Summary: M2M / ‘Embedded’ solutions have high growth potential but face big barriers too. An overview of the market, focusing on the cost-crisis needs of the Healthcare Sector, and reviewing strategic options for Telcos and other communications industry players.

NB. This is an extract from the full Executive Briefing. Members of the Telco 2.0^TM Executive Briefing Subscription Service can access the full item here. Non-Members, please see here for how to subscribe, here to buy the Briefing (£1,450 for a license for up to 5 people), or email contact@telco2.net or call +44 (0) 207 247 5003.

[Ed. We will also be focusing on these themes for ‘two-sided' telecoms business models at our April 28^th-29^th 2010 Executive Brainstorm in London, in our syndicated research projects, and in our future research programme.]

Introduction

'Machine-to-Machine' (M2M) has recently changed from a topic that barely rated in telco business priorities, to one that presents a new frontier of opportunities, particularly for mobile operators. This appears to be very much a top-down change in mind set amongst senior executives in the mobile operator, technology provider and equipment vendor communities. This has not come about by accident but rather by a number of factors coming together at the same time, including:

• Handset driven P2P growth has reached a plateau in most developed markets and so the mobile industry is looking for new sources of growth
• The nearly ubiquitous access to 3G networks is opening up the prospect for new applications and services especially as the consumer electronics industry starts to embrace the concept of wireless connectivity
• Policy actions are driving the adoption of M2M types of solution for smart metering (USA and European Union) as well as the automotive sector (eCall in the European Union). These initiatives provide standards-based platforms for value added services to be offered on top of the foundations of an embedded mobile platform
• Innovative devices and services, such as the iPhone, connected digital photo frames, remote health monitors and Amazon's Kindle, have demonstrated the potential for a whole new category of commercially viable mobile device that is quite distinct from traditional handsets and USB data modems

This has happened at the same time as it has become generally acknowledged that the economic state of the health care industry is unsustainable. In the USA in particular, the wide spread introduction of technology is being explored as part of fundamental reform to industry practices. From a communications industry point of view, Electronic Health Records (EHRs) and remote monitoring services are two solutions that could help to improve existing cost structures in the health sector, enhance resource efficiencies and deliver a higher quality of patient care, while across a range of industries, ‘mobile' solutions in particular are perceived to be a critical service delivery platform.

Clearly there are drivers pushing both the health and communications industries towards e-health solution but is the combination of M2M and mHealth the right partnership to deliver new business opportunities for leading edge mobile operators and health care practitioners?

This report begins by exploring the overall industry landscape and promises being made for M2M in the mobile arena. Next, the health sector is examined and a framework that identifies the different types of e- and mHealth opportunity is described. The report concludes with a discussion of strategic options for mobile and fixed operators and partners in the emerging devices and services industry.

M2M / 'Embedded Technologies' Overview

Is M2M Connectivity the next big growth driver for mobile?

While not unique, the developments in the US are indicative of the rapidly changing view of M2M communications. Ivan Seidenberg[1], the Chairman and CEO of Verizon recently spoke about reaching penetration levels of 500%; his vision is one that envisages no limit on the number of connections as part of the mobile grid. Verizon has backed this vision with the launch of its Open Development Initiative[2]. This has the aim of encouraging new devices on to the Verizon network through targeted advice for developers and device vendors. Verizon has also made structural changes to the certification process which now promises a 4-week cycle.

In the USA, AT&T shares an equally strong view of the market opportunity and in 2008 it established a dedicated Emerging Devices and National Resale business unit. Glen Lurie[3], its President, offers the view that "connectivity really expands so many aspects of everyone's life" and that virtually any product "on the shelves at a Best Buy, Wal-Mart, Radio Shack or Costco would deliver a better consumer proposition if it was connected".

M2M reality check - is it 500% or 150%?

While the executive level comments and business unit launches from AT&T and Verizon signal a highly promising vision for the future, the reality of today's M2M market is quite different.  A comparison of analyst projections for the M2M market points to a market of about 40m unit shipments for 2009 growing to approximately 100m shortly after 2012 as shown in the following figure.

These projections equate to an incremental market penetration of between 5% and 50%. Most established mobile markets exhibit penetration rates of about 100% which means that the current M2M market projections suggest that the overall industry is a considerable way off the 500% goal.

MNOs have to date paid little attention to this market for a variety of reasons:

• Overall industry shipments in terms of millions per year pale into insignificance when contrasted with handset shipments of over 1 billion units per year. The smaller shipment volumes make for less industry attention and lower economies of scale.
• M2M's focus is typically on industrial applications which are not such an intuitively attractive topic for marketing teams that prefer to advertise consumer handsets and to promote entertainment and social networking applications.
• Finally, M2M applications are typically associated with low-data rate solutions and ARPUs of a few dollars per month. This latter measure compares unfavourably with handset ARPUs in the region of $20-50/month.

M2M Redefined as 'Embedded'

The vision for high penetration rates only makes sense if the opportunities for M2M connectivity are expanded into new and non-traditional segments such as consumer electronics, clean technology, health care, transport and utilities as shown in Figure 2. This wider definition with a greater addressable market encompasses M2P and P2M services as well as M2M and is better described by the broader term Embedded Mobile[4] solutions.

However, for this broader definition, it is not enough just to apply current M2M business practices which typically involve high and costly levels of customisation to expand into new sectors.

The mobile industry as a whole needs to innovate around new service concepts and the associated business models and eco-system partnerships building around a rich new set of value drivers including:

• Innovative consumer services such as connected eReaders
• Delivery of operational efficiencies and cost savings for business and individual consumers
• Delivery of societal benefits in areas such as congestion reduction and public health services
• Putting consumers in control in areas such as energy consumption and personal health and wellness management

Lessons from current limitations

There are two important lessons to be learned from the limitations of current models for M2M services.

Firstly, the industry value chain is complex and highly fragmented. This makes it costly and time consuming to develop and sell M2M service solutions.

Secondly, in new sectors where embedded mobile enables new service offerings there are complicated business decisions to be made as to which sub-segment to target.

The M2M value chain is complex and fragmented

There are two components to the M2M value chain, one relates to devices (horizontal layout) and the other to service delivery (vertical layout), for which two variants are shown in the diagram below.

The service delivery value chain typically involves several different organisations (as illustrated by the left-hand side of service delivery chain) although there is growing evidence that MNOs are entering the market for total solutions (right-hand side of service delivery value chain).

Alongside each element in the value chain comes a degree of customisation and associated gross-margin. These combine to create the major barrier to growth that any company targeting this market have to overcome.

It is perhaps no surprise therefore, that for new and innovative device and service offerings there is a strong overlap between the device and service value chains as companies attempt to reduce both complication and cost on one side and secure a greater share of limited revenue on the other. This can be seen in the design of the Apple iPhone, for example and it's also telling that Amazon saw fit to set up a separate business entity - Lab126 - to design and engineer its Kindle eReader, rather than look to the existing providers.

Prioritisation challenges within the matrix of telecoms and non-telecoms segments

So it is clear that the embedded value chain has its own challenges but this is only the beginning. Within each of the new business segments that companies can target with embedded mobile connectivity, a second complication arises - understanding the business dynamics and sub-segment needs within the target market. This is essential in order to properly define the market as a whole and to prioritise the most attractive options within it. For example, consider the health sector as illustrated below and how it is perceived by health and communications service providers respectively.

The critical segmentation framework for the health sector is shown in terms of acute, chronic and wellness forms of care. In contrast, communication service providers might consider fixed, nomadic and mobile as the principal market dimensions. Just in this simple framework, the languages, terms of reference and associated priorities are very different. And, within the overall space, there can be a range of service opportunities each requiring a different level of service design, quality and commercial model.

This isn't just a case of semantics; the choice of sub-segments to market is important because it characterises the service to be offered. This includes consideration of such factors as:

• the type of end-user, whether it is enterprise, government or personal and the type of sales channel that needs to be employed
• the robustness of the service offering, ranging from casual to critical life-support use
• the role of regulatory factors in service definition (e.g. US FDA approval for medical devices, US HHS rules[5] on privacy of health information)
• the role of external agencies and technical developments in determining when a market is likely to develop commercially
  

In turn, each of these impacts on the cost requirements and the revenue opportunities. For example, if a service is for critical life-support services, the guarantee of service requirements may make it cost-prohibitive for an MNO and certainly put it on a very different plane from wellness monitoring type services. This was a factor high in the minds of delegates at the 8^th Executive Brainstorm held in Orlando at the end of 2009, who felt that wellness monitoring applications provided a natural starting point.

To read the full Briefing, covering...

• How Operators are actively targeting the 'Embedded' Opportunity
• Opportunities in Connected Health
• The Digital Healthcare Ecosystem
• Healthcare spending
• Where to start
• Target segments and telecoms service concepts
• Mobile Health Opportunity
• Barriers to Connected Health 2.0 Adoption
• Conclusions and recommendations
• Healthcare and Telecoms: all about interfaces
• Strategic choices across the value chain for operators
• Where's the value?
• Mobile Vs Multi-Modal?
• Vertical / Retail Vs Horizontal / Wholesale?
• More than Connectivity?
• Next Steps

...Members of the Telco 2.0^TM Executive Briefing Subscription Service can access the full item here. Non-Members, please see here for how to subscribe, here to buy the Briefing (£1,450 for a license for up to 5 people) or email contact@telco2.net or call +44 (0) 207 247 5003.

We will also be focusing on these themes for ‘two-sided' telecoms business models at our April 28^th-29^th 2010 Executive Brainstorm in London, in our syndicated research projects, and in our future research programme.


References

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[1] The US Department of Health and Human Service enforces the Health Insurance Portability and Account Act (HIPAA) rule to protect the privacy of individually identifiable health information

[2] The Embedded Mobile term was coined as part of a market strategy assignment conducted by Ventura Team for the GSMA - GSMA report on Embedded Mobile - "M2M Solutions and Beyond (2008)"

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[3] SOURCE: Key note address at CTIA 2009 (as reported in Fierce Wireless, 1 April 2009)

[4] Verizon Wireless' ODI is the company's program designed to allow and encourage the development community to create new products, applications and services beyond what Verizon Wireless offers in its portfolio and bring these to the marketplace on the Verizon Wireless network.

[5] SOURCE: GSMA Embedded Mobile newsletter (September 2009)