Telco IoT in 2018: Firework or Flop?
As predictable as a hangover on New Year's Day, the assertion every January that IoT (the Internet of Things) is poised for a breakthrough year is likely to elicit similar howls of anguish from seasoned industry observers used to disappointment. But as more efficient network technologies move out of the lab and into commercial deployment, the signs this year are more encouraging than usual. The falling prices of equipment and services could also give IoT a much-needed shove in the right direction.
Despite the bullish sentiment that has long surrounded it, IoT continues to underwhelm, as far as most operators are concerned. Data gathered by Northstream, a Swedish consultancy, and shared with Light Reading in late 2017 showed that IoT revenues as a percentage of total sales were just 1.59% for Vodafone Group plc (NYSE: VOD), 1.18% for Verizon Communications Inc. (NYSE: VZ) and as little as 0.53% for Spain's Telefónica in the third quarter of that year.
Analyst firm Analysys Mason also notes that IoT still accounts for "only a small part of operators' business." In research published earlier this month, it found that IoT constitutes less than 2% of revenues for Vodafone, Verizon, Telefónica and Telstra Corp. Ltd. (ASX: TLS; NZK: TLS). Even if IoT revenues grow 15% annually -- the average organic growth rate so far -- they would not cross the 5%-of-sales threshold until 2026. And that is assuming the top line stays flat. (See Telstra Launches Extensive NB-IoT Network.)
These figures have not stopped the IoT evangelists from promising the usual salvation this year. Chief among them is China's Huawei, which told analysts and reporters "the golden age of IoT has arrived" at a press briefing in London in February. Huawei Technologies Co. Ltd. argues that when IoT revenues generate more than 1% of an operator's total sales, they cross an important inflection point. "IoT growth will be much faster afterwards," said Edward Fan, Huawei's vice president of carrier business group marketing. "IoT will become a major source of revenues for operators." (See DT, Chinese Operators Take NB-IoT to Market.)
In the kind of hockey-stick projections not seen in the telecom market since the birth of 3G, Huawei predicts the number of IoT connections will soar from about 600 million in 2017 to 3.8 billion by 2020 and 35 billion by 2025. Over that same period, operators' IoT revenues will rise from $8 billion last year to $38 billion in 2020 and as much $400 billion in 2025. As a proportion of total sales, IoT revenues will necessarily grow from 0.5% in 2017 to 20% by 2025.
These forecasts prompt guffaws from Northstream CEO Bengt Nordström and are bound to be viewed with skepticism by many of the operators that Huawei serves. It is not just the rate of growth in connections that looks optimistic, either. Huawei's forecasts imply that average revenue per connection (ARPC) falls from $13.33 last year to $11.43 in 2025, a compound annual growth rate of -1.9%. Yet Analysys Mason reckons ARPC is falling at a rate of between 5% and 10% annually. And Huawei's ARPC numbers look high when compared with IoT service charges from companies using non-cellular technologies. LoRa connectivity, for instance, is available from as little as €5 ($6.15) annually, according to advertising.
Huawei assumes that operators will sell more than just connectivity, however. Responding to questions from Light Reading, Fan said: "We are seeing the carriers changing their business models and there are already good practices in this area. They are selling services and also offering data mining because IoT is generating so much data. That is a goldmine."
But selling data analysis will be easier in some jurisdictions than others. European operators, in particular, may struggle to monetize data in this way because of strict regional rules about data privacy. The fallout from the recent data scandal involving the UK's Cambridge Analytica, which used Facebook data for political advertising, might result in much tougher regulations in other countries, too. (See Facebook: The Sick Man of Silicon Valley.)
What's more, operators' efforts to be more than just connectivity providers have been fairly cack-handed. While there are undoubtedly success stories, most telcos still generate a negligible share of revenues from other activities. Nordström continues to feel that systems integrators and consulting companies like Accenture and Capgemini, which have experience across numerous industries, can do a better job than operators at developing an IoT service proposition.
Next page: Signs of life
Signs of life
For all the doubts, there are some positive indicators for the IoT industry in early 2018. For one thing, at this time in 2017, the NB-IoT cellular standard, which promises lower IoT costs than mainstream 2G and 4G technologies, had been a fully standardized option for less than a year. With growing maturity, it has now drawn commitments from some of the world's biggest operators, including Deutsche Telekom AG (NYSE: DT), Vodafone, China Mobile Communications Corp. and T-Mobile US Inc. (See Vodafone to 'Crush' LoRa, Sigfox With NB-IoT, Deutsche Telekom Deploys NB-IoT Across Europe and T-Mobile Rolls Out $6-a-Year NB-IoT Plan.)
Importantly, much of the current NB-IoT action appears to be in China. "A Chinese carrier last year saw the growth of 10 million new [NB-IoT] customers every two months and this growth is quite fast," said Fan at Huawei's February event in London. This could persuade operators in other parts of the world that NB-IoT is ready for mass-market deployment. Given the size of the Chinese market, it should also help to lower equipment and service costs. In the context of these Chinese deployments, a Huawei forecast that NB-IoT will have 150 million connections by the end of 2018, up from 10 million last year, does not seem so far-fetched.
On the non-cellular side, there is also greater momentum. Semtech Corp. (Nasdaq: SMTC), the Californian chipmaker behind LoRa technology, now claims to have sold more than 50 million chips that will support LoRa connections. In the telco world, its supporters include France's Orange, South Korea's SK Telecom (Nasdaq: SKM) and US cable giant Comcast Corp. (Nasdaq: CMCSA, CMCSK). Several operators are using LoRa alongside LTE-M, another cellular technology that supports faster IoT connections and looks more suitable when mobility is a requirement.
In the US, in particular, rivalry between operators backing different technologies could spur deployment. "Comcast is rolling it [LoRa] out in a big way and that will drive the cellular players to make a decision," said Geoff Mulligan, the former chairman of the LoRa Alliance, an association that promotes LoRa, during a conversation with Light Reading in February (the LoRa Alliance announced Donna Moore as its new chair in March).
The non-cellular technology built by France's Sigfox could also have a role. Despite the company's difficulties, the Sigfox technology is still highly regarded in parts of the industry, and currently represents a much lower-cost option than cellular. Sigfox expects to more than double the number of connections this year, from 2.5 million to around 6 million. With additional funding and astute management, it might be able to carve out opportunities with companies that balk at NB-IoT costs. (See Sigfox Poised to Get €40M Funding Prop – Sources and French Toast? Sigfox on Skid Row.)
The number of IoT connections is now growing extremely quickly, says Analysys Mason. Vodafone, for example, finished 2017 with 65 million connections in total, up from 50 million at the end of 2016. That, in turn, is fueling growth in revenues. And even if this accounts for a tiny share of overall sales, the revenue figures are by no means insignificant. In annual sales, IoT is now worth more than $1 billion for Verizon and about $890 million for Vodafone. "If IoT were a standalone business, it would be considered large; it is only small in comparison to the core business," says Tom Rebbeck, a research director at Analysys Mason, in a recent paper.
Even if operators fail in the value-added services market, IoT as a pure connectivity business is not to be sniffed at. While Huawei's forecasts are indisputably optimistic, continued growth in connections should ensure that IoT accounts for a bigger share of total revenues by the mid-2020s. For some operators, IoT could also form a connectivity "beachhead" from which they can bid for larger enterprise contracts, says Rebbeck. With the mainstream consumer business going nowhere fast, that could prove vital.
— Iain Morris, News Editor, Light Reading