Making More Money in M2M: The M2M Service Company
Machine-To-Machine (M2M) has many potential applications with big benefits to end-customers, but how do suppliers including telcos make enough money to make it worth investing in? Here's a preview of a new M2M business model we're working on, the 'M2M Services Company', based on an approach successfully used by energy and IT companies to share end-customer productivity gains. This preview includes an example use-case.
We'll be publishing a more detailed research report on this approach soon, and also discussing M2M and the 'Internet of Things' in-depth at our Silicon Valley Executive Brainstorm, 19-20 March, San Francisco. If you'd like to contribute or find out more, email us at email@example.com.
M2M - where's the money?
For telcos, M2M ARPUs are low, and are also being eroded, like ARPUs across the industry. M2M used to be thought of as the next SMS, a business with potentially huge scale and high margins on relatively undemanding traffic volumes. But it's turning out to be a rather disappointing generic ISP product. So, more recently, operators have been increasingly keen to substitute value from bulk telecoms products with value from software and managed services, providing service enablers that help the customer deploy and manage the device fleet.
However, few operators have any illusions about being providers of compelling software. In most cases, with the notable exception of Telenor, they have had to partner with third-party developers such as Jasper Wireless and Pachube. So that's a partial solution to the problem, but at the cost of sharing some of the revenue and losing much of the potential for differentiation.
So what else can be done?
M2M: like selling cosmetics or selling hope?
Charles Revson, the founder of cosmetics giant, Revlon once famously said: "In the factory, we make cosmetics. In the drugstore, we sell hope."
In M2M, operators have traditionally tried to sell the equivalent of 'cosmetics' - something that makes sense to operators, such as SIMs, gigabytes of data traffic, or bundled messaging tariffs. Whether it was a sheep, for Telenor, an Amazon Kindle for Sprint or Vodafone, or one of these baggage-tracking devices that SMS you their location, it worked a bit like that.
But here's a question: how many M2M customers actually want "SIMs", "modules", "data", or "connectivity"?
Consider this other famous remark by the US energy-efficiency pioneer Amory Lovins:
People don't want energy. They want cold beer.
Energy, as such, isn't particularly useful. It is only valuable because of the work that can be done with it - for example, cooling the beer. M2M is very much like that: its customers typically have business requirements that don't have very much to do with telecommunications, but which do depend on telecoms. What if they were offered the solution to their business requirement, rather than just the minutes of use?
An Innovative Business Model in Energy
In the energy sector, people began doing just this at the end of the 1970s. A company called Time Energy, which makes timers, thermostats, and other controls, noticed that the biggest challenge for their sales force was convincing the customer that they really would save substantial amounts of money on their energy bills.
They came up with an elegant solution: offer the goods free, in exchange for a share of the savings. More precisely, Time Energy would offer 100% vendor financing and the customer would pay them back at a rate based on the reduction in their energy expenses. However you cut it, Time and the customer shared in the reduced energy costs, and the customer didn't have to put any money down up front. It's hard to say no to free.
This business model was later developed into the energy service company or ESCO, which applies the same idea to a broader selection of energy-related products and services. Some projects even include deeper re-engineering of production processes, or include the option to take the customer's share as a lump sum. IBM extended it into the IT sector, applying it to major enterprise computing projects.
What if the same approach was applied to M2M? Most M2M projects are all about some kind of cost reduction or productivity gain in a business process. Quite often, they involve energy saving, but that's not necessary.
The approach could:
- Use the power of free to sell the project
- Share in the underlying productivity gain
- Create sticky customers
- Make M2M more of a "SMS-like business"
- Make practical use of big data
Data is the Key to New Business Models in M2M
The ESCO experience shows that data is critical to the business model. Typically, it's necessary to carry out a careful energy audit of the customer premises in advance in order to estimate the potential energy savings (and therefore revenue) and to cost out the job. Then, after closing the deal, it's necessary to come back and measure the effects, in order to settle the bills and to guarantee quality. In a M2M service company project, data will be on the front line. Whatever the metrics are, it will be critical to master the data in order to make it all work.
Analysing the success factors for such a business, we identified two axes, one of scale and one of "data legibility". Some projects - the ones in the "zone of gold" on the chart - have good data and a big payoff. These are likely to get done in-house, and therefore they aren't really available to operators. Some have terrible data and are tiny, and therefore can be safely ignored.
But there are two groups of opportunities we see as ideal for the M2M service company model: ones where the benefit is clear, but the data isn't good enough, and ones where the data is there, but the individual project size is too small to be worth doing. We can get at the first group through better M2M data collection and analytics. We can get at the second through aggregation and financing.
Example Use Case: UK Rail
Here's an example. In the UK, train leasing companies acquire and maintain trains for the UK railways' train operating companies and the Department for Transport (Rail). Today, it is typical that the contract between DfT(R), the TOC, and the leasing company specifies a number of "diagrams" - roughly, a diagram is one train-movement - rather than a number of physical trains. This means that a major opportunity exists for the competitor who can maximise the amount of time the trains spend on the line, thus both making the service more efficient and reducing the number of trains they need to buy.
Collecting live data from instrumentation on the trains could make it possible to bring them in for maintenance on an as-needed or predictive basis, rather than on a schedule, and therefore improve their operational efficiency. (Similar projects exist for Rolls-Royce jet engines, for example.) An M2M service company could take on the project, supplying the hardware, the service enablement, the connectivity, and some or all of the data work, in exchange for a share in the gains from improved availability and on-time running. As there are numerous TOCs, leasing companies, and M2M applications in UK rail, such a company might even aggregate more projects and become a sector-wide platform.
That could, in turn, create opportunities for new and creative re-use of the data resource.
We'll be exploring this and many other aspects of M2M and the 'Internet of Things' in-depth at our Silicon Valley Executive Brainstorm, 19-20 March, San Francisco. We'll also be publishing a more detailed research report on this approach soon, and also offer private workshops to help companies explore and develop effective strategies and roles in these important and evolving fields. If you'd like to find out more or contribute to our programme, email us at firstname.lastname@example.org.