Machine-to-Machine Market Emerges as Hot Opportunity

Wayne Ward, VP, emerging solutions, SprintWhat's the difference between Amazon's Kindle and an electric meter? Not much, which is a major reason why the machine-to-machine (M2M) market is in the midst of a growth spurt.

The M2M space used to be the domain of the mundane: utility meters bleating out a few hundred bytes of usage data each month, vending machines reporting jammed coin boxes and tractor trailers sending their location every few hours. But devices such as e-readers are redefining M2M and the revenue opportunity.

"M2M is getting fuzzy," says Dan McDuffie, senior vice president for North America at Wyless Group, which provides M2M network connectivity and other services. "It's starting to converge into anything that's data-only. I could even say connected consumer devices: for instance, a personal navigation device."

M2M hardware vendors such as Telit agree.

"What I see as the emerging area and a growth area for M2M is some of these B2C applications," says Mike Ueland, Telit's vice president and general manager for North America. "That could be a CE device like an e-reader or a digital photo frame or a personal navigation device."

That's good news for wireless carriers. In the case of greenfield operators, such as Clearwire, courting M2M is another way to load up their networks. And for incumbents, M2M is a way to reduce their reliance on the saturated, cutthroat consumer market.

"Many operators have begun to address the M2M market after facing slowed growth in their mobile handset business," says Yoram Berholtz, senior product manager at Red Bend Software. "Plus, there are an increasing number of connected wireless devices that present significant market potential."

Signs of the Times

The growth in the variety of M2M applications reflects the times. One of the best-known examples is the recent, sharp increase in government and utility funding for "smart grids," where M2M modules collect usage information so water, gas and electricity can be managed more effectively. (See ScreenPlays December 2009 issue, p. 1.)

"Smart grid somewhat dominates the dialogue," says Kittur Nagesh, Cisco Systems' director for worldwide service provider marketing. "To me, that's just one vertical."

Just as M2M benefits from the new interest in energy efficiency, it also gets a boost from the lousy economy. For example, tight credit markets have auto finance and leasing companies using M2M to reduce their risk by putting modules in their vehicles that can track and remotely disable them after a couple of payments are missed.

"That's a big market for us," says Telit's Ueland. "We sell hundreds of thousands of modules into that market. Most people don't realize that it's such a big segment. We certainly sell much more to that segment than we do in the utility vertical, for instance."

Some insurance companies, such as Progressive, are offering pay-as-you-drive plans, where premiums are based on mileage. The U.S. government is considering a similar architecture to fund roads, where gas taxes would be replaced by ones based on the amount of miles driven.

"We will be embedding devices that enable this new insurance model," says Wayne Ward, Sprint's vice president of emerging solutions.

Pay-as-you-drive insurance also is an example of how telematics – a catch-all term for M2M apps where the host device is portable or mobile – is becoming an off-the-shelf product. Instead of having to pay shops to install M2M modules in its policyholders' vehicles, Progressive ships them directly to customers for self-installation via the OBD-II port built into all U.S. cars and trucks since 1996. That business model works in a variety of other verticals.

"You can see the growth opportunity at the small-fleet level," Ueland says. "Joe the plumber can go into Sam's Club and get six OBD-II devices to manage his fleet. Included in that is prepaid services for a year or two and access to a telematics platform that would give him status and location information on all of his trucks."

M2M growth also reflects concerns about terrorism.

"The U.S. Department of Homeland Security's Container Security Initiative requires advanced technology to track the movement and location of cargo," says Red Bend's Berholtz.

M is for Money

In 2009, only about 4.3 percent of all wireless connections in the U.S. market were M2M, according to Berg Insight, a research firm. Worldwide, it was 1.4 percent and will grow to 3.1 percent by 2014, Berg predicts.

The upshot is that today and tomorrow, M2M is one of the nichiest of niche plays. But many vendors and carriers still see it as a market worth pursuing, to the point that they've created joint ventures and business units to target it.

Verizon Wireless, for example, teamed with Qualcomm to launch nPhase in August 2009. That was four months after Verizon CEO Ivan Seidenberg told CTIA Wireless attendees that the era of 500 percent penetration was nigh – a vision that requires each customer to have multiple devices.

But where's the money? That question has dogged M2M for years because most telemetry and telematics applications have been low-bandwidth, which implies single-digit ARPU and anorexic margins. For example, some analysts estimate that the Kindle has an ARPU of about $2.

Those concerns are a major reason why most carriers historically only dabbled – if that – in M2M, preferring to focus on consumers and business users, where ARPUs average $50 per month. Some vendors say that strategy is short-sighted.

"A $1 or $2 rate plan is still extremely profitable for the carrier, for a number of reasons," says Wyless' McDuffie. "One is that most M2M applications tend to be in the lower bandwidth side: one megabyte or less of usage per month. Second is that there's almost zero churn."

Churn is a byproduct of the device. For example, a utility meter typically hangs onto its M2M module for five years or more, while an M2M module in a car – such as for pay-as-you-drive insurance – could remain in service even longer.

In some applications, profit margins also get a boost from reduced overhead costs. For example, unlike a human subscriber, a utility meter isn't going to call customer care a couple of times a year, and it doesn't need a hefty handset subsidy every two years to keep it from churning to another carrier.

There are plenty of other potential ways to minimize M2M's overhead costs, such as by sending and receiving data overnight, when network capacity isn't at a premium. If the enterprise or residence has a cellular femtocell, it could communicate with the M2M module, eliminating the cost of running that traffic over the carrier's macro network.
The less money that a carrier spends supporting M2M, the better able it is to offer rate plans that match M2M's needs. In fact, one factor that's held back M2M thus far is rate plans that were designed more for human usage levels than machines. Over the past year, that's changed.
"There are more M2M-friendly rate plans," says Red Bend's Berholtz. "In the past operators offered data plans that were expensive compared to the benefits offered, but now they are addressing M2M in a more focused and strategic way in order to increase momentum and appeal to more enterprises."

As M2M-friendly rate plans lower one of the historic barriers to adoption, vendors and end users are coming into the market.

"With the other carriers now entering the space and developing offers for both B2B and B2C applications, we're seeing a significant amount of activity in the supplier side – chipsets, modules, devices, applications, venture capital – which is stimulating demand, creating more scale and competition, which is driving the costs down," says Sprint's Ward.  "So on the enterprise [customer] side, it provides a new and different business model, potentially lowers the initial capital expense to build/adopt a solution and provides a better RoI."

More and bigger deployments increase M2M module volumes, which helps drive down their prices – around $20, in some cases – to the point that more enterprises can make a business case for M2M.

One variable is technology. Modules that use the GSM family of technologies – such as GPRS and EDGE – typically are significantly less expensive than their CDMA counterparts, simply because GSM has about 80 percent of the worldwide wireless market. So in highly price-sensitive M2M applications, GSM can have an edge.

Hardware for so-called 2.5G technologies – such as CDMA2000 1X and GPRS – is relatively cheap these days simply because those technologies have had a decade to ride down the cost curve. Not so for their 3G successors, such as CDMA2000 1xEV-DO and UMTS/HSPA.

"3G modules are double or triple the cost," says Wyless' McDuffie.

Need for Speed?

Third-generation technologies are known for their throughput, with average speeds north of 300 kilobits per second. So one obvious question is whether the 3G hardware price premium limits the market for M2M applications that could benefit from a fast connection. The answer is yes, but most M2M apps don't need 3G speeds.

Take video surveillance. Unless full-motion, real-time, broadcast-quality video is required, a 1X, GPRS or EDGE connection is fast enough, especially when compression reduces the payload. Some surveillance apps also keep bandwidth usage to a minimum more as a way to reduce monthly costs rather than because the wireless network can't keep up. One example is a security system that doesn't start feeding video until motion detectors warrant it.

"More and more companies are doing more and more things with less and less bandwidth," McDuffie says.

On the other hand, some low-bandwidth apps have surprisingly high-bandwidth requirements, to the point that they prefer 3G or even 4G connections. One example is Consert, which installs a gateway-like device outside a home or business that then communicates with networked devices inside, such as air conditioners and water heaters. The system lets customers remotely manage – via a Web interface – those devices, and utilities also could use the system to adjust appliance settings during peak-consumption periods.

Consert's system has a per-message payload of only about 80 bytes. But multiplied by tens or hundreds of thousands of customers in a metro area, the traffic scales up dramatically: 400 to 800 kbps per node, depending on how many homes and businesses are served by each node. In a December 2009 ScreenPlays interview, Consert said it prefers technologies and networks that can support an average of 600 kbps – solidly 3G territory.

As useful as they still are for M2M and other apps, one big wild card is how long wireless carriers will continue to support legacy 2.5G technologies. A few years ago, carriers such as AT%26T and Verizon Wireless began shutting down their CDPD networks, which supported a wide variety of M2M applications.

Eventually they could do the same with 2.5 G in order to focus their resources on 3G or 4G. Although that might not happen for several more years, it's still something for M2M users to consider, especially for devices that will remain in service for five years or longer.

Who Needs 4G?

If 2.5G technologies are cheap enough, fast enough or both for the vast majority of today's telemetry and telematics applications, does that mean fourth-generation (4G) technologies such as LTE and WiMAX will have a tough time breaking into the M2M market?

The answer depends on a variety of factors, particularly coverage, which is a chicken-and-egg situation: M2M module vendors won't develop LTE and WiMAX products until those networks have enough geographic coverage that potential customers will consider using them. For now, the selection of WiMAX M2M devices is virtually nil.

"GE's power meter [division] and some industrial modules are working on solutions for the coming year," says David Maquera, senior vice president and chief strategy officer at Clearwire, which uses WiMAX. "Additionally, we are also working with other vendors on bringing products to market in 2010 and beyond."

Another factor is module costs: As brand-new technologies, LTE and WiMAX haven't had time to build the hardware volumes necessary to drive down costs, putting them at a disadvantage compared to 2.5G and even 3G for at least the next few years.

Even so, there are some apps that can justify the additional expense of 4G hardware. One example is TV stations that see WiMAX as a cost-effective alternative to satellite trucks and airtime for live remotes.

"For example, up until today, fleet-monitoring systems have never used video," Maquera says. "High-speed mobile Internet allows them to install cameras in their vehicle fleets for new applications such as security footage or traffic accident recording."

Some enterprises, utilities and municipalities have their own, private WiMAX networks. For them, the cost of WiMAX M2M modules might be a small price to pay if it means they no longer have to buy service from a cellular operator.

For carriers, LTE and WiMAX also are supposed to provide a lower cost per bit compared to 3G and 2.5G. If that turns out to be the case, then 4G carriers could pass along some of those savings in the form of cheaper M2M rate plans as a way to grab market share from 2.5G and 3G rivals. Such price wars could drive even more growth – something that's been a long time coming.