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The Billion+ Dollar M2M Device Swap


At the International CTIA Wireless 2012 show, M2M Zone spoke with executives in the industry and held a panel session to get their inputs on 2G technology usage in M2M Applications. Rather than concentrate solely on how long 2G was going to be around, there was a question on whether M2M should skip 3G and go straight to 4G. The responses were mixed, with people on both sides of the fence.

Some stated that moving directly to 4G LTE was better, since the longevity of 3G was suspect (potentially being dropped as soon as five years from today). Indeed, for the past year, the Carrier focus has been to deploy 4G LTE rather than expand any coverage of 3G HSPA.

Others felt that the radio module price step from 2G GPRS to 3G HSPA/HSPA+ to 4G LTE would make an interim move to 3G with a later move to 4Gmore viable.

Current 2G GPRS Installed Base

In discussing the future of M2M cellular technology, an important issue was overlooked: the current, large installed base of 2G GPRS M2M Devices.

On GSM networks, these must be swapped out since the Carriers in the US are facing a spectrum crisis that will force them to re-farm 2G GSM spectrum for 4G LTE within the next two years.

But, requiring M2M Customers to replace their existing 2G GPRS Devices with 4G LTE Devices ignores business reality.

Lets examine this issue in more depth.

New Devices and Spectrum Concerns

Carriers are focused on selling data-intensive Devices such as tablets and smartphones to their customers and the data usage is rising at a rate that the Carriers did not plan for. Consider also that studies have shown that tablets generate triple the data traffic of smartphones, and the difficulty that traditional Carriers are experiencing handling this data.

Thus, it is not surprising that cellular operators need to convert their deployed spectrum and networks to 4G LTE as soon as possible. This is particularly important for the 2G GSM Carriers who are limited by their spectrum holdings for 4G LTE in many markets.

To achieve this goal, these Carriers have to move any remaining 2G usersincluding M2M Applications and Devicesoff their 2G networks.

2G Network Shutdown

Based on comments by Carrier executives (pre- and post- the T-Mobile acquisition attempt), it is very likely that 2G GPRS services will be shut down within the next two years in most major markets, and shortly after that, everywhere else in the country. This will allow handset and tablet manufacturers to provide new 4G LTE units on that spectrum for their customers.

Thus, the Carriers want their 2G M2M Customers to migrate to 3G or, preferably, 4G, in that two year interval.

However, moving current 2G GPRS Devices to just 3G HSPA/HSPA+ is not a viable business option for M2M Applications that need technology longevity, since the 3G HSPA/HSPA+ network will also be replaced with 4G LTE.

Small Customers

Lets look at a relatively small Customer deployment of 2G GPRS Devices: an M2M Application with 10 thousand Devices in service.

With todays 2G GSM module prices hovering around $12 to $15, 3G HSPA modules around $40, and 4G LTE modules around $125 to $150, there is a two to three times cost difference between a 2G module and a 3G module.

And a ten times cost difference between a 2G module and a 4G module!

Total Cost of Radios

Even assuming that we can ignore:

  • The cost of designing a new 3G or 4G Device (since the module command set, form factor, power requirement, etc., of a new module is likely to be different from existing 2G modules),
  • The ability to add any additional new 2G units (some Carriers already do not allow this), since the Customer may be busy swapping out their existing 2G Devices over the next two years.
  • The length of time it takes to get a new Device designed, certified, and into production.
  • The total cost of building the new Devices, even when excluding the radio modules.
  • Etc.
i.e., just the cost of the radio modules in these 10 thousand replacement Devices is high:
  • 2G: approximately $120k to $150k (the deployed sunk cost of existing units),
  • 3G: would be about $400k, and
  • 4G: would be about $1.25M to $1.5M.

Thus, replacing existing 2G GPRS Devices with new 3G or 4G Devices will be a huge cost burden for M2M Customers. Given the low Average Revenue Per Unit (ARPU) of M2M Applications, the margin from services may not be sufficient to cover the cost of Device replacements, especially if they are unable to pass these replacement costs through to their End-users.

Indeed, many of these Customers might still be attempting to reach or sustain profitability, and this burden may cause their business to fail.

During the last migration where Carriers forced their Customers to switch from Analog AMPS to Digital cellulardespite a 5 year AMPS Sunset period mandated by the FCC, a large portion of the market did not survive the transition.

A Medium Customer Case

If we consider a larger Customer who has a successful, growing, and profitable, M2M business (lets say 100 thousand M2M Devices), the radio replacement costs are even higher.

Assuming a lower module cost per unit (due to the higher volume), the module costs for:

  • 2G: approximately $1M to $1.3M (in deployed sunk cost for existing 2G units),
  • 3G: would be $3M to $3.5M, and
  • 4G: would be $10M to $12M.

While this larger M2M Customer might be able to absorb this hit, it may be difficult for them to generate any significant margin or profit during this transition periodeven if they are able to get their End-user customers to tolerate and pay for Device replacement costs.

What About The M2M Industry as a Whole?

Lets skip the large M2M Customers and look at all 2G GPRS M2M deployments as an industry whole.

About 4 to 5 million 2G GPRS Devices are currently deployed and operational in residential and business Alarms. This is a reasonable estimate based on the 750 thousand to 1 million Analog AMPS security Devices that were changed to 2G GPRS in 2007, just prior to the AMPS Sunset.

Further, if we include the large number of utility meter, oil and gas, agriculture and health care units, there are an estimated 11 to 12 million 2G GPRS M2M Devices in use in the US today. These numbers do not include any high-end tablets or smartphones, of course.

Conservatively assuming a total industry deployment of 10 million 2G GPRS Devices, the module costs become very high. Even with a quick drop in 3G HSPA module price (to a low $25 average) and 4G LTE module prices (analysts project an $85 to $90 LTE module price may be reached by 2014) in the next two years, the total module costs are:

  • 2G: approximately $150M (an estimated, conservative, sunk cost),
  • 3G: would cost approximately $250M, and
  • 4G: would cost between $850M to $900M.

If the 4G LTE module costs drop spread out over the next two years, rather than an unlikely sudden drop at the beginning of that interval, the last number above may be closer to $1B (this is Billion with a B) possibly more.

Again, this is only the radio module costs it does not include the other development and hardware costs inside the Device, etc.

Replacement Logistics and Costs

As an example, lets look at the cost of replacing Devices in the fieldi.e., a cost unrelated to the radio and hardware costs.

As we know, deploying new M2M Devices at the factory is easier than touching the deployed units for replacement and repair once they are in the field.

Thus, ignoring the fact that:

  • There may not be sufficient trained installers available for all the M2M Applications, and
  • The Device designs may not be ready, certified and in production well before the need arises,

... the travel charges, scheduling End-users, coordination with installers, etc. could be very high. Today, a conservative cost of a field swap ranges from $100 to $500 per Device.

Even assuming efficiencies (due to volume) allow a minimal $100 average cost, field replacing 10 million 2G GPRS Devices could be an additional $1B, or more.

Further, assuming a two year timetable, replacing 10 million Devices requires over 13,500 Devices to be replaced in the field every day, seven days a week, for the entire period starting immediately!

Repeated M2M Industry Financial Shocks

Back in 2008, the M2M industry transitioned from Analog AMPS to Digital Cellularusing a 5 year AMPS Sunset period imposed on the cellular industry by the FCC. Many cost-conscious M2M Applications, such as in the Alarm industry, chose to switch to lower-cost 2G GPRS radiosagainst the advice of people like myself who recommended 2G ANSI-2000 CDMA for technology longevity.

These Applications, Customers and their End-users now have to deal with the current need to transition away from these 2G GPRS technologies.

This time, there isnt a long sunset period mandated by a Federal body, that allows a graceful and controlled migration.

Even if my figures and estimates are off a little, the bottom line is that the need to change 10 million 2G GPRS Devices to 3G HSPAlet alone directly to 4G LTEis going to cost the M2M industry more than a few Billion dollars in the next few years.

Since Carriers do not subsidize sales of M2M modules and Devices, this will be a direct cost to the M2M Customers and their End-user customers.

Further, if some Customers choose to migrate to 3G HSPA over the next two years (to save on module costs), and later change them again to 4G LTE a few years after that (incurring another round of costs), this will have a disastrous effect on the M2M industry as a whole.

Where Do We Go From Here?

It is clear that the cost of multiple technology migrations of the same End-user Devices in relatively short periods, is very financially difficult for 2G GPRS M2M Customers to deal with.

In the CDMA world, some Carriers in the US have committed to keeping ANSI-2000 CDMA 1xRTT data services available for a long timesome a decade or more.

Thus, a better technology migration strategy is to change the 2G GPRS Devices to 2G and 3G ANSI-2000 CDMA Devices over a longer three to four years instead of jumping directly to 4G LTE. This would provide:

  • The ability to continue selling CDMA M2M Devices for three to four years beyond that migration period (providing a good six to eight year device life-cycle for the End-users).
  • Breathing room and time to develop 4G LTE Devices and solutions during the next five to six years (enabling an easier transition when 4G LTE module prices have dropped close to todays 3G levelsbased on LTE handset and tablet sales growth during that interval).

Frankly, this is the safest strategy for all Customers using 2G GPRS technologies todayany other approach is extremely risky, in my opinion.

What are your Comments?

Agreements? Disagreements? Please post your comments. Thanks!

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