Global Telecom Insider

Vol. 4, No. 3, March 2012 Pyramid Research Global Telecom Insider Operator M2M Success Hinges on Flexible Pricing TABLE OF CONTENTS INTRODUCTION 2 A. Fixed tariff for telematics and fleet monitoring 5 B. Tiered pricing 8 C. Flexible pricing will drive the M2M business 12 D. Cooperation and partnerships 13 MARKET DETAIL 15 CASE STUDY: AT&T, US 15 CASE STUDY: MOVISTAR MEXICO 16 CASE STUDY: MTS, RUSSIA 17 CONCLUSIONS 20 Key findings 20 Recommendations 20 RELATED RESOURCES 21 HIGHLIGHTS It is still too early to say which M2M pricing model works the best. Mobile operators will continue to customize their M2M tariffs to address customer needs. M2M pricing will move away from a fixed price to a mixture of flexible and tailormade tariffs. We also expect the operators will introduce a greater degree of price tiering because M2M will serve a larger number of verticals, some of them more data-hungry than others. Partnerships are key when it comes to M2M, both in terms of the platform and application delivery, but also roaming. Operators that have good roaming coverage will be able to serve clients across a number of markets. PYRAMID RESEARCH 2012 ID# 1092

subscriptions (m) Introduction In the past, mobile network operators (MNOs) have taken a passive approach to the machineto-machine (M2M) market because of its complexities and relatively small size. However, this is rapidly changing in developed and developing markets the opportunity is now more appealing as the traditional mobile market is becoming saturated and as additional revenue sources are hard to come by. We expect global M2M subscriptions to grow at a CAGR of 25.5% between 2010 and 2016, and account for 3.6% of mobile subscriptions globally in 2016 (see Exhibit 1). This translates into an almost threefold increase in total M2M airtime revenue, from US$2.2bn in 2010 to $7.0bn in 2016, and an increase from 1.0% to 1.4% of total mobile data revenue between 2010 and 2016. Exhibit 1: M2M subscriptions, M2M as a percentage of all subscriptions globally, 2007-2016 M2M subscriptions M2M % subscriptions 300 4.0% 250 3.5% 200 150 100 3.0% 2.5% 2.0% 1.5% 1.0% As a % of all subscriptions 50 0.5% 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 0.0% Source: Pyramid Research In markets where the M2M opportunity is still in an embryonic stage, telcos cannot justify building additional infrastructure and resources to support M2M subscriptions. But in markets with a visible M2M opportunity, operators have used partnerships or developed their own platforms to better support M2M subscriptions. By becoming more active in the value chain, operators can take a larger revenue share of it while also controlling and driving the growth of the service. The go-to-market strategies and business models are still in the development stage. Some players are experimenting with tiered pricing, while others are working with customers on a one-to-one basis, putting their faith in flexible pricing. Pricing M2M services right is becoming increasingly vital because of the typically long-term M2M client relationships and contract commitments. Quite often modules are embedded and contract lengths vary anywhere between one and 25 years. PYRAMID RESEARCH GLOBAL TELECOM INSIDER VOL. 4, NO. 3 2

A number of telcos have moved aggressively on the M2M opportunity. Telekom Austria, for example, set up its M2M division in September 2011 and was able to close 19 projects worth 5m ($6.67m) in Q4 2011, covering the verticals of transport, logistics, payment and industry automation. We believe that M2M pricing will move away from a fixed price to a mixture of flexible and tailor-made tariffs. We also expect the operators will introduce a greater degree of price tiering because M2M will serve a larger number of verticals, some of them more datahungry than others. In this report, we look at a number of operators M2M commercial offerings, and we analyze pricing strategies of Tier 1 mobile operators across 14 markets. We present the case study of US-based MNO AT&T, one of the most successful operators in the M2M sphere, and then take a look at two additional operators in emerging markets: Movistar Mexico and MTS Russia. PYRAMID RESEARCH GLOBAL TELECOM INSIDER VOL. 4, NO. 3 3

What is this M2M fuss all about? In our recently published report, The Machine-to-Machine Market: A high-growth opportunity for MNOs, we look at the M2M value chain and ecosystem, and we identify the main growth segments. In essence there are three elements of the M2M value chain: the device, the network and the application. Exhibit 2 presents Pyramid Reseach s estimate for the breakdown of total M2M revenue into the three elements of the value chain. In 2011, we estimate that the value of the hardware module comprises only around 2.0% of the market, equivalent to an opportunity of $750m globally, and this is a playground for vendors such as Cinterion, Sierra Wireless and Telit. We estimate the connectivity element to acount for almost a third of total M2M revenue opportunity. Connectivity consits of two parts: (radio) network access and service management. The traditional core network of the operator is typically not suited to the management of M2M subscriptions, and so a separate platform is required to offer capabilities such as remote device activation, specific billing requirements, device/subscription monitoring and so on.the last piece, systems integration (SI) and application service provision (ASP), accounts for almost 65% of total market revenues. Exhibit 2: M2M revenue breakdown across the value chain Module revenues Connectivity SI and ASP 2010 0% 20% 40% 60% 80% 100% Source: Pyramid Research 2011: The Machine-to-Machine Market: A high-growth opportunity for MNOs Operators are moving away from merely offering wholesale airtime access to M2M specialists and MVNOs (see the CORE Telematics Case Study in our recently published MVNO Insider, MVNO Strategies Beyond the Traditional Ethnic and Discount Models) to providing a whole suite of connectivity capabilities. In addition, to make themselves more attractive networks, operators are building partnerships both up and downstream in order to enable clients to bring services to market faster, to lower costs, and to provide a range of services and capabilities to suit different needs. While the network access, or airtime revenue, is the core service the mobile operators provide, it accounts for only around 18% of the total connectivity revenue, and mobile operators are increasingly focusing on the service management aspect of connectivity to increase their revenue. PYRAMID RESEARCH GLOBAL TELECOM INSIDER VOL. 4, NO. 3 4

Connection/activation fee In general M2M is offered to corporate customers, and in addition to a monthly fee there is also a charge for activation of the service. This activation depends on an operator s strategy and plan, and ranges from $0 and $33.62, but the price is almost uniform across operators in the same country, with operators charging $15 in Sweden and $6 in Ukraine. Connection/activation fees also vary by type of SIM. For example in October 2011 MegaFon started selling thermo-resistant SIM chips which can endure temperatures from -40 C to +105 C to its corporate customers in Moscow for $8.37 (Rb235) while it charges 60% less for M2M SIM cards ($3.14/Rb90). While there is no data available on the uptake of thermo SIMs in Russia, MTS s Ukrainian subsidiary sold 600,000 M2M thermo SIMs across the country between July 2011 and January 2012, accounting for 3% of all M2M subscriptions. We believe that an activation fee is a good way for operators to make extra money, but we think it should depend on the contract length and the type of device connected. For example, an activation fee for video surveillance cameras, which are more data-intensive than smart meters and require higher bandwidth, can be higher than for smart meters. Exhibit 3: Cost of connection/activation fee across a sample of operators, 2012 Operator Price Telenor Sweden $15.17 (Skr100) Tele 2 Sweden S15.02 (Skr99) Telia Sweden $15.17 (Skr100) MTS South Africa free MTS Russia free T-Mobile Poland $33.62 (Zl 99) Kyivstar Ukraine $6.27 (UAH 50) MTS Ukraine $6.15 (UAH 49) Tele 2 Ukraine $6.27 (UAH 50) Verizon Wireless $15 (monthly and 12 months), $10 (24 months) MegaFon Thermo SIM chip Thermo SIM $8.37 (Rb240) $3.14 (Rb90) Sprint US up to $36 activation fee/line Sources: Operators, Pyramid Research A. Fixed tariff for telematics and fleet monitoring As M2M services traditionally generate constant bit-rate (CBR) traffic, quite often mobile operators can set the transmission time to suit them. This used to be a dominant pricing model when the M2M services were just taking off, and operators that are the newcomers in the M2M area tend to use it. In our view, this model is still well-suited to serve devices with low data transmission or non-frequent needs such as anti-theft alarm or smart meter. These devices require monitoring only once a day, and could be programmed to send data at night or during off-peak hours. For example, smart meters transmit 1Kb or 2Kb of data every other week, but it doesn t require latency or roaming. We have noticed that the number of operators utilizing this pricing model is decreasing, partially because operators are trying to adopt a wider portfolio of M2M applications, which call for tailored pricing. Across the operator sample, only a couple of MNOs in emerging PYRAMID RESEARCH GLOBAL TELECOM INSIDER VOL. 4, NO. 3 5

markets still charge a fixed fee for telemetry services including TIM Brazil, MTS Ukraine and Play Poland. In June 2011 TIM Brazil introduced a postpaid plan for data transmission for telemetry services to be used for card payment machines, ATMs, alarms and real-time location tracking of fleet and equipment. This plan is data-only; each M2M subscription comes with an average allowance of 4MB per chip. Exhibit 4: Telemetry fixed monthly tariffs across a sample of operators, 2012 Operator TIM Brazil MTS Ukraine GPRS Monitor Play Poland Monthly fee $8.02 (R$14.90) $0.63 (UAH 5) Pricing SMS $0.22 (R$0.39) CSD* $0.55 (R$0.98) $0.03 (UAH 0.25) CSD* to MTS $0.03 (UAH 0.25) CSD other $0.12 (UAH 99) Includes 5MB GPRS, outside of allowance UAH 2/MB Telematics Tariff 5 $1.70 (Zl 5) Telemetric Tariff 10: $3.40 (Zl 10) includes 15MB &100 SMS to Play Zl 0.15/$0.05/SMS on net, $0.07/Zl 0.20/SMS off net $0.003 (Zl 0.01) per KB *CSD (circuit-switched data or GSM data) is a standard technology of data transmission with the channels commutation in the GSM network. Source: Pyramid Research, operators Quite often operators utilize a fixed pricing model to charge for fleet management, especially if bundled with a device. Fleet monitoring generally warrants more expensive monthly tariffs across a number of analyzed operators, as shown in Exhibit 5, and these tariffs vary between $8.55 for Vodafone Czech Republic to $35 in the case of Iusacell Mexico. The equipment cost hovers in the $200 range. Fleet monitoring is offered in partnership with one or more companies. MTS (Ukraine), for example, partnered with SatTrans Navigator. MegaFon provides vehicle tracking solution in cooperation with Ends (Unified National System of Dispatching Russia), and the subscriber has to purchase GPS or GLONASS 1 enabled equipment from an authorized retailer. 1 GLONASS (Global Navigation Satellite System) is a radio-based satellite navigation system used in Russia. In 2010, it achieved 100% coverage of the Russian territory, and in October 2011 full global coverage, making it an alternative to GPS (Global Positioning System). PYRAMID RESEARCH GLOBAL TELECOM INSIDER VOL. 4, NO. 3 6

Exhibit 5: Fleet monitoring monthly tariffs across a sample of operators, 2012 Ukraine Ukraine Czech Republic Iusacell Mexico MegaFon Russia Landmark 1 Plus Monthly rent $11.29 (UAH 90), 50MB, 100SMS Landmark 2 Plus Monthly rent $12.55 (UAH 100), 100MB, 200SMS Equipment cost from $251 (UAH 2,000) MTS Navigator Monthly rent $10.04 (UAH 80) $0.14 mobile Internet (UAH 1.12)/MB Advanced payment $50.06 (UAH 399) Car Manager Data traffic $8.55 (Kc147.50) Device cost: $240 (Kc4,147.50) Ubicacel Vehicle Monthly rent $35 (PS425), Device cost depends on contract length: $166 (PS1,999)/12- month contract to $0/36-month contract Mobile Patrol Monthly rent $27.91 (Rb 800) Data transfer up to 1MB $0.17 (Rb7), SMS $0.03 (Rb1) in the region outside $0.06 (Rb1.80) CDS outside region $0.31 (Rb9) Includes 5MB data transfer &20 SMS Sources: Pyramid Research, operators Of course M2M pricing is still in a state of flux, and operators are trying to cover all the bases. Iusacell, the third largest operator in Mexico, not only values each M2M service separately, but the pricing depends on the contract length (see Exhibit 6). Still, we would consider this offer as fixed pricing, since the price doesn t depend on the amount of data to which the customer subscribes. PYRAMID RESEARCH GLOBAL TELECOM INSIDER VOL. 4, NO. 3 7

Exhibit 6: Iusacell M2M tariffs, 2012 Ubicacel: LBS for individuals Ubicacel Vehicle: Vehicle LBS Locator: LBS for objects, perso ns and property Encore: mobile access router Geocontrol: inventory management 18-month contract 12-, 18-, 24- and 36-month contract 12, 18 & 24 month contract 24/7 support 18-month contract PS358 ($30)/ PS89 ($70) for equipment Devices from PS1,999 ($166) depending on contract length Device cost: PS2,399 ($199), PS2,199 ($182) and PS1,999 ($166), respectively No installation costs PS428 ($35) PS50 ($4) credit 2,000 onnet minutes Monthly rent PS425 ($35) Monthly rent PS199 ($16) 24/7 support ATM, kiosks, POS PS75 ($6) credit 2,000 onnet minutes Source: Iusacell B. Tiered pricing As we have argued in our Insider Mobile Data Pricing Plans: How Operators Can Escape the All You Can Eat Trap, tiered pricing will become as prevalent for mobile data packages as it has for fixed voice, mobile voice and fixed broadband pricing. A growing number of operators are moving toward tiered pricing, and according to a February 2012 Cisco study, tiered pricing has had a positive impact on global data traffic. There are multiple levels of classification of M2M tariffs depending on the type of application, volume of data, money quota, roaming requirements, number of SIMs and so on (See Exhibits 7 and 8). There is also a distinction in tiered pricing between two main groups: individual (tariff per M2M line) and shared/pool, whereby a predefined number of lines uses the data allowance. In general, while M2M offers are moving away from unlimited tariffs, such plans still exist, such as Telefonica s O2 Machine Unlimited in the Czech Republic, which is billed at $34.78. Operators are also adding a prepaid option: French operator Bouygues Telecom was one of the first players to introduce prepaid in late 2010. We believe the prepaid model will be adopted by a larger number of operators and will be especially well-suited for in-house connectivity devices such as nannycams. Across the operators we looked at, T-Mobile in the Czech Republic is the only offering prepaid M2M. The operator introduced a prepaid tariff, M2M Twist, in October 2011 to both its partners and customers. T-Mobile s affiliate program was started in 2002 and involves more than 50 companies, which together offer more than 100 products and services focusing on localization, mobile or remote data collection, SMS, applications, e-health and remote monitoring. Some operators have also leveraged tiered pricing to target international organizations. Both Orange Poland and T-Mobile Germany offer a separate package targeting companies with an international presence. T-Mobile s Germany Roaming S is a tariff that divides countries into PYRAMID RESEARCH GLOBAL TELECOM INSIDER VOL. 4, NO. 3 8

three zones Zone 1 is the operator s footprint and also covers the footprint of its partners, Orange and TeliaSonera. Orange Poland takes on a different approach to M2M pricing. It has a dedicated telemetry plan, Telemetry Tariff 10, with three different tariff quotas: Option 1 (Telemetry Tariff 10 + individual quota packages), Option 2 (TT 10 + Packages without Borders) and Option 3 (TT 10+M2M Connect). In addition, Orange offers M2M Europe and M2M World Orange packages, again with money quotas. Although typically M2M uses a 2G GSM network, Orange takes advantage of its CDMA network to offer Telematics Tariff for CDMA with dedicated CDMA modules and tariffs. It is priced depending on the volume of data included in the subscription 10MB ($3.40), 20MB ($4.07) and 50MB ($5.09) or in conjunction with the M2M Standard Tariff. Strategies of data pooling and share groups are relatively new in the market. At Verizon Wireless, to qualify for 3&4G M2M pricing, business customers should have a minimum of five M2M lines and sign a major account agreement and a supplement for M2M services. M2M plans can be activated for mobile data modems, telemetry and similar devices, transmitting data between two points without human contact, excluding tablets. Verizon has tailored data plans serving embedded modules based on certain demographics, such as budget vehicles or those that OEMs (original equipment manufacturer) can make the most of. An OEM can benefit from multiple data tiers based on a wholesale and retail approach. Sprint's data pooling is a joint (added together) monthly data allowance of all M2M devices in the same pooling group. Each M2M device uses the data on a first-come, first-served basis. Once all of the data in the pooling group for the billing period is used, then Sprint will charge an overage fee (at that specific M2M device s overage rate) for each M2M device that uses excess data. Other operators, such as Vivo and Movistar in Latin America, try to combine a data pool and individual packages. Movistar s offer is particularly extensive, consisting of 20 M2M tariff options, ranging from 0.1MB allowance to up to 50MB, while both Sprint and Verizon s in the US have a cap that reaches up to 5MB. Turkcell, a leading Turkish operator, offers another type of segmentation. It not only provides different pricing depending on vertical (Smart Energy, Cargo Tracking Service, Smart Car and Intelligent Building) but also based on the number of lines connected. For example, its fleet tracking M2M monthly service charge consists of a service fee per line starting at TL5.5 ($3) for up to 100 lines, decreasing to TL1 ($0.54) for 101-50,000+ lines, plus data usage fees. PYRAMID RESEARCH GLOBAL TELECOM INSIDER VOL. 4, NO. 3 9

Exhibit 7: Machine-to-machine monthly tariffs across a sample of operators, 2012 Czech Republic O2 Machine Basic $3.84 (CZK 60), 1MB O2 Machine Unlimited $34.78 (CZK600), unlimited O2 Machine +1MB, $0.87 (CZK14), 1MB O2 Machine +2MB, 2MB, $1.16 (CZK20) O2 Machine +5MB, 5MB, $1.45 (CZK25) O2 Machine +10MB, 10MB, $1.74 (CZK30) O2 Machine +20MB, 20MB, $2.03 (CZK35) O2 Machine +50MB, 50MB, $2.32 (CZK40) Czech Republic M2M Mini $0.87 (CZK15) M2M $5.74 (CZK99), 1MB, up to 30 SMS & free minutes M2M Premium $5.80 (CZK100)/50MB $14.49 (CZK250)/200MB $28.99 (CZK500) /500MB M2M Twist $1.68 (CZK29) Germany Data M2M 1, $3.93 ( 2.95), 1GB, additional MB $3.93 ( 2.95)/MB M2M Data 2, $5.27 ( 3.95), 2GB, additional MB $3.93 ( 2.95)/MB M2M Data 5, $6.60 ( 4.95), 5 GB, additional MB $2.12 ( 1.59)/MB M2M Data 10, $9.27 ( 6.95), 10GB, additional MB $2.12 ( 1.59)/MB M2M Roaming S,$19.93 ( 14.95), 2MB, additional MB $19.93 ( 14.95)/MB additional MB Countries in Group 1: $19.93 ( 14.95)/MB Countries in Group 2: $33 ( 25) Countries in Group 3: $67 ( 50) Group 1 charging per 1 KB, group 2&$ per 10 KB Poland Individual Quota M2M 10, $3.40 (Zl 10), money quota $6.79 (Zl 20) Individual Quota M2M 15, $5.09 (Zl 15), money quota $10.19 (Zl 30) Individual Quota 20, $6.79 (Zl 20) money quota $13.58 (Zl 40) Individual Quota 25, $8.49 (Zl 25) money quota $16.98 (Zl 50) Pricing: SMS to own network Zl 0.15/$0.05/SMS Data transmission CDS on-net network $0.08 (Zl 0.24) for 5 seconds, outside $0.25(Zl 0.75) for 5 minutes; Data transmission GPRS $0.003(Zl 0.01)/10kB Package 40 No Borders data transmission quota for PL and EU $13.58 (Zl 40): unlimited $6.79 (Zl 20) 12 months $5.77 (Zl 17) 12/24 month $5.48 (Zl 16) Package 100 No Borders unlimited $16.98 (Zl 50) 12month $15.28 (Zl 45) 24/36 $13.58 (Zl 40) M2M Connect Standard $16.64 (Zl 49) Orange Hotspot $13.24 (Zl 39) limit 4GB M2M Connect Premium $33.62 (Zl 99) no fee for Orange Hotspots South Africa M2M Lite $0.57 (R4.39) M2M Data $0.86 (R6.58) includes 5MB M2M Chip Lite $0.86 (R6.58) M2M Chip Data $1.14 (R8.77) includes 5MB M2M Chip Extended $3.43 (R26.32) M2M Pro $9.73 (R74.56) SIM Fee $1.30 (R10) with all subscriptions, additional charges per SMS, call & out of bundle data $0.26 per MB (R2) Russia 30MB $1.47 (Rb42), additional data usage $0.05 (Rb1.40)/MB 100MB $3.49 (Rb100), additional data usage $0.03 (Rb1)/MB 300MB $9.42 (Rb270), additional data usage $0.03 (Rb0.90)/MB Sources: Pyramid Research, Operators PYRAMID RESEARCH GLOBAL TELECOM INSIDER VOL. 4, NO. 3 10

Exhibit 8: Individual and shared machine-to-machine monthly tariffs, 2012 TIM Brazil Mexico US US Individual Package 1MB (bonus 1MB) $5.59 (R$9.90), additional MB=$2.77 (R$4.90) Individual Package 4MB (bonus 4 MB) $7.29 (R$12.90), additional MB=$1.81 (R$3.20) Individual Package 10MB (bonus 10 MB) $8.98 (R$15.90), additional MB = $0.85 (R$1.50) Shared Package 100MB $271 (R$480), additional MB = $2.71 (R$4.80) Shared Package 300MB $780 (R$1,380), additional MB = $2.60 (R$4.60) Shared Package 500MB $1,243 (R$2,200), additional MB = $2.49 (R$4.40) Shared Package 1GB $2,373 (R$4,200), additional MB = $2.37 (R$4.20) Shared Package 3GB $6,780 (R$12,000), additional MB = $2.26 (R$4.00) SIM Fee: 0-300 lines $5.65 (R$10) 300> free, Data measured per every byte shared packages minimum commitment of 2Mb per line Data 0.1, 0.1MB, $1.39 (PS16.81) Data 0.25, 0.25MB, $1.76 (PS21.26) Data 0.5, 0.5MB, $1.87 (PS22.61) Data 1, 1MB, $2.64 (PS31.83) Data 2, 2MB, $4.02 (PS48.57) Data 3, 3MB, PS60.66 ($5.03) Data 5, 5MB, $5.78 (PS69.8) Data 10, 10MB, $7.33 (PS88.51) Data 25, 25MB, $10.98 (PS132.5) Data 50, 50MB, $13.93 (PS168.11) Source: Pyramid Research, operators Data Pool 0.1, 10MB, $173 (PS2,091) Data Pool 0.25,25.6MB, $203 (PS2,455) Data Pool 0.5, 51.2MB, $230 (PS2,774) Data Pool 1, 102.4MB, $310 (PS3,742) Data Pool 2, 204.8MB, $488 (PS5,886) Data Pool 3, 307.2MB, $638 (PS7,697) Data Pool 5, 512MB, $733 (PS8,851) Data Pool 10, 1,024MB, $917 (PS11,073) Data Pool 25, 2,560MB, $1,354 (PS16,342) Data Pool 50, 5,120MB, $1,731 (PS20,893) Pooling Group 1 1MB $8.99 Overage per KB $0.003 2MB $10.99, Overage per KB $0.003 5MB $16.99, Overage per KB $0.003 10MB $19.99, Overage per KB $0.003 25MB $24.99, Overage per KB $0.003 Pooling Group 2 50MB $39.99, Overage per KB $0.0003 100MB $43.99, Overage per KB $0.0003 500MB $49.99, Overage per KB $0.0003 1GB $54.99, Overage per KB $0.0003 Pooling Group 3 2GB $59.99, Overage per KB $0.0003 5GB $99.99, Overage per KB $0.0003 Tier 1 Share Group $8.99. 1MB. Overage $0.005/KB $10.99. 2MB. Overage $0.005/KB $12.99. 3MB. Overage $0.005/KB $14.99. 4MB. Overage $0.005/KB $16.99. 5MB. Overage $0.005/KB $19.99, 10MB, Overage $0.005/KB $29.99, 25MB, Overage $0.005/KB Tier 2 Share Group $39.99, 50MB, Overage $0.0003/KB $49.99, 250MB, Overage $0.0003/KB $59.99, 1GB, Overage $0.0003/KB Tier 3 Share Group $99.99, 5GB, Overage $0.0003/KB PYRAMID RESEARCH GLOBAL TELECOM INSIDER VOL. 4, NO. 3 11

C. Flexible pricing will drive the M2M business A large number of mobile operators do not publish their pricing and refer inquirers to its business representatives in order to get a quote. The deals are done on a one-on-one basis, depending on the number of SIMs connected and the vertical. Across the 14 markets we looked at, the following operators don t publish their tariffs online: Plus Poland; UK operators O2, Vodafone, Orange and T Mobile; Danish operators TDC, Telenor and Telia; MTN South Africa; Telcel Mexico; Claro Brazil; AT&T US; and Mobistar Belgium. Among the operators that we observed, Mobistar Belgium has been quite successful in leveraging flexible pricing. The operator started its MaTMa offer in 2002, and in 2004 it created a dedicated M2M business unit. At the moment, Mobistar holds around 70% share of the M2M market in Belgium, with 420,000 M2M SIMs. M2M SIMs now account for around 11% of the operator s total subscriptions, with the revenue showing double-digit year-on-year growth. Exhibit 9: Mobistar Belgium M2M subscriptions by type (2011), and M2M subscriptions and revenue, 2009-2011 Mobistar Belgium M2M market share by vertical Source: Mobistar FY2011 Results presentation, Pyramid Research We believe that flexible pricing will become a prominent pricing model, as different types of services require different data support and thus generate different ARPS. At the moment, operator M2M offerings concentrate on telemetry, but M2M is moving from relatively lowbandwidth applications to more data-intensive ones, including the following: Business and consumer security and surveillance: This includes video streaming commercial security cameras, nannycams and petcams, accessible via mobile-enabled residential or commercial gateways. Healthcare: There is growing adoption of M2M to provide connectivity in remote areas. This is a particularly important growth segment in emerging markets. Telematics: Navigation, journey assistance and vehicle management are becoming more popular. So too are broadband-to-the-car offerings using a connection to the vehicle and then allocating the connection to devices within the car via Wi-Fi. PYRAMID RESEARCH GLOBAL TELECOM INSIDER VOL. 4, NO. 3 12

MB per month Inventory and fleet management: Mobile connectivity is crucial while the fleet is in the field, whereas Wi-Fi is deployed to download and upload data to fleet headquarters and loading areas to lower costs. This migration will have a tremendous impact on operators network capacity and traffic. In its 2011 VNI forecast, Cisco projects that the average M2M module will generate 266MB of mobile data traffic per month in 2016, a 660% increase compared with the 35MB generated in 2010 (See Exhibit 10). Exhibit 10: M2M module traffic, MB per month 300 250 266 200 150 100 50 35 71 0 2010 2011 2016 Sources: Cisco VNI Mobile, 2012, Ericsson 2011 D. Cooperation and partnerships As we have argued in our Insider report, Coopetition Replaces Competition as Telcos Aim to Cut Costs and Grow Revenue Streams, partnerships and strategic alliances will become more important going forward. In order to provide complete connectivity solutions, operators need to either develop and manage in-house platforms or they can leverage partnerships such as: Partner at a wholesale level: M2M partners provide all the service management capabilities, and the operator need only bill the partner for the data access. Partners are typically MVNOs or other airtime resellers. Service management platform partnership: Jasper Wireless, Raco, nphase, Ericsson and other service management companies provide the M2M platform. In this way, operators can be more involved, offering their own branded services, working directly with companies selling M2M services, and leveraging their own sales and marketing channels. Alternatively, they can provide the end-to-end connectivity as a white label for third parties offering M2M services. Jasper Wireless inked deals with a number of mobile operators, including Beeline (VimpelCom) Russia, AT&T, Rogers Canada, America Móvil, Telstra, Singtel and KPN. Operator/operator partnerships: These are in the area of international roaming and cross-border services. Sprint, the US MNO, signed a deal with Orange Business Services (OBS) for international M2M connectivity, as a result expanding to a total of 180 countries. The agreement will cover areas outside the US in the following sectors: smart grid and metering, automotive and telematics, healthcare, retail PoS and security. Two European giants, France Telecom and Deutsche Telekom, also announced PYRAMID RESEARCH GLOBAL TELECOM INSIDER VOL. 4, NO. 3 13

a smart industry agreement in February 2011 covering the areas of network sharing, M2M, connected cars and e-health. TeliaSonera has signed a cooperation agreement with France Telecom (Orange) and Deutsche Telekom (T-Mobile) in the space of M2M communications. This agreement was initially signed by France Telecom and Deutsche Telekom in February 2011 to cover France, Germany, Belgium and Luxembourg, and then it was extended to the Netherlands and also to UK s Everything Everywhere. The partnerships global footprint will now extend to include TeliaSonera s geographical reach, including Sweden, Norway, Finland, Denmark, Estonia and Lithuania. Operator partnerships with module vendors: In certain segments, operator/device vendor partnerships are becoming increasingly important, with device vendors distributing products with integrated modules. Thanks to that, operators are able to offer developer kits and be further involved in the M2M ecosystem (see Exhibit 11). Exhibit 11: Developer kits, T-Mobile and Telcel Mexico, 2012 Sources: Pyramid Research, operators PYRAMID RESEARCH GLOBAL TELECOM INSIDER VOL. 4, NO. 3 14

Devices (m) Market detail CASE STUDY: AT&T, US The US mobile operator AT&T has two units dealing with M2M: the Emerging Devices Organization (electronic devices) and Advance Mobility Enterprise Solutions (enterprise). M2M started off at AT&T as a niche segment in the early 2000s, when the operator worked to support particular clients such as FedEx or UPS, and developed a custom platform, Enterprise on Demand, which allowed an enterprise via a portal to provision and decommission their own SIMs. AT&T s M2M customers that use its network aren t required to make an initial capital investment in platform support because the MNO has built up multiple platforms to support its connected customers. In May 2009, AT&T inked a multiyear agreement with Jasper Wireless, an exclusive one in the US, which influences the operator s business strategy. The platform, AT&T Control Center (powered by Jasper Wireless), offers a number of features such as instant activation, usage analytics, customer support and flexible rate plans, making it a one-stop solution for specific end-user applications and interfaces. AT&T s service delivery platform offers hosted and cloud access to connected devices, designed for provisioning and managing. AT&T s so-called connected devices segment (e-readers, security systems, fleet management and global positioning systems) accounted for 10% of the operator s subscriber base in 2010, representing 98% year-on-year growth from 2009. Exhibit 12: AT&T connected devices and percentage of total customer base, 2007-2016 20 AT&T connected devices % subscriptions 16% 18 16 14 12 10 8 6 4 2 14% 12% 10% 8% 6% 4% 2% subscriptions (%) 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 0% Source: Pyramid Research, AT&T At the moment, AT&T s view of the M2M market is driven by cost-reduction strategies in shipping and logistics, industrial automation, residential and commercial buildings, and fleet telematics verticals characterized by low data usage consumption per device and lower ARPS levels. Now AT&T plans to take advantage of global roaming agreements; with this in mind, AT&T is expanding into new areas such as solar panel, smart grid monitoring and remote healthcare. In this vein, AT&T continues to expand its partnerships. In February 2011, AT&T announced four partnerships: with cloud-based M2M platform provider Axeda, which has PYRAMID RESEARCH GLOBAL TELECOM INSIDER VOL. 4, NO. 3 15

footing in the industrial, medical, retail, IT, banking and government sectors; with ILS Technology, providing monitoring and analytical maintenance applications in the building automation, energy management, data center and industrial markets; with SensorLogic, dedicated to fleet management; and with Sierra Wireless, developer of the AirVantage cloudbased service and development platform. Exhibit 13: AT&T Control Center Source: AT&T, 2009 AT&T has certified more than 300 M2M network-ready devices. At CES in 2010, AT&T and Jasper debuted a Connection Kit for Device Developers, which helps developers get their applications off the ground, thanks to test SIMs, a benchmark device, access to the control center and accelerated device verification. AT&T offers two types of kits or packages for device developers. AT&T focuses on a number of vertical sectors, including utilities, fleet management and consumer electronics. Its customer list includes Hertz, BMW and USA Technologies, as well as security alarm monitoring and utilities companies. AT&T also benefits from having Amazon as its customer; it took over Amazon s relationship with Sprint in October 2009. CASE STUDY: Movistar Mexico Movistar Mexico, a subsidiary of Telefónica, is the second largest mobile operator in Mexico, holding 21% market share. Movistar has created a series of communications solutions that improve communication between businesses, with the goal to bring savings to its customers. These solutions include M2M-based offerings such as: mobile computing (designed for those companies with field personnel requiring constant communication to take orders or make inventories), GPS tracking of people, vehicle location, real-time fleet management, telemetry and point of sale wireless PYRAMID RESEARCH GLOBAL TELECOM INSIDER VOL. 4, NO. 3 16

payment solutions with which customers can make transactions with credit and debit cards in places where there is no fixed connection. With the additional spectrum obtained, the operator will be able to achieve economies of scale and efficiencies in their operations, reducing costs in the provision of mobile data and thus encouraging M2M connections. In 2012, Movistar started to provide end-to-end services (including consulting services) for M2M. Movistar also plans to launch a management service that will allow its customers to monitor the consumption of MB per line. The strategy is to charge not only for connectivity but also for the application and the entire solution. Movistar s M2M offer consists of three options: 1. Individual SIM with a predefined capacity: Each SIM has its own data contract and is charged for use. 2. Pool (50 lines): Each SIM consumes megabytes without a predefined capacity. Movistar charges a fee for use around the pool, no matter how much traffic is being used by each line. 3. Super pool: This offer is essentially a combination of the first two. Customers may incorporate additional lines to existing pools without having to buy packs of 50 lines. Exhibit 14: Movistar Mexico M2M pricing, 2012 Data Data Pool Mbytes Price per month Mbytes Price per month Data 0.1 0.1 PS16.81 ($1.39) Data Pool 0.1 10 PS2,091 ($173) Data 0.25 0.25 PS21.26 ($1.76) Data Pool 0.25 25.6 PS2,455 ($203) Data 0.5 0.5 PS22.61 ($1.87) Data Pool 0.5 51.2 PS2,774 ($230) Data 1 1 PS31.83 ($2.64) Data Pool 1 102.4 PS3,742 ($310) Data 2 2 PS48.57 ($4.02) Data Pool 2 204.8 PS5,886 ($488) Data 3 3 PS60.66 ($5.03) Data Pool 3 307.2 PS7,697 ($638) Data 5 5 PS69.8 ($5.78) Data Pool 5 512 PS8,851 ($733) Data 10 10 PS88.51 ($7.33) Data Pool 10 1,024 PS11,073 ($917) Data 25 25 PS132.5 ($10.98) Data Pool 25 2,560 PS16,342 ($1,354) Data 50 50 PS168.11 ($13.93) Data Pool 50 5,120 PS20,893 ($1,731) Source: Movistar Mexico CASE STUDY: MTS, Russia MTS is the largest Russian mobile operator in terms of subscribers, holding around a 45% share of the M2M market. MTS reported that at year-end 2010, it had 530,000 M2M subscribers, a 105% year-on-year growth, with an expected 60% growth in 2011. The M2M ARPU for MTS ranges from 50 to 300 rubles ($1.74 to $10.47), not very far off from Western European markets. MTS reported that M2M-generated revenue was 1.7% of its overall revenue, a number it expects to grow to 3% in 2013. PYRAMID RESEARCH GLOBAL TELECOM INSIDER VOL. 4, NO. 3 17

In July 2010, Sistema, which includes MTS, bought 51% of the shares of M2M Telematics, the developer and provider of specialized software and equipment to monitor vehicles and stationary objects using satellite navigation systems. M2M telematics operates in more than 80 Russian regions and CIS countries. This acquisition has strengthened Sistema s position in the navigation market, especially with the implementation of public transport monitoring systems. The Secure Transmission of Data (APN) service is the solution for companies, employees or equipment that require secure remote access to corporate networks, databases and remote equipment, transport and the Internet to receive and exchange information via secure data links. Exhibit 15: MTS M2M service offerings including Secure Transmission of Data (APN) service, 2012 Source: MTS MTS s M2M technology is available not only for large enterprises but also for small commercial and municipal agencies, and the operator expects that these smaller opportunities will drive its M2M division. In Russia there are three areas for M2M growth: 1. Infrastructure such as customer meters, 2. Oil and gas, where energy companies use M2M to monitor their asset base (pipe pressure, volume transfers) using smart meters, and 3. Anti-theft, monitoring and alarms systems, which comprise around 10% of MTS incountry sales. JSC Interregional Distribution Grid Company of Centre equipped its power grids with thousands of SIMs connected to encrypted APN channels, while Coca- Cola uses M2M to monitor its vehicles. In September 2011, MTS began a municipal transport monitoring project in Sochi, with more than 3,000 public transport and urban freight transport vehicles monitored via M2M technology. At the same time, MTS started the new M2M Manager Web portal, enabling customers to manage telematics devices online, without the need for any special software. This service is designed for consumers using M2M in ATMs, payment terminals, transport surveillance and management systems. PYRAMID RESEARCH GLOBAL TELECOM INSIDER VOL. 4, NO. 3 18

In Tatarstan, which is the eighth largest republic, the number of MTS M2M projects during the first half of 2011 increased 1.5-fold, while M2M SIM cards increased by 85% year-on-year. Across the corporate customers of MTS in Tatarstan, the distribution of M2M completed projects is as follows: 38% data transfer between devices in the transport sector, 30% in the housing industry and energy, 15% security firms, 10% payment terminals and ATMs, 2% other industries Thermo-resistant M2M SIMs are a segment that MTS expects will bring in revenue of $250-290m between 2010 and 2015. The cost of provision of thermal M2M SIM card is Rb95 ($3.31), VATinclusive. Contrary to the other mobile players, which focus solely on the B2B segment, MTS is also addressing the residential market via MTS Tracker, a compact personal GPS monitoring service. In July 2011 it launched MTS Tracker in its retail units. The device enables access to navigation services to determine the location of people and objects; personal monitoring for security purposes (children and elderly, pets); protection of motor vehicles, motorcycles and scooters (SMS alert in case of unauthorized movement); small businesses and government (protection, monitoring of movement of logistics and employee movement for mobile workers); and medicine (patient communication with medical staff). The user tracks the location and route of the object with the tracker via PC or smartphone on specialized Internet portals, MTS NIKA or M-Search. The price for individual clients is Rb5,490/$192 (Rb850/$30 going toward account balance), plus a monthly fee of Rb350 ($12.21) with traffic inclusive. Exhibit 16: MTS M2M tariffs, 2012 Monthly fee $1.05 (Rb 39) Packages GPRS Traffic Source: MTS Russia Packages SMS Traffic Packages SMS+ GPRS Traffic Package 5MB $1.36 Rb39 Package 5 SMS $1.36 Rb39 Package 5MB + 5 SMS $1.67 Rb48 Package 10MB $1.67 Rb48 Package 10 SMS $1.67 Rb48 Package 10MB+ 10 SMS $2.30 Rb66 Package 20MB $2.23 Rb64 Package 20 SMS $2.23 Rb64 Package 20MB + 20 SMS $3.42 Rb98 Package 50MB $3.63 Rb104 Package 50 SMS $3.63 Rb104 Package 50MB + 50 SMS $6.52 Rb187 Package 100MB $5.72 Rb164 Package 100 SMS $5.72 Rb164 Package 100MB + 100 SMS $10.40 Rb298 PYRAMID RESEARCH GLOBAL TELECOM INSIDER VOL. 4, NO. 3 19

Conclusions Key findings While it is still too early to say which pricing model works best, we believe mobile operators will continue to customize their M2M tariffs to address customer needs. Fixed pricing of M2M services is limited to only a handful of operators at the moment. As the M2M market matures, operators will move away from this pricing scheme. Tiered M2M pricing comes in all shapes and forms, and it depends on the operator s strategy. It is often subdivided into two groups: individual (tariff per M2M line) and shared/pool, whereby a predefined number of lines uses the data allowance. Flexible M2M pricing comes into play across a range of operators in developed markets where the service offering is already well-developed. Having said that, corporate enterprises have bargaining power and can negotiate deals with mobile operators. Partnerships are key when it comes to M2M, both in terms of the platform and application delivery, but also roaming. Operators that have good roaming coverage will be able to serve clients across a number of markets. Recommendations MNOs Consider which segment you want to target, and provide pricing that suits customers needs. Consider following the lead of T-Mobile Czech Republic and provide a prepaid M2M tariff that you can market to residential users. There is a vast opportunity in video-enabled M2M applications, healthcare and consumer electronics verticals, all of which will bring higher ARPS. Remember to partner! OEMs Customers don t want to pay an additional fee for connectivity, so if possible include the data transmission in your connected device. The Amazon Kindle is a prime example of this strategy. Government With the number of government-led initiatives in areas such as smart metering and healthcare coming into play, telcos will need clear guidance. As the Swedish example shows, smart metering doesn t translate into an immediate revenue windfall for telcos, so make sure that the regulation put in place benefits all parties involved. Author: Sylwia Boguszewska, Senior Analyst (sboguszewska@pyr.com) Editor: Badii Kechiche, Manager, EMEA, bkechiche@pyr.com Support: www.pyramidresearch.com/insiders.htm (info@pyr.com) PYRAMID RESEARCH GLOBAL TELECOM INSIDER VOL. 4, NO. 3 20

Related resources The Machine-to-Machine Market: A high-growth opportunity for MNOs Thematic Report published October 2011 The machine-to-machine (M2M) market serves diverse vertical industries with a range of different devices across multiple networks. Growth is driven by a number of factors including new regulations, a variety of business models, innovations, falling hardware costs and technological developments. 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. In this report, Pyramid Research analyzes the current state of the M2M segment, providing forecasts by application type and by region. MVNO Strategies Beyond the Traditional Ethnic and Discount Models Telecom Insider published February 2012 This report analyzes successful MVNOs in developed markets and will attempt to draw lessons for emerging markets. We will look at different breeds of MVNO, starting with so-called ethnic MVNOs, and we will take a look at the market potential of such services. Then we will analyze fixed operators strategies to become fully fledged multiplay operators through MVNO strategies, and finally we will describe the emerging and exciting trend of data-only MVNOs. Mobile Data Pricing Plans: How Operators Can Escape the All You Can Eat Trap Telecom Insider published June 2010 The exponential increase in traffic generated from the use of data-intensive applications is one of the top challenges that mobile service providers are facing today. Unlimited data plans are not sustainable in the long term, as they cap spending while usage continues to increase. Operators need to introduce pricing models that will promote the adoption of non-voice services, while making sure that increased adoption also translates into increased revenues as traffic loading accumulates on their network. Coopetition Replaces Competition as Telcos Aim to Cut Costs and Grow Revenue Streams Telecom Insider published June 2011 This report analyzes the development of the cooperation agreements among a number of European telecom players, their successes and also learning points for those considering future tie ups. We will first discuss those initiatives employed by operators to maintain their market position and leverage their existing customer relationships. Then we will contemplate those initiatives that address balance sheet woes and existing revenue streams, and finally we will take a look at partnerships that are focused on new revenue streams and the development of standardization across new technologies. Global Smartphone Forecast Forecast published quarterly The Smartphone Forecast tracks annual handset sell-through of total mobile handsets and smartphones for a ten-year period including five historical years and five forecast years. Smartphone sell-through is segmented by vendor and by operating system. Granular data is provided for each of more than 50 countries, making Pyramid s smartphone forecast the most detailed on the market today. Location-Based Services: Market Forecast, 2011-2015 Research Report published May 2011 The report provides a detailed overview of the current status and size of the location-based services market. It takes a specific look at the positioning of the mobile operators within the value chain and how they can leverage their assets to take a stake in this growing opportunity. A number of services are analyzed, but the biggest focus is on navigation, the largest in terms of revenue where various business models are establishing themselves and a range of different players are focusing their efforts, creating a dynamic and fast-changing market segment. Other services such as people finding and local search are also covered. We do not include fleet tracking services or location-based voice billing. To learn more about Pyramid Research s product offerings and how they can be of service to your company, please contact sales@pyr.com or visit us on the Web at www.pyramidresearch.com. PYRAMID RESEARCH GLOBAL TELECOM INSIDER VOL. 4, NO. 3 21

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