator would have to connect close to 100 bins to equal just the revenue of one mobile user.   

Of course not all devices will require simple mobile connectivity.  But, when we talk about IoT the majority of the use cases are like my trash bin example - sensors monitoring the temperature of transportation cargo, parking sensors alerting when a spot is free, or smart meters communicating daily energy consumption.  This would mean that these 1 Billion new M2M connections could represent just 1 percent of the revenue that the industry would have traditionally collected if those connections had been to people and their smartphones, rather than to inanimate “things”. 

So, while IoT promises huge numbers of new mobile connections, the economics are fundamentally different than the traditional mobile business.  IoT offers mobile operators huge quantities of connections but potentially very little new revenue.  If providing mobile connectivity is nowhere near as lucrative as it would appear, how are mobile operators to prosper from the IoT revolution?  The obvious answer is to move up the value chain, providing a wide variety of value-added solutions and services that are required for successful IoT implementations and realization of business value. 

In a future article I will explore what these value-added services and solutions are and who will be the winners in the Internet of Things revolution.


Read blog on Cisco.com

Observations from Mobile World Congress 2015

I have just returned from a very interesting and jammed-packed week at Mobile World Congress 2015 in Barcelona.  A record 93,000 plus people are estimated to have attended this year’s premier technology festival.  Much has changed in the industry over the last year since I reported my observations of MWC 2014.  However, what is most remarkable is how the boundaries of mobility continue to expand and morph – everything now seems to be mobile?  As such, the show offers a fascinating glimpse into the future of technology and the major social and business shifts that we can expect in the next few years.
The following are my personal observations and extrapolations from the show, based on my conversations with operators, customer meetings, analysts, and colleagues, as well as from simply walking the show floor.

1. 5G – The Next New Technology — What is a technology show without a shiny new technology? Despite the fact that less than 5 per cent of global subscribers have adopted the previous new technology (4G), and over half of mobile users are still back on the second generation (2G) technology, we are now entering the fifth generation of mobile technology – 5G. The remarkable thing though is that no one really knows what 5G is. There are no technical standards or industry agreements on the definition of 5G. However, every major vendor is now “5G ready” and promoting their 5G solutions. And mobile operators like KT and SKT in South Korea are aggressively promoting their pending 5G deployments.
2. IoT – The Year’s Hottest Three Letter Acronym — These 3 letters – standing for the “Internet of Things” – were everywhere. They were on the signs of practically every booth and on the tip of everyone’s tongue. No doubt, the ability to connect sensors, devices and “things” to the Internet is the next wave of mobile growth and presents tremendous opportunities for technology vendors to sell new products and services. A number of key partnerships were announced and some very interesting and compelling industrial IoT case studies were promoted. The mobile operators shouted out their relevance in IoT by displaying their platforms, capabilities and lighthouse customer engagements.
3. Smart Phone Wars – Samsung won the unofficial market launch of the show with its slickly executed unveiling of the new S6. This stunning new device is Samsung’s attempt to get back into the game – trying to recover some of the ground lost to the new iPhone 6 and to firmly establish itself as the Android leader. While many other manufacturers launched new smartphones, Samsung was by far the most talked about brand at MWC. In the continuing saga of the smart phone wars, it looks like we might be back to a 2 player game again for a while?
4. Building the New Mobile — For those of you who follow me, you will know that I have long been a proponent of a “Wi-Fi Max-Mobile Min” strategy to create a new mobile service.   With the near ubiquity of Wi-Fi enabled devices, Wi-Fi access in homes and offices and the growth of public Wi-Fi, there is an opportunity to create a new type of mobile service running largely over Wi-Fi. While there have been a number of smaller, niche players (e.g., Republic Wireless, Scratch), it wasn’t until Google announced that they were getting into the game that it started to get serious. Sundar Pichai of Google gave an unsettling (at least for the traditional MNOs) keynote describing how Google’s MVNO would be primarily based on Wi-Fi, and when that was absent it would select the best, and cheapest, cellular coverage from a number of the big mobile providers.
5. The Connected Car Show — At times you could be forgiven for thinking that you had wandered into the auto show in Geneva or Detroit instead of MWC. There were cars everywhere. The industry sees these as “smart phones on wheels.’ Operators, such as AT&T were crowing about their big deal to connect all new Audis. Auto manufactures, such as Ford, were demonstrating the cool things that you could do with their connected cars. And for some reason, even exhibitors like Visa had cars at their booths. These were not just any cars – they were Porches, Audis, Mercedes, Maserati’s and every other high-end auto you can imagine.   Fancy cars are now the standard “eye candy” at big technology shows.
6. Virtual Reality — Samsung demonstrated a very cool technology for adapting one of their Galaxy Note 4’s or the new S6 into a virtual reality device. Not only does VR make games incredibly cool, but it has lots of applications to industry, enhancing solutions and business processes. HTC is working on a similar VR adaptor for its mobile devices. Several exhibitors were also using virtual reality devices to enhance the impact of their messaging. As virtual reality becomes integrated with cost-effective, and near ubiquitous smart phones, we can expect it to have a big impact on re-shaping many businesses – far beyond the gaming world.
7. Virtualization Reality — Virtualization and the cloud have finally hit the core mobile network elements. Not only will this make it less expensive for operators to build networks, but will provide them with much greater flexibility and responsiveness and allow the network to extend well beyond the boundaries of the traditional mobile network.   This is the year that the promise finally started to become a reality. Mobile operators, such as Telefonica, China Mobile and NTT DoCoMo, announced fully operational NFV (Network Functions Virtualization) deployments. AT&T reiterated its desire to move 75 percent of its network to a cloud architecture by 2020.
8. Making Wearables Wearable — There were 53 wearable devices on display at the show – 10 of which had their own SIMs to connect directly to the mobile network. The majority of these were smart watches and fitness trackers. The challenge, however, seems to be getting people besides device geeks to wear these. Huawei made a very interesting debut in this category with a high-end watch with a round-faced classic design. It looked like something that even James Bond might wear. And, although Apple was nowhere to be seen, rumors (and subsequent launch) of its new Apple Watch presented additional hope that wearables might in fact become wearable.
9. Mobile Monetization – An Industry on the Edge — At one time, service providers were the kings of the show. They are now just one of the participants in the massive and rapidly changing mobile industry. The decline in voice traffic, loss of messaging and competition to their data business from over the top providers and alternative access networks such as Wi-Fi, means that they desperately need to find new ways to make money. Most of the world’s major mobile operators now have their own large and prominently placed booths on the show floor. They are proudly displaying the latest business solutions, cloud services, gaming, IoT and other innovative mobile offerings that they have to sell. They are hoping that these new revenue-generating opportunities will move them beyond merely connectivity providers and deliver the next wave of monetization opportunities.
10. The Battle for the Great Indoors — Changes in devices, applications and social behavior are re-defining mobility from an on-the-go activity to a more nomadic activity, which takes place largely indoors. Traditional macro networks have a tough time penetrating buildings and reaching indoors. Hence operators are struggling to provide 5 bar coverage in homes, offices and public spaces. Traditional mobile technology vendors are now showcasing their small cell, Wi-Fi and DAS solutions as the answer to this challenge of lighting up the indoors. At one time, these solutions were relegated to the back corner, but they are increasingly becoming center stage as a solution to this new and growing problem. Not to mention, they offer an attractive new revenue opportunity for traditional macro network vendors.
11. Selfie Journalism – TV Production in the Palm of Your Hand – It was truly amazing to watch journalists reporting on the show holding their smartphones at arms-length in one hand and an attached professional-grade microphone in the other. In the past crews of cameramen and soundmen would have been needed to produce professional quality reporting from remote locations. The mobile revolution has created “selfie-journalism”, replacing these crews with one reporter, a smartphone and some clever software. The BBC did an interesting story on how they filmed, edited and produced their coverage of MWC entirely on mobile devices.
12. Mobile Payments – This May Be The Year? — The last point that I always seem to make on these reviews of MWC is on mobile payments. Once again, mobile payment solutions from banks, credit-card companies, MNOs and other providers were all competing to create a wallet-less world. However, unlike the promises of past shows, this may be the year that mobile payments finally take-off. With the launch of Apple Pay earlier this year and the big announcement that Samsung’s new S6 would incorporate technology from their recent acquisition of Loop (making mobile phones work with any existing magnetic card reader) we may finally start to leave our wallets at home.

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The Mobile Paradox – Why Are There Price Wars in a Time of Plenty?

One of the first lessons that every economics student is taught is “supply and demand” – the fundamental economic principle that price goes up with increased demand.  Yet we are witnessing the opposite to these age old principles in the mobile business.  Despite phenomenal demand for mobility services, the mobile operators that provide these services are engaged in a fierce price war.

Faster, sleeker, and more powerful mobile devices, running countless of applications have transformed businesses and our personal lives.  The insatiable demand for mobile devices and new bandwidth-hungry applications is generating enormous amounts of mobile data. The Cisco Visual Networking Index™ (Cisco VNI™) predicts that these trends will cause global mobile data traffic to increase 11-fold from 2013 to 2018, surpassing 15 exabytes per month by 2018.  Operators continue to invest in leading technologies like LTE, purchase more spectrum, and race to deploy ever more network infrastructure to meet this huge demand. 

In spite of this phenomenal growth and insatiable consumer demand, many MNOs are struggling to profit from this mobile gold rush. Mobile operators are watching as their average revenue per customer (ARPU) flattens or declines. Despite increasing customer appetite for mobile data, minutes of use in their cash-cow voice business are falling off sharply, and usage of text messaging is peaking. In fact, Ovum predicts that 2018 will mark the first year of revenue contraction in the history of the global mobile market. Following four years of less than 1 percent growth between 2012 and 2017, revenues will decline by 1 percent in 2018, ending the year $7.8 billion lower than in 2017.

When other industries, such as the automobiles, hotels, or airlines, face healthy customer demand, they build out more capacity, raise or maintain prices and sell more products, reaping greater profits.  However, the mobile industry doesn’t seem to be like other industries?  This “Mobile Paradox” - huge growth and customer demand, yet significant business and market challenges for MNOs to make money - seems to be unique to the mobile industry. 

Yet given this grim outlook we are witnessing very aggressive price wars in the US, and other markets.  In the US, T-Mobile has significantly disrupted the market by slashing prices, dropping device subsidizes which had tied consumers to their carrier, and most recently, introduced “rollover data” – allowing subscribers to rollover their unused data allocation to the next month.  All of the American operators have been forced to follow T-Mobile’s lead or watch their customers walk out the door.

What gives?

In seeking to understand this paradox and the current price wars, we need to consider three critical characteristics of the industry: 

1. High Fixed Cost Business – Operators spend billions of dollars to acquire spectrum and deploy far-reaching sophisticated networks to service a large base of subscribers.  Once they have built this expensive asset every new customer that they add contributes significant revenue at a very low marginal cost.  Operators have every incentive to add new customers and to keep the ones that they have to profit from these huge economies of scale.  Most markets are now saturated, with mobile penetration rates of 80 percent and higher.  So, it becomes a zero-sum battle with competitors to steal customers.  While a somewhat blunt instrument with huge long-term profitability implications, T-Mobile has clearly demonstrated that slashing prices is an effective means to fight this battle.
    
2. Substitutes and Alternatives – While it lacks many of the quality, coverage and features of cellular mobile, Wi-Fi has quickly become an important means to connect devices to the Internet without wires.  Aside from smartphones, most of the important and fast growing mobile devices, such as tablets, eReaders and laptops, are exclusively Wi-Fi enabled.  In fact, smartphones, which we tend to think of as synonymous with the mobile industry, are increasingly accessing Wi-Fi for Internet connectivity.  Our research shows that smartphone users actually connect to the Internet through Wi-Fi over one-half of the time, versus accessing the mobile network.  The Cisco VNI™ study confirms that Wi-Fi will account for 56 percent of all IP traffic in 2017, versus 12 percent from mobile.
    
3. Value Migration – Mobile operators once controlled all of the value that was created on their networks.  Whether that was voice, messaging or the early media services that they offered (e.g., music, games, ringtones) through their exclusive “walled garden” platforms.  Much of this business is now being lost to substitute over-the-top (OTT) services and to major shifts in usage behaviors. Mobile consumers would rather pay for these OTT services or be subjected to advertising from the likes of Google, Facebook, YouTube, and the App Store, than pay more to mobile operators.

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