Although considered a strong growth driver for operators, the challenges of profitability intrinsic to this market, strong competition and the global pandemic are making the task harder for operators.
Clément Eberhardt, Wholesale consultant
As legacy markets such as copper and mobile experience stagnation or decline, telecom operators are actively seeking new growth drivers. According to the GSMA, global mobile subscriptions reached 5.3 billion by the end of 2021, and they are projected to rise to 5.7 billion by 2025.
In parallel, Analysis Mason estimates that by 2031 there will be 7 billion IoT connections (CAGR: 15%). The automotive sector is also driving this growth, with a CAGR of 16% from 2020 to 2031, compared to the overall market CAGR of 9%.
As of now, driven by the consumer market (smart homes), the IoT is still far from reaching its full potential. While the industrial and automotive markets appear to be the new high-potential markets, others are still in their infancy (e.g., connected healthcare, automated transport, smart cities, agriculture, etc.).
Yet, while competition is fierce for telco operators, the opportunities for IoT as a growth driver are increasing, and other players could well come into their own. However, the IoT implies a lower level of profitability, given the low level of data usage and the need to sell larger volumes in a highly competitive market.
As the telecom market is so vast, we'll be looking at the supply of wholesale connectivity services to intermediaries.
A Fast-Changing Ecosystem
The telecom industry was no exception, with the COVID pandemic impacting markets such as IoT and the shortage of semiconductors impacting deployments. Players were forced to review their deployment plans and postpone certain investments. As a result, some market forecasts have been revised downward. Combined, this multitude of players represents a significant share of addressable volumes. Although the total volume represented by the sum of these players is interesting, operators must also add up their operating costs, which in many cases are not profitable for the biggest operators. This has led to a multitude of intermediate players positioning themselves between the market leaders and the outsiders to offer greater flexibility. In the wake of the COVID pandemic, these small players have had to refocus on their most strategic issues, while shortages of electronic components have slowed the volume of terminals in circulation. International organizations (the GSMA) and industry experts have revised their estimates.
On the wholesale market, a number of players are now unavoidable, including Vodafone, 1NCE (a Deutsche Telekom subsidiary), Orange and BICS. In addition, other major international operators have been trying to position themselves in IoT for several years, as did NTT Communications Corporation in 2019 with the acquisition of Transatel and Telus with the investment of 17.35 million euros in Eseye in 2021.
These players are addressing the market with similar offerings, where scope and price are key. They now rely on their cellular network technologies, such as 2G/3G/4G LTE (CAT 1, CAT M, etc.), 5G NSA and LTE-M, and NB-IoT, which are the two LPWA (Low Power Wide Area) technologies designed for IoT. From a structural point of view, wholesalers' operator customers can be both MNOs and MVNOs using international roaming agreements to address other markets that are inaccessible or unprofitable to them; most use Roaming Sponsor offers. LoRaWan® can also be considered a telecom technology in its own right, even though it works well via LoRa radio communication, enabling the creation of a wide-area network mesh on free frequencies for very low-consumption uses. However, LoRa is not a direct competitor to operators' IoT solutions due to the security of cellular solutions and the higher data rates required for certain IoT applications. Finally, satellite can also be an alternative for addressing IoT terminals in specific applications (in outdoor areas without coverage and for low-latency requirements), making it a niche market.
Historically, operators have had to contend with the standardization of mobile connectivity services, which has tended to erase the markers of differentiation. With services becoming very similar between operators, competition has hitherto been based on price, leading to a fall in mobile ARPU. In the IoT, however, ARPUs are already low, and this pattern will have an impact on revenues, making volume-based competition even fiercer. For operators, it's a question of maintaining the profitability of IoT offers, which will never be as profitable as consumer market packages due to low traffic levels.
Other players are now entering the IoT market without telecom licenses. These non-cellular IoT terminals are likely to account for the lion's share of future market growth. These short-range, license-free terminals should drive the vast majority of the market in the long term. This indirect (and often inexpensive) competition for operators will impact addressable revenues, i.e., $900 billion in 2025, as estimated by the GSMA.
Current Challenges
What's more, operators are already impacted by these new market challenges, on which their future attractiveness will depend.
As a result of this competition, operators are forced to compete on quality of service as well as price. As things stand, when a terminal is in use and its SIM card is connected to the network, the operator seeks to charge as fairly as possible for usage. However, where on the retail market in France, AUPUs are approaching 13.4GB1 per month per user (in the second quarter of 2022, according to ARCEP), IoT AUPUs are much lower (on the order of a few bytes to a few dozen MB on average). Most of the time, the MVNO customer will pay a per-unit rate for traffic consumed, but operators often apply a monthly fee to each SIM activation to ensure a break-even point. Some players also have a minimum billing model, but this is too complex to achieve market consensus.
When the provider applies monthly charges, the tariff is applied by default to all lines/parks that activate and operate on the network. It doesn't matter how much is consumed because it will be billed in addition to the minimum break-even point defined in the contract.
The minimum charge may apply to a line and/or a fleet and is fixed by the terms of the contract. For each connection, it is applied in addition to the charges associated with the line's actual consumption. Thus, if the line or fleet consumes less, a supplement is applied up to the defined threshold; if it consumes more, only the traffic will be billed. However, the latter is not the most widespread model due to the complexity of the billing model.
Conclusion
Although considered a strong growth driver for operators, the challenges of profitability intrinsic to this market, strong competition and the global pandemic are making the task harder for operators.
As a result, wholesalers are well aware of the need to be present in the market, both through their offerings and through their services and technologies. In addition, some of their MVNO customers are focusing on this market themselves, as Transatel and Cubic Telecom have done in their partnership with Audi2.
While the market tends to grow rapidly and profitability is a critical issue for some providers, it's the technological challenges of the future that will determine tomorrow's leader — but that's another story.
1https://www.arcep.fr/fileadmin/reprise/observatoire/2-2022/obs-marches-T2-2022_oct2022.pdf
2https://www.cubictelecom.com/case-study/audi-is-now-generating-intelligent-insights-with-the-help-of-cubic-telecom/
Glossaire
IoT: Internet of Things
5G NSA: The majority of early 5G network deployments are non-standalone or NSA deployments. They focus on enhanced mobile broadband. The aim is to deliver higher data bandwidth and more reliable connectivity. More concretely, this means that 5G networks leverage existing 4G infrastructure to benefit from 4G low-band coverage, as well as the connection to an advanced 4G core network, to which is added the functionality needed to support the new 5G standard. This is the option that has made 5G deployment and commercialization possible as early as 2019.
https://www.ericsson.com/fr/blog/3/2022/5/5g-sa-et-5g-nsa-quelles-differences-
5G SA: 5G in standalone mode, or SA, is 5G that works "on its own" without relying on existing 4G infrastructure. This is the definitive, long-term option for 5G.
MNO: A mobile network operator, abbreviated as MNO and sometimes also called operator service provider, mobile operator or mobile network operator, is a telecommunications service provider organization that provides wireless voice and data communications to its subscribed mobile users.
https://croslegacy.ec.europa.eu/content/Glossary%3AMobile_network_operator_%28MNO%29_en
MVNO: MVNOs (Mobile Virtual Network Operators) are operators without their own radio network who, in order to offer mobile communications services to their subscribers, rely on the services of one or more mobile network operators (currently four in number: Bouygues Telecom, Free Mobile, Orange and SFR) by purchasing wholesale communications from them. Although they do not have their own radio network, MVNOs are operators in their own right, with full control over the design and launch of their commercial offers, and full responsibility for the provision of mobile communications services to their customers.
https://www.arcep.fr/professionnels/operateurs-des-telecommunications/liste-des-mvno.html
ARPU: Average Revenue Per User designates the average monthly sales generated by a company with one user/customer. ARPU was originally developed by telecommunications companies. They sought to identify the average revenue (or sales) generated by a single subscriber over the course of a year. Today, ARPU is used in many fields to provide precise information on a company's sales. In particular, it is used in the online services and mobile application sectors. It should be noted that there is no legal definition of ARPU perimeters. Therefore, they vary from company to company.
https://www.journaldunet.fr/business/dictionnaire-du-marketing/1207665-arpu-average-revenue-per-user-definition-traduction-et-synonymes/
AUPU: Average Usage Per User represents the average consumption of a unit (voice, SMS, data, etc.) on the same basis as ARPU.
Compound annual growth rate (CAGR): Compound annual growth rate
Slicing: Network slicing involves dividing the network into several sub-networks, known as "slices." Each slice operates independently, although they are deployed on the same physical infrastructure.
https://reseaux.orange.fr/actualites/5g-network-slicing
NB IoT: Narrowband IoT is a communication standard standardized in 2016 and dedicated to the Internet of Things. More concretely, it's an LPWAN (Low Power Wide Area Network) communication standard whose main mission is to facilitate the communication of large volumes of data over very long distances. On a more technical level, NB-IoT operates on the old GSM network (200 kHz frequency band), with the LTE network or within an independent network. It delivers download and upload speeds of 20 to 250 kbit/s, with a latency of less than 10 seconds.
https://www.journaldunet.fr/web-tech/dictionnaire-de-l-iot/1489515-nb-iot-qu-est-ce-que-le-reseau-bas-debit-utilise-dans-la-5g/
LTE-M: LTE-M (LTE-Machine) is a cellular network dedicated to IoT whose technology has been standardized by 3GPP. There is a major difference between LTE and LTE-M. The latter is an evolution of LTE technology, optimizing the use of radio frequencies. LTE-M is part of LPWAN (Low Power Wide Area Networks). These technologies enable manufacturers of connected objects to communicate data over long distances with low power consumption. LTE-M covers a wide range of use cases with high data rates and large volumes of data. This is very important for many IoT (Internet of Things) solutions.
https://iotjourney.orange.com/fr-FR/support/faq/qu%27est-ce-que-le-lte-m
LoRaWan©: LoRaWAN® stands for Long Range Wide Area Network. It's a radio telecommunications protocol that enables the transmission of small packets of data at low bit rates and is particularly well suited to connected objects.
https://iotjourney.orange.com/fr-FR/connectivite/tout-savoir-sur-la-connectivite-lora
SDN: Software-defined networking (SDN) is an approach to networking that relies on software controllers or APIs to direct network traffic and communicate with the underlying hardware infrastructure.
https://www.vmware.com/fr/topics/glossary/content/software-defined-networking.html
NFV: Network functions virtualization (NFV) enables network services (routers, firewalls, load balancing modules, etc.) traditionally run on proprietary hardware to be virtualized.
https://www.redhat.com/fr/topics/virtualization/what-is-nfv
Roaming sponsor: The Roaming Sponsor offer enables operators (MNOs or Full MVNOs) with a core network to benefit from another operator's international roaming coverage.
https://wholesalefrance.orange.fr/fr/nos-solutions/mobile/mobile/roaming-sponsor/
