2014/07/17 The IoT and M2M market is experiencing vibrant M&A activity, but telecoms operators are curiously absent

Vodafone's acquisition of Cobra Automotive Technologies, announced on
16 June 2014¹, is part of a spate of merger and acquisition (M&A) activity in the machine-to-machine (M2M) space. Three major deals were closed or announced in June and we are aware of more than ten in 2014.

Figure 1: M2M-related M&A in June 2014 [Source: Analysys Mason, 2014]

However, the Vodafone deal is unusual in that it involves a telecoms operator. Of around 100 M2M-related acquisitions that we have tracked, we are only aware of 5 that have involved mobile network operators (MNOs). Verizon, with its USD612 million purchase of Hughes Telematics in 2012, is one of the few operators – along with Vodafone⁴ – to have been active in M2M M&A.

MNOs are aware that connectivity, their core offering, represents a low share of the total value of M2M

This lack of activity by telecoms operators is surprising because it potentially limits opportunities to generate more value from M2M. For most M2M services, connectivity represents only a small share of the total value of M2M. If we include devices and applications, connectivity rarely represents more than 50% of total value – it can represent less than 20%. Telecoms operators are aware of this and a common aim is to gain more of the value of M2M services. According to Analysys Mason's M2M carrier scorecard 2013, operators have indicated that they aim to generate only 47% of M2M revenue from connectivity by 3Q 2016, with the remaining 53% from applications and other services. Operators indicated that on average, 79% of revenue was from connectivity in 3Q 2013 (see Figure 2).⁵

Figure 2: Share of telecoms operator revenue from connectivity and other services, 2013 and 2016 [Source: Analysys Mason, 2014]

Operators that have developed end-to-end M2M solutions have favoured safe partnerships over bold acquisitions

Operators aspire to increase revenue from non-connectivity services, but there is a risk that they are not taking the steps required to do so. To gain a greater role in M2M, operators have three options.

• Partnering. This has been the dominant approach taken by operators to date. Operators partner with service providers, either acting as a simple sales channel for another brand, or reselling a white-label solution. This approach provides a fast route to market, but gives the operator limited control over the service and only a small share of revenue. Longer term, opportunities to partner may decline because consolidation means that potential partners gain scale and have less need for the sales channel that operators can offer./li>
• Developing services in-house. Most operators lack the skills to develop services in-house. Even where they do, time to market will be an issue. We are not aware of any operators that have fully developed M2M services in this way.
• Acquisition. Targets can bring a mixture of customers, vertical expertise and development capabilities. The M2M services – a mix of device sales, application provision and ongoing support – are all aspects that telecoms operators are well positioned to offer. Furthermore, operators have the financial clout to experiment with new types of business model (for example, no upfront fee, revenue share, savings share and so on) – all of which may be hard for smaller organisations to test. Acquisition has downsides too – the geographical coverage of a target may not match the operator's footprint, integration can be challenging and the vertical focus of most M2M companies may not sit well with the generalist nature of most operators.

Telecoms operators need to decide how seriously they want to make a play in M2M. Only by making bold moves, which will probably involve acquisitions as Vodafone and Verizon are doing, will they have a chance of generating significant revenue from this growing market.


Source: Analysys Mason