Wireless carriers are tapping into machine-to-machine communications, but specialty service providers offer strong competition

For a market that’s expected to grow 50% this year, machine-to-machine communications have caused surprisingly little stir in the wireless service provider community. But that’s beginning to change. A half-day seminar on service provider M2M opportunities at the CTIA show in April was packed. And earlier this year, T-Mobile Venture Fund, the investment arm of the wireless carrier, made an investment in Siemens’ M2M unit, which the telecom manufacturer spun off.

Alex Brisbourne, president and chief operating officer of Kore Telematics, a specialty service provider that focuses on M2M, offered a definition of the term “M2M.” As he explained, M2M is “all about collecting remotely accessible data and pulling it to a central location so you can perform a useful action on it.” M2M communications involve automatic connections between two devices, often using exception reporting to alert human beings when necessary. In a burglar alarm monitoring application, for example, personnel would get involved only in the event of an intrusion or equipment problem. M2M communications may be over wireless data services such as EV-DO or GPRS or, because many applications require very little bandwidth, over short message service (SMS).

Kore Telematics estimates that currently there are about 50 million M2M connections worldwide, with about a third of those in North America. Consider some of the hottest M2M applications today: Kore offers an asset tracking service that recently helped apprehend a rental equipment crime ring; Kore competitor Numerex offers a lock box that wirelessly sends information in real-time when a real estate agent borrows or returns the key to a property, providing more timely tracking than earlier-generation systems, which had no communications capability; another specialty service provider, Aeris Communications, is developing an application for power companies that Chris Purpura, senior vice president of marketing for the company, called “demand response.”

A power company client “wanted the ability to do broadcast paging over cellular,” Purpura said. Using that technology, the client will be able to turn off consumers’ air conditioning for up to 15 minutes a day, helping the company to avoid blackouts. Participants will get a discount on their energy bills.

Traditional wireless carriers also are in the game. Mobile resource management (MRM) applications from companies such as AT&T and Verizon Wireless track truck fleets, helping business customers ensure that drivers are taking efficient routes and staying on schedule. Verizon Wireless even supports an application that tracks railroad locomotives.

“The application provides a host of information about the train and its systems back to a monitoring center, including fuel consumption, the braking system and power management,” said Kenneth Wells, associate director of enterprise data sales for Verizon Wireless.

Companies such as Aeris, Kore Telematics and Numerex arose originally because they saw an opportunity to tailor communications services to address the specific needs of the M2M market. As Brisbourne noted, traditional wireless operators “are fixated on churn, average revenue per user and customer acquisition — they want to keep ARPU in the $60 range.”

In comparison with conventional cellular service, most M2M connections use relatively small amounts of bandwidth — and in some cases, communication may be infrequent. As a result, Brisbourne said, customers want to pay “in the single digits of dollars” for monthly service — and traditional operators often are not very interested in that business.

“What we did is we essentially said there’s a gap between the carrier and the application service provider, and it’s our business to fill that gap,” Brisbourne said.

Kore and its competitors are sometimes called M2M mobile virtual network operators. Like other MVNOs, they do not have cellular licenses but instead lease airtime from traditional wireless network operators. But unlike marketing-focused MVNOs that simply resell traditional mobile voice and data services, the M2M-focused MVNOs add considerable value on the technology side.

“We actually operate our own network,” said Purpura of Aeris. “We’ve built an overlay network of 20 carriers across North America. We have our own phone numbers, and we have direct connections into 800 [wireless carrier] switches. We direct backhaul traffic to our network and to customers’ own private networks, and we have our own operations support systems and business support systems.”

Using that approach, Aeris claims three-nines reliability — even for applications based on notoriously unpredictable SMS technology. When an Aeris application registers with a local tower, Purpura explained, “it is identified as an Aeris phone number, and the local switch immediately hands it off to Aeris so we’re not competing with consumer traffic — we don’t have messages that show up five minutes or three hours later.”

Aeris and some other M2M-focused MVNOs also help their customers develop applications and select equipment. They also may sell equipment, which comes in a wide variety of form factors. Several manufacturers, including Kyocera, Wavecom and Siemens Wireless Modules (which will be renamed later this year), offer the radio components, while a wide range of specialty companies manufacture the meters, sensors, black boxes and other devices into which the radio components are installed.

Perhaps one reason we don’t hear a lot from traditional wireless carriers about their M2M initiatives is that those carriers typically do not have a business unit dedicated specifically to a broad range of M2M initiatives. At Verizon Wireless, for example, M2M is the responsibility of the enterprise data sales and support groups, which handle a wide range of wireless data communications. That business unit also is segmented by industry. Wells’ group focuses on utilities, media and transportation, while other groups focus on industrial, construction, finance, government and other market segments.

But despite their low profile, traditional wireless carriers have made substantial progress in the M2M market. Igor Glubochansky, director of industry solutions for AT&T Enterprise Business Services, is particularly enthusiastic about that company’s MRM offering. For customers, he said, “the return on investment is great — the fuel savings and routing benefits can be better than what they’re paying for software and hardware.”

AT&T has approved nearly 200 specific vertical devices for use with its service. And like its MVNO competitors, the network operator offers services beyond simple connectivity.

“We can resell software and hardware and provide installation support and training,” said Harold Allen, senior manager of transportation and logistics for AT&T Enterprise Business Services. Supporting AT&T’s MRM initiatives are a range of partner companies, including @Road and Trimble.

MRM has significant upside potential, added Glubochansky, who said that there are about 25 million fleet vehicles in the U.S., but only 15% to 20% of them have deployed an MRM solution. “The business should be there for the long haul,” he said.

Traditional wireless carriers may be better-positioned to sell to some large business customers than their MVNO competitors, as the traditional carriers typically are already engaged with these businesses, serving a wide range of communications needs. And as Dean Fledderjohn, general manager of the M2M business segment for equipment developer Kyocera, said, “A key metric to adoption is what’s the cost of ongoing service. And if ongoing service is a greater portion of the total cost of ownership, the carrier, being the spectrum owner, probably has the most latitude to do things.”

But the low ARPU on M2M communications could continue to make it difficult for some customers, particularly smaller enterprises, to get the attention of the larger network operators.

“They focus on new subscribers and ARPU,” said Purpura of his traditional wireless operator competitors. “The place they need to get to is units and average margin per user.”

Purpura argued it would be difficult for traditional wireless operators to make the shift required to aggressively pursue the M2M market. “The biggest thing they don’t understand is that M2M is hundreds of mini vertical niches and the specific types of applications and devices that are involved. The type of device in a thermostat versus something installed in a farm tractor have almost nothing in common other than communications. Can a major carrier support all that?”

Answering his own question, he said, “If they try to do this at the top line, they will incur all kinds of costs and not do a good job of it. But we can give them a big check on a wholesale level, and they don’t have to lift a finger.”

Perhaps a similar logic was involved in T-Mobile’s investment in Siemens’ M2M division. T-Mobile saw an opportunity to get a piece of a business that sells 1.5 million units in the U.S. per year and is seeing 59% annual growth, said Peter Fowler, vice president of sales and general manager for Siemens Wireless Modules’ NAFTA region. “Siemens Wireless Modules is a very profitable and growing market-share leader that serves a segment of the market that T-Mobile and all carriers will continue to grow in,” Fowler said.

A less passive opportunity for traditional network operators also could emerge as enterprises seek to mine M2M data in pursuit of further business efficiencies. Joe Barkai, practice director for research firm IDC, cited the example of a company with a fleet of M2M-equipped vehicles.

“If you move a lot of data from different devices to a central location, the benefit is being able to look at the entire fleet,” said Barkai. “You not only get early warnings and alerts, but you can also understand trends.”

That application would require a centralized data repository — and traditional network operators could be well-positioned to provide that repository, said Barkai, who added that M2M-focused MVNOs may be less interested in that opportunity. Referring to the MVNOs, he said, “Many of them don’t want to be in the data business because you have to provide disaster recovery and backup.” Those tasks, he said, may be better-suited to larger companies such as the traditional network operators.

But will traditional service providers be content with niche opportunities?

The answer could depend on the same dynamic that occurred in the Internet backbone market a decade ago. There a range of specialty service providers emerged, building offerings on top of communications infrastructure that they bought on a wholesale basis from traditional network operators. Like the M2M-focused MVNOs, those providers built successful businesses by adding their own technology elements to serve a specific purpose. Tellingly, none of those providers are around today. Nearly all of them were acquired by traditional network operators.

Perhaps then the right question to ask is not whether the same thing will happen in the M2M market, but when.