ICT businesses will lose out on IoT revenues in 2018 until they change legacy pricing and offers
You feel a tap on your wrist, you glance at your watch… but no, it’s not the person next to you asking for the time, it’s an SMS, email, or other notification appearing on your smart watch. In 2017, the Internet of Things was already omnipresent and predicted to have grown a further 24% to a total of 28bn devices worldwide, with similar spectacular growth this year, writes Dr Kajetan Zwirglmaier, a partner in the global telecommunications practice at Simon-Kucher.
ICT companies have known and expected this for a while. The rise of the IoT should send the business value of telecommunications players skyrocketing. But this is not the case, for instance for listed players growth is currently only at 10% (Figure 1), well behind others. This effect is also harming the value of private small and mid-sized ICT companies too.
What is the reason for the telco and ICT sector’s significantly lower performance? One key aspect is certainly that telco’s monetisation power for innovations, such as 4G, has not been very strong. The key question therefore is: how can ICT businesses design their offers, pricing, and go-to-market strategies in 2018 to generate greater sales and initiate sustainable growth?
The problem is that operators, MVNOs, dealers, and resellers are finding themselves selling a perceived commodity, with limited potential for differentiation, instead of the actual thing that is connectivity, namely an emotional and highly differentiable product. This is especially true for the countless IoT use cases, which have actual diverging requirements as the new technologies NB-IoT or CAT-M are showing.
Despite increased data usage, the growth in data volume is still driven by competition, while the prices continue to decline. For instance, as of today, price models are virtually uniform, packages invariably specifying MB/GB, minutes, and SMS so the market is trapped in a price war spiral of value-up and price-down.
Alternative approaches are possible. For instance, T-Mobile US on the residential side and SigFox/LoRa on the B2B side have left the beaten path and developed new pricing approaches, better suitable for monetizing IoT. T-Mobile US designed a new offer, selling one package, including full speed and unlimited data, SMS, and minutes, but without tethering. The price is scaled via the number of devices added to the tariff and a monthly premium for HD-streaming. As the number of personal devices is expected to double by 2020, this approach seems future-proof and also had an immediate impact (+14% revenue and +4% customer growth within the first quarter after its release).
On the B2B side, as newcomers on the telecoms market, LoRa and SigFox sell their connectivity by number of messages instead of data volume (MB). For the customers this metric is intuitive, easy to measure, and directly correlates to their service. For example, connected garbage cans will send one message per day, reporting their filling level to waste management companies. Using this message-based price metric, it becomes less easy to compare with standard M2M prices in MB and creates a closer connection to the customers’ service. This enables a 600-fold premium in average revenue per MB.
Next to the price metric, where offer design plays a crucial role in monetising the potential of IoT. The current mass market-tailored one size fits all offer structure shows an increasing lack of monetisation power. Market segmentation and tailored offer designs in B2B and B2C are therefore key to extract the diversity in value created and address the different consumer needs.
This becomes especially clear when looking at different IoT/M2M use-cases. While the benefit of monitoring the level of waste in garbage cans has value, this is by far surpassed by the value of monitoring a patient’s health conditions, potentially indicating strokes before they actually occur.
Hence the IoT will generate increased importance, with a skilled salesforce needed by ICT providers as their offer range will need to increase so customers will need expert advice to select suitable offers. It also becomes clear that connectivity is no longer a commodity. Network coverage, quality of service, and other elements will literally become vital to enable our future digital society.
To conclude, telcos must boldly strive for new offer and pricing models to take advantage of the opportunities arising from the dramatic growth that is arising from the IoT. Changing these is never easy, as there is no one-size-fits-all solution and the residential segment the legacy base must be considered, too. But giving IoT some serious thought, calling on experts for support and making it a top management priority always pays off, leading to an immediate increase in revenue on average of over 4% according to our research, which represents pure profit contribution.
 CISCO VNI mobile 2012
 Deutsche Telekom Annual Report 2016