There has been some discussion in the trade press and in analysts’ reports that cellular carriers are starting to focus on M2M as their next growth opportunity. Many of these carriers in both the United States and Europe have established or greatly expanded their M2M-focused business units to try to grow and capture this emerging market for cellular devices and service.
For many reasons, the M2M business should be very attractive to carriers. First, the potential market size is very large – there are many more machines and devices in the world than there are people, and carriers like large markets. Second, the M2M business is largely a wholesale business, with some other company selling the product or service which incorporates cellular communications, so the carrier does not take on the significant expense of marketing and sales. Whether it is a tablet computer, an e-book reader, a home health diagnostic unit, or an oil pipeline monitoring device, the manufacturer of the product sells the cellular service as part of the overall product. Third, the M2M market is developing without the use of upfront equipment subsidies, as are common in the US cellular handset market, so that the carriers do not face a large upfront investment to add each new M2M “subscriber.”
There are other characteristics which should make the M2M business economically attractive to carriers. Because this is largely a wholesale business, the acquisition cost of each individual subscriber is very low. In addition, outside of the consumer data appliance category, the average service life of the devices using cellular communications is very long, sometimes as much as a decade. This means that the churn of M2M devices is very low. Except for consumer appliances, most M2M applications tend to be tightly defined and change little over time. Once they are working, they tend to simply keep working, so carrier support costs are relatively low per unit. In fact, most direct support is actually provided by the product manufacturer. Finally, the network usage of M2M devices tends to be relatively low, predictable and stable, so these applications do not place unforeseen demands on network capacity (other than simply adding more devices to the network).
But carriers are actually somewhat ambivalent about the M2M business. The problem for them is that M2M devices usually provide a much lower monthly Average Revenue Per Unit (ARPU) than do traditional cellular subscribers. In fact, M2M ARPUs are often a full order of magnitude lower than standard consumer handset ARPUs.
Cellular carriers are public companies whose operational performance is evaluated on three numbers – subscriber count, average monthly revenue per unit, and churn (i.e., the percentage of customers who drop cellular service with that carrier during the month). While the stock price of cellular carriers does partly reflect the carriers’ recently reported quarterly financial performance, investors also attempt to gauge the carriers’ future financial performance by tracking these three operational metrics. These three numbers impact an investor’s view of the carrier’s future prospects, and investors incorporate this view of the future into the stock price.
In terms of these investor metrics, then, a significant increase in M2M subscriptions will cause the subscriber count to increase, but will also cause the ARPU metric to decline. The greater the number of M2M subscriptions added, the more dramatic will be the impact on the carriers’ overall metrics. But when investors see a carrier’s overall ARPU numbers declining, they can not easily tell whether that is caused by a growth in M2M subscriptions, or whether it is driven by general price erosion in the consumer handset business, from customers shifting from higher cost plans to lower cost plans that better fit their usage, or from a shift in customers from traditional post-paid cellular plans to prepaid plans. All of the other possible explanations for declining ARPU are generally viewed as “bad” from the investors’ perspective, since they threaten to reduce the carrier’s future profitability from declining revenue with no corresponding decline in costs.
The reason that carriers are actually ambivalent about the M2M business, and remain uncommitted to really growing it, is because the faster this business grows, the less attractive the carrier looks to investors. Even though an M2M business might be extremely profitable as a stand-alone business (even after allocating its share of the full cost of the network capacity that it consumes), it is impossible to convey this fact to investors using the summary financial and operating reports that carriers disclose publically and that investors use to evaluate carriers. So growing an M2M business will make a carrier’s stock price go down – at least in the near term. Like most public companies, carriers focus on short term stock price performance as their primary guide for managing their business. Most of the carrier palaver about supporting M2M is really about high end consumer appliance subscriptions, not about the average low ARPU M2M applications.
