IoT Won’t Deliver Additional Revenues for the Telecom Industry

by Jeff Wiener on June 24, 2016

iot_nexus1For more than a year now telcos and vendors have been championing the Internet of Things (IoT) as the greatest new vertical revenue stream for operators, arguing that the development of 5G network technology will open up a brave new world for ubiquitous, sustained connectivity of our entire digital existence. The sustained connection of ever-proliferating devices equals increased profits…or so the dream goes.

But unwilling to buy the hype, New Street Research partner Andrew Entwistle has bucked the mainstream and rejected both the notion that 5G will be the great enabler of IoT, or that IoT will unlock erstwhile untapped revenue sources for an increasingly beleaguered telecom industry.

As Entwistle said earlier this week, “I’m perfectly prepared to accept that the internet of things is extraordinarily interesting to equipment makers and vendors, to systems integrators, to policy makers, and to people concerned with the social role of communications services in our lives, but there is an awful lot of noise about the internet of things that doesn’t actually translate into, to put it strongly, a whole hill of beans for the telecoms operator who’s looking to sell services to achieve revenue per customer or revenue per device.”

Entwistle provided several reasons why IoT may not be the saviour the telecom industry thinks it is: First, while the growth of IoT present unique opportunities for vendors, system integrators and other market participants, it offers much less for network operators (if they remain solely operators of course). As Entwistle explains, “Traffic volumes and revenue yields tend to be low and margins tend to be thin,” meaning that even as data traffic increases, this won’t deliver the windfall telcos are hoping for.

Second, we could argue that telcos are currently undergoing a radical reformation into service and solution providers, but unfortunately these are not areas where operators have excelled in the past, and as Entwistle notes, there is little evidence that this will change. “Many telcos would certainly like to be good at the systems integration, innovation, technology and business development activities that these projects require, but that transition has been problematic for telcos for a long time.” [emphasis added]

Finally, with the hype surrounding IoT, particularly in niche markets like driverless cars, regulators are now getting involved, and that could end very badly for the telecom industry, as pressure to commit to “non-commercial investments” as part of the greater good of growing IoT for everyone will likely mean losses for telcos. As Entwistle notes, when that happens, “Distortion, waste and ‘crowding out’ are the likely results.”

More to the point, Entwistle offered the example of a 5G connected healthcare facility with tens of thousands of connected devices. While vendors will charge a price per device, telcos will do what they’ve always done, provide connectivity to the premises.

“The telecoms operator will not see a single penny from any one of those devices; they sell a 5Gbps fibre into the data room of the hospital today, and in 10 years’ time they’ll probably still be selling a 5Gbps connection, or 10Gbps fibre at half the price of today’s 5Gbps fibre,” he claimed.

“I can’t see any business case for a telecoms operator.”

Now telecom operators are completely unprepared for this radically different reality, he said, with many simply assuming that multiplying devices means multiplying revenues. Not so.

“An operator said: ‘We will have 1,000 times as many devices and we only need 1,000th of the ARPU [average revenue per user] in order to build a business as big as our existing business’. That’s not a business plan, that’s just multiplying two numbers together and making a brave assumption,” he argued.

Now I have to say that Entwistle makes some compelling points, that much of the hype surrounding the growth of the Internet of Things means little to the telecom industry when it comes to growing profits and finding untapped revenue streams. In fact, IoT seems to be creating a perfect storm for the telecom industry, where they’ll have the network resources necessary to grow IoT, yet due to regulations and restrictions, will likely have less opportunity to profit off of their participation then, say, IoT hardware vendors.

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