M2M for Telecommunications Companies Strategy Dimensions for Entering the M2M Market 62 Detecon Management Report blue 1 / 2015
Telecommunications companies find themselves facing the threat of stagnating or even worse, declining mobile network business. Their focus is shifting to new business models closely related to their own core competencies and with the potential to increase revenues. The developing M2M market still offers highly promising opportunities for telecommunications companies. T he introduction of machine-to-machine (M2M) services in their portfolio initially appears to be a simple matter for telecommunications companies because M2M business does not differ in any significant points from traditional mobile network business or so it would seem at first glance. Basic processes such as the provision of SIM cards and devices as well as calculation of commissions and billing are required in both businesses. But a second, closer look reveals substantial differences leading to consequences in the provisions of M2M services by telecommunications companies. If telecommunications companies hope to enter the M2M market successfully, they should develop a comprehensive strategy which takes into account the specific characteristics of the M2M market and operating models as well as the technological landscape necessary for the provision of M2M services. In the remarks below, we will describe our experience in handling the various issues related to this subject we have gained from many different client projects and will give you valuable tips on how to proceed. The market The M2M market differs significantly from traditional mobile network business. M2M business is driven by many different business use cases in which M2M communication plays a role, ranging from sector-specific solutions such as industrial automation or remote health monitoring, smart metering, and M2M service portfolios adapted to local or regional conditions to generic tracking solutions which can be put into service anywhere in the world. Owing to the broad range of possible uses of M2M technology, telecommunications companies must develop a clear strategic positioning in preparation for their entry into M2M business. Doing so requires the definition of the desired value creation depth, the product portfolio, and the regional focus. More over, the build-up and maintenance of cooperative activities with other companies and within partner networks are of critical importance. Figure 1: M2M Strategy The Market M2M Strategy Operation Technology Value creation depth Customer segmentation and product portfolio Regionality Partnerships Organization Governance SIM/Roaming Platform Network Source: Detecon 63 Detecon Management Report blue 1 / 2015
The value creation chain for M2M services can be broken down schematically into the required hardware components such as communication modules and sensors, connectivity, the IT platform for the management of connectivity and SIM administration, the platform for solution enabling, and the (vertical) solution for the end customers. The latter frequently demands comprehensive services for the integration of the M2M platforms into the customers existing IT landscape. This is the complex value creation chain in which telecommunications companies must stake out a position. Our project experience shows us that there are essentially three possible positionings which must be assessed in terms of each company s own possibilities. Telecommunications companies can decide to offer connectivity exclusively the connectivity wholesale model. Providers who decide to operate using this model generate no more than limited awareness of their presence on the market they have no direct access to end customers and can skim off only a small share of the total revenues of an M2M solution. This fact prompts many telecommunications companies to provide the service of the managed connectivity scenario in which services related to connectivity and SIM management are made available. If a telecommunications company decides to position itself as an end-to-end solution provider, the orchestration of possible partners along the full length of the value creation chain as well as a platform for solution enabling become necessary. However, operators deciding on this option have direct access to end customers and can exploit their own brand for marketing purposes. Customer segmentation and product portfolio: Starting from the positioning possibilities for a telecommunications company on the M2M market described above, B2B and B2B2C represent the most important models. The spectrum of potential customers covers the complete bandwidth from small companies, many of them startups, to large global corporations. The targeted customer segments have substantial influence on the type of services which are offered. Standardized products must be offered to small companies, for instance, while tailored solutions requiring in-depth integration into legacy IT systems are often implemented for large customers. The selection of the customer segments which will be addressed is consequently highly dependent on the provider s own competence and/or that of its partnerships in the areas of system development and system integration. Moreover, the service portfolio should be oriented to specific industries. Specialized solutions and products which must be adapted to the particular needs of one industry are offered. Horizontal solutions, on the other hand, are standard products which can be offered across a number of industries. However, the use cases for horizontal solutions continue to be limited. Figure 2: M2M Value Creation Chain M2M Value Creation Chain Devices/modules & SIM management Solution enabling Vertical solutions Integration Trend for telecommunications companies Option 1: Wholesale Provider Option 2: Managed Provider Option 3: End-to-End Solution Provider & SIM management & SIM management Solution enabling Figure: Detecon 64 Detecon Management Report blue 1 / 2015
Regionality: One component which is largely responsible for the complexity in M2M business is the geographical reach of the M2M service. Observers around the world see telecommunications companies deciding to offer M2M services exclusively on their home markets or in neighboring regions. There are only a very few large providers Vodafone is one which have set their sights on the global provision of solutions. Criteria for the determination of the geographical reach are the current market coverage, partnerships, and the provider s market potential. Partnerships: The M2M market is diversified and complex. Partnerships are absolutely essential for survival in this environment. They can play a vital role in all of the dimensions described above: value creation depth, product portfolio, and regionality. The functional partnerships cover sections of the M2M value creation chain which are not part of the company s own area of competence, e.g., the development of hardware components. Vertical partners provide support during the development and marketing of services in the targeted industries. Aided by geographical partnerships, telecommunications companies can expand their footprint on the M2M market, this can take the form of separate roaming agreements, M2M cooperative ventures with other providers, or joining an existing M2M alliance. Nor should the importance of partnerships in the marketing of M2M products be neglected. Besides cooperative efforts in distribution, which are found especially frequently in large deals, the provision of a marketplace has turned out to be a veritable model for telecommunications companies. Here, customers can acquire partner solutions which function on the basis of a platform for solution enabling. The selection of the partner model is heavily dependent on the product maturity and customer relationship of the partner in comparison with the company s own levels. Operation The special circumstances of M2M business are not limited to the segmentation of the market and the corresponding positioning; they extend as well to the operational provision of M2M services. Organization and governance must be structured differently in comparison with conventional mobile services business because of the typically low ARPUs, the necessary IT expertise, and the demands for flexibility and speed in making solutions available. Organization: The optimal internal organizational structure is essentially a matter of the selected value creation depth and the priority of the M2M division in the company. A distinction can be made among three basic variants for the integration of M2M in the organization. An integrated M2M organization incorporates an M2M team within a provider s existing B2B organizational unit. This variant is especially relevant in the scenario connectivity wholesale because it can be realized so quickly. However, the limited autonomy in setting budgets and the low level of awareness accruing to the unit within the organization is a hindrance to realizing more ambitious M2M goals. The establishment of a strategic business unit for M2M, on the other hand, promises the utilization of crossover functions while simultaneously assuring greater self-determination. However, there is a risk of competition with well-established units; the M2M unit may be at a disadvantage here because its profit margins are typically slimmer and acquisition times are longer. The introduction of an independent legal unit for M2M which is itself responsible for P/L and autonomous with regard to its contracts with customers and partners is the typical solution for end-to-end solution providers. Clear governance: Telecommunications corporations with more than one operating company (separate companies in a number of countries, for instance) must clearly define the roles and responsibilities in the M2M sector. If governance is centralized, the M2M business of all of the operating companies is steered and controlled at the group level. If this governance model is tied to the establishment of a central M2M competence team which cooperates with the local B2B units, the result in the short to middle term can be a decisive competitive advantage because M2M expertise can be developed quickly and in specific directions. In contrast to this situation, the M2M business is handled at the level of the operating company in a model based on local governance. This option holds the promise of a high level of specialization for the specific markets in conjunction with lower synergy effects at the group level. In a federal system of governance, the responsibilities are divided between the group and the operating companies. The greater expenditures for coordination can be compensated by the creation of a central M2M competence team simultaneous with the targeted address of local markets. 65 Detecon Management Report blue 1 / 2015
Ultimately, the selection of the governance model depends strongly on the organizational structure of the group and the collaboration of the separate operating companies. Technology Technology joins market and operation as the third pillar of an M2M strategy. There are major elements which must be carefully considered at the levels platform (for connectivity and SIM management and for solution enabling), SIM strategy/roaming, and network. Platform: The type and scope of the required M2M platform depends especially on the positioning sought within the value generation chain. A platform for connectivity and SIM management serves as a kind of self-service portal. It acts as switchboard to provide the major functions in the administration of SIM cards e.g., activation and deactivation of SIM cards, ordering, calculation of commissions and the appropriate connections for business partners. Moreover, it can be used as a basis for the creation of a platform for solution enabling. A solution-enabling platform offers program libraries containing frequently used functionalities and other program interfaces, simplifying and accelerating the development of industry-specific, vertical M2M solutions. Solution-enabling platforms have suffered from neglect for a long time. However, they gain in importance when telecommunications companies want to skim off greater shares of the value creation and revenues from M2M solutions., explains Claus Eßmann, Senior Consultant at Detecon. Current market development, including the growing significance of the Internet of Things, clearly points in the direction of solution-enabling platforms becoming essential building blocks in the services offered by telecommunications companies on the M2M market. Once the decision has been made to establish an M2M platform, the make or buy question must be answered. Should the company build its own platform, or should it turn to an existing standard product? Our experience shows that projects to develop the company s own platform can rarely be realized within the planned time frame. Common failings are the underestimating of the complexity (e.g., for direct network integration) or the lack of control over certain factors (e.g., the provision of the required performance features of third-party provider systems). In contrast, it is possible to impose contractual penalties in the event of failure to comply with delivery dates when standard software programs are obtained from suppliers. Moreover, more and more operating models in which the platform can be financed in the form of a revenue-sharing model with the supplier are being offered. In this model, the telecommunications company generally pays only a small amount for the installation, provision, and integration of the M2M platform in its own network. This charge is supplemented by the payment of a certain share of the sales price for every SIM card sold to the supplier. However, these advantages related to the minimization of financial risks are offset by the more limited opportunity for individualization of the performance features of the platform. M2M-Expert Eßmann advices: Overall, the selection of the M2M platform must be matched closely to existing technology strategies (e.g., network/it strategy) so that seamless integration in the legacy technology landscape is ensured. However, deep integration in existing BSS and OSS systems cannot be recommended because of the growth projections in M2M business. Possible scaling problems can lead to negative impact directly affecting the core business on the mass market. SIM/Roaming: In M2M business, two significant objectives must be followed when selecting the SIM card: minimal costs for the provision of the SIM card and securing the desired network coverage. So the basic criteria for selection are the planned scope of use of the SIM card (local vs. regional vs. global) and the stipulated demands on network coverage. For instance, it may be (financially) advantageous for both sides to offer a so-called global roaming SIM card instead of a local SIM card to customers. A SIM card of this type does not have a home network and always operates in roaming mode when it logs on to a network. Network: Specific elements of M2M business must also be considered when it comes to the network. Existing network nodes can be used for M2M communication, i.e., M2M SIM cards and M2M data traffic are managed in the existing systems (HLR/HSS or GGSNs). However, large telecommunications providers in particular are inclined more and more to take a different approach. In view of the forecasts for the drastically rising communications volumes in the coming years, M2M communication will be carried more and more through dedicated network nodes., estimates Eßmann. This separation brings with it a number of advantages. For one, M2M data traffic can be more easily distinguished from conventional data traffic, opening the door to further options such as a range of simple and flexible (roaming) rate plans. For another, M2M SIM cards do not require many 66 Detecon Management Report blue 1 / 2015
of the (expensive) functions available in the HLR/HSS. Thanks to the lower license fees per SIM card in dedicated HLR/HSS, substantial potential for savings can be realized. Careful analysis is decisive for success Before they enter the M2M market, telecommunications companies should become aware of how it differs from traditional mobile network business. M2M offers a broad spectrum of design options, and fundamental decisions are required when selecting the right ones. Market, operating, and technical aspects must be given due consideration for the development of a comprehensive, successful M2M strategy. Based on our experience, the process of making these decisions should focus first on the market objectives, followed by the forms of operation and the technical realization. All three components must be coordinated with one another and merged into a uniform M2M strategy. In addition, the match with the overall business and technology strategy must be ensured. Dr. Philipp Bodenbenner is Management Consultant and advises clients from the service sector. He investigates issues from the interface of business strategy and information technology and advises companies on business model innovations and market access strategies for innovative (technology) products. Andreas Winter is Management Consultant. His specialist area is in the creation of market access strategies and the commercial evaluation of innovative ICT products for clients in the telecommunications and automotive industries. He has provided support to companies during the drafting of concepts for business field strategy and its implementation in the sectors of IoT and M2M. 67 Detecon Management Report blue 1 / 2015