Risk and the Internet of Things

In the communications sector, the area of strongest innovation is the Internet of Things (IoT). One or other company makes a new announcement every day. There is explosive growth in the number and types of things that are being connected to the internet. And there is great potential to connect wearables, smart appliances, home monitoring devices, and more. The business model of telcos must change significantly, to participate and take advantage of the opportunities.

I would like to focus on the risks that come with these changes. As of today, telcos are focusing on shifting from voice to data, as they experience higher revenue growth in data. With IoT, there is going to be another shift as meeting customer and market expectations will require a new mindset. This is because of how IoT is configured, and how it is ‘consumed’. Behind the scenes, IoT is a complex stack of technologies, applications and services, including devices, connectors, data management, security, end user applications, and analytics. In order to make this work for telcos, they must be the conductor of an orchestra. The telco’s role is to form relationships with vendors across the entire IoT ecosystem, and be the trusted partner for the end customer.

It is vital that the operator manages SLAs with all its partners, ensuring a seamless experience for the subscriber. An IoT solution will include all of the following.

  • Sensors and actuators.
  • Microcontrollers that act as links between the sensors/actuators and a gateway or the cloud.
  • Gateways that act as a medium between multiple microcontrollers and the cloud.
  • Data processing servers in the cloud, with the client.
  • The end user layer – devices, UI, apps etc.
  • An administrative layer.

The question becomes: is it better for telcos to take a leadership role, or is it less risky to be passive and be satisfied selling data and access? My answer is that it is actually more risky to decline the leadership role. This is because the communication part of the ecosystem is the most vital component of IoT, followed by data management.

If telcos decide to be just a vendor of SIMs and connections, then device and app vendors will manage the customer relationship and their loyalty. The telcos will lose out on an enormous opportunity as they are giving up on an important connection to what will be the fastest growing segment of their subscriber base.

The opportunity for telecom operators to sell more bandwidth is huge and data communications will have the major share of the consumer wallet within the IoT ecosystem. Telcos cannot afford to take a passive role. This means that enormous planning is needed on the infrastructure side, which can include smart packaging of data plans, innovation in data management for the connected devices, and cool applications for the subscribers.

I would like to provide a few important statistics on the market size of data connections, including IoT devices. Gartner forecasts 25 billion devices will be connected by 2020. Assuming Garner’s number is close to reality, we can safely say that there will be, on average, about 3 connected things per person by 2020. Internet penetration as a proportion of the world’s population was 42.4% by the end of December 2014. Internet penetration should rise to 62% in 2020, assuming 8% growth each year. This implies the number of internet users would be about 4.8 billion. Hence, an average internet user would use about 5 connected devices by 2020. This means telecom operators have to provide 10 billion data SIM or equivalent connections exclusively for IoT purposes (assuming 2 internet connections per internet user, to manage their 5 connected devices). These 10 billion connections are additional to the 4.8 billion connections for normal internet usage.

Conventional revenue for telecos are generated from voice, SMS, data packages and VAS. In future, consumers will look for trusted providers to bundle solution sets that include sensors, actuators, microcontrollers, gateways, connectivity, data management platform, security and the client/app. There are significant risks associated with such a huge responsibility. For example, when it comes to operational challenges, connected devices may have very low volume data output but the business case may not tolerate any downtime. SLAs would have penalty clauses and non-compliance would lead to loss of trust in the market along with any financial penalties. Security is another area of significant importance as the number of threats are increased, data loss opportunities are increased and the complexity of the environment is increased. Risk management will be very different from the way telcos manage risks today.

The tradeoff between risks and rewards means that the greater the risks, the greater the returns that must be sought. To get those returns, whilst minimizing the risks, I believe telcos should start pilot projects with smaller groups of customers. That way, they can build a strong framework, and prepare for change. Telcos such as Vodafone, AT&T, Ooredoo, Telenor etc are already providing IoT solutions while developing their infrastructures. For example, AT&T has a cloud-based IoT data management platform called M2X, whilst Telenor has launched Trax, real-time GPS trackers for consumers to locate their children and pets. However, the offerings from these vendors are limited to a specific element in the IoT. They have not yet matured to the stage where consumers will be able to access the entire IoT stack from telcos directly. This is similar to how customers can buy a smart phone plus the connection and additional services directly from the telco.

If telcos maximize their role in the IoT value chain, their potential returns increase whilst their risks are managed. If they allow others to occupy a leadership position, telcos may be left with more risk than they wanted, and less revenue than they hoped for.

Daniel Peter
Daniel Peter

Daniel Peter is Vice President of Analytics at Gamma Analytics. He heads Gamma’s Data Science group working with customers in advanced predictive model development, business data analytics, data science, and product strategy. He also has significant expertise working with Fortune 500 companies for Connectiva Systems and Hewlett Packard.

Daniel has a Business Analytics degree from IIM Calcutta, Masters in International Business from Kedge Business School, France, and MBA from Loyola Institute of Business Administration, India. He is the author of: “Corporate Response to Recession (2008-09)”. He speaks and writes on telecom topics and can be reached at daniel@gammanalytics.com

  • Sarit

    Interesting read. It would be a challenge for Telcos to offer full scale IoT services both to consumers as well as business customers; IoT services would always be specialized e.g. a service related to patient health tracking and alerting or vehicle tracking in logistics. Telcos in that case would need specialists in understanding the need for each such sector or consumer and build services; that would be a difficult proposition. Your points are thought provoking, but I believe that Telcos would need to be a part of the consortium of ICT companies and the industry, they might not be in a position to give leadership on their own.

    • Daniel Peter

      Sarit: Agreed that Telcos will not be in a position to give leadership on their own. But they have to play a larger role in the industry rather than just being a part of the consortium of ICT companies and device providers. If telecos fail to seize the opportunity, who else can