How Carriers Can Have Their Cake and Serve the IoT Too
We know that longevity is a core part of the Internet of Things’ (IoT) value proposition that can be inhibited by inadequate technology. But technological limitations are not the only factors that may thwart the IoT’s success. In this article, we’ll discuss why good business decisions made by traditional wireless carriers, based on economic and cultural forces, also counteract the longevity needed by devices on the IoT. We’ll also propose a couple of key changes to the current cellular ecosystem that will enable them to use these forces to powerfully serve the IoT.
The traditional wireless industry is comprised of many players. The cellular carriers themselves are technology integrators. They take the pieces of technology, integrate them into a single system, market it like crazy, and make it easy to access for consumers. We go to a store, buy a phone, pay for the service and enjoy.
The Ericssons, Qualcomms, and other technology providers of the wireless world develop (and patent) the technology that is integrated into the towers (Ericsson) or the handset (Qualcomm) or both. They make their money by integrating their intellectual property (IP) into as many components of that system as they can. That IP is what the carriers integrate and what ultimately becomes a large part of their costs.
‘It Just Makes Good Business Sense’
Two costs lay heaviest on the balance sheets of traditional wireless carriers: infrastructure and spectrum. Infrastructure involves the cellular radios and other hardware, permitting, tower space leases, backhaul, and many other costs. Infrastructure costs are mostly driven by the technology providers, the Ericssons and Huaweis of the world. They provide the hardware that is used in the base stations to send and receive cellular signals, transmit backhaul to the operating centers, and route traffic. In recent years, software defined radios have allowed the base stations to upgrade their technology not with hardware swaps, but with software upgrades. While these technology upgrades are simpler, the technology providers still want to cash in and thus charge enormously for those upgrades.
Two costs lay heaviest on the balance sheets of traditional wireless carriers: infrastructure and spectrum.
Cost pressure comes from licensed spectrum as well. Licensed spectrum is an extremely expensive resource. In 2015, traditional wireless providers spent $45 billion on spectrum in the United States. The $45 billion amount is more than 100 countries’ GDP. Spectrum is a valuable resource for a reason: it is the lifeblood of wireless voice and data connectivity. Consumers and businesses are willing to pay good money for that high data throughput and carriers need that licensed spectrum to provide it.
To remain profitable, licensed spectrum must be used by carriers for voice and data connections rather than other uses like machine connectivity.
To remain profitable, licensed spectrum must be used by carriers for voice and data connections rather than other uses like machine connectivity. Voice/data connectivity brings carriers the most revenue per Hz (a unit of measure used for amount of spectrum). In the industry, this logic is broken down using average revenue per user, or ARPU. It just makes good business sense for carriers to maximize ARPU, especially with the enormous weight of spectrum costs. It is for this very reason that carriers are shutting down their 2G networks.
Carriers must use that precious spectrum for the highest ARPU. Two factors will put additional pressure on carriers. The overall market of voice and data users will increase as will the amount of data each user will require. This only exacerbates the importance of using spectrum for highest ARPU purposes. It’s basic economics. Any deviation from that strategy will result in profit loss and punishment in terms of market share and on Wall Street. So, maximizing ARPU ripples throughout all of their business decisions regarding spectrum usage. And that’s as it should be. Businesses that do well serve their best customers well.
Economics and Misaligned Incentives
But what makes good business sense for traditional wireless carriers doesn’t make sense for IoT devices. At least not with the cellular industry’s current dynamics. Anybody or anything that isn’t high ARPU will naturally and rightfully be relegated to lower priority. And the lowest ARPU customers are the same devices that LPWA is fit to serve. According to James Brehm & Associates, 86% of current IoT devices use less than 3 MB of data per month — those are hardly power users. And the devices that have yet to be developed, the “greenfield applications” as industry insiders would say, are projected by the 3rd Generation Partnership Project (3GPP standards development body) to have an average of 32 KB a month of data. What’s more is that the same 3GPP standards development body, which is responsible for the LTE standards, has built IoT traffic de-prioritization into its LPWA candidate standards, including LTE-M and others.
…what makes good business sense for traditional wireless carriers doesn’t make sense for IoT devices.
In other words, carriers can turn down or turn off machine traffic whenever their expensive spectrum gets clogged with higher ARPU traffic. And it doesn’t take much for that to happen. If you’ve ever been at a sporting event, you’ve probably experienced delays in receiving even a text message because so many people have cell phones connected to the cellular towers in the area.
How would this type of prioritization impact businesses that have their device messages blocked out by the carriers? Naturally, some proportion of the delayed messages will have a minimal impact on business. But some proportion of them will be majorly impacted by these unpredictable interruptions. The more important point is that your business would be subject to the whims of the carriers. And these whims are based on the carriers’ sound business reasoning.
Always Second Tier
The conclusion to be drawn from this is that connected machines will always be second tier to voice/data connections using the same spectrum. Carriers’ current business models depend on this. Their cost structure dictates it. These economic forces will not just go away, and will continue to relegate machine connectivity to the bottom tier.
…connected machines will always be second tier to voice/data connections using the same spectrum. Carriers’ current business models depend on this.
The misaligned incentives between connected businesses and traditional cellular carriers go beyond lower priority machine connectivity. Because human consumption of voice/data is the highest ARPU customer, their needs will continue to be the primary driver of cellular technology’s development. Voice/data needs are what have pushed the cellular generations from 1G to 2G to 3G to 4G, and in the coming few years, 5G. These cellular generations begin about every nine years.
Sunsets are fine for voice/data customers using smart phones as these devices are upgraded every couple of years. But, the incessant cellular sunsets are completely anathema to the longevity needs of IoT devices. The current cellular ecosystem will be unable to provide adequate IoT device longevity due to the incessant sunsetting cycle which is driven by sound business decisions.
The current cellular ecosystem will be unable to provide adequate IoT device longevity due to the incessant sunsetting cycle which is driven by sound business decisions.
Cultural Forces
The cellular world has a longstanding culture of standards bodies and technology providers. The technology providers’ revenue comes from royalty and licensing fees paid by the cellular carriers for using their technology. Each generation of technology they compete with one another to be the provider with the most IP in the wireless stack. Ericsson wants to provide the most IP so that its revenue stream increases; Huawei, Nokia, and others want the same. This competition shows up in the standards bodies.
The standards bodies have representatives from the technology players as well as others. They attempt to develop a technology and performance standard that defines the next generation. Of course, if your company has a representative present, and you know your company is developing some strong IP in a certain area, you have the incentive to influence the standard toward your strengths. That way it is easier to have your IP represented, allowing your company to get a larger portion of the revenues. This is all fine and has given us some phenomenal high-throughput technology. But this pattern destroys the longevity needed by so many machines.
This pattern emerges because of two forces. First, as just described, technology providers stand to gain more as each standard is developed. They are competing to have their IP take the largest share for the next generation. Second, the standards bodies are an entity unto themselves, and that entity wants to continue existing. There are multiple standards bodies (e.g., 3GPP and GSM), and these bodies compete with one another to write the standard that will in the end define the next generation of wireless technology. That will not go away.
…technology providers stand to gain more as each standard is developed.
These bodies’ sole purpose is developing standards; it is their charter. And this has not changed for the IoT standards. Even within the last year, standards have been created and have died (Cat-0). LTE-M was just announced in September of 2015 as a standard, but NB-IOT is only six months behind it and there is EC-GSM as well.
In a space that requires more continuity to justify investment, the standards bodies have actually increased their standards-creating cadence.
In a space that requires more continuity to justify investment, the standards bodies have actually increased their standards-creating cadence. This does not bode well for IoT devices and the businesses wishing to connect them wirelessly. And the forces driving the standards creation are economic (technology providers competing for their piece of the IP pie) and cultural (the standards bodies exist to write more standards). These forces will continue, and recent history suggests they will only increase in intensity.
How Carriers Can Have Their Cake and Serve the IoT Too
None of the forces described are necessarily bad. Cellular carriers want to efficiently use their infrastructure and spectrum resources to remain profitable. Technology providers want to maximize the amount of IP that is embedded in the wireless standards. The standards bodies want to write standards that improve performance over previous generations. All of these are good efforts.
The problem enters when these efforts are not aligned with the needs of the devices requiring connectivity on the IoT.
The problem enters when these efforts are not aligned with the needs of the devices requiring connectivity on the IoT. Spectrum and infrastructure costs mean that low ARPU devices will always be second tier. Moreover, the cellular generations are driven not by IoT device needs, but by the higher ARPU, voice/data needs of human consumers. Competition between technology providers drives the cellular generation cycles that destroy the longevity that IoT devices need. These cycles are reinforced by the standards bodies themselves wanting to create the next accepted standard.
…we claim that it is possible to use those forces to properly serve the IoT’s needs — with a couple of key changes to the cellular ecosystem.
But we claim that it is possible to use those forces to properly serve the IoT’s needs — with a couple of key changes to the cellular ecosystem. The core of the issue is the intersection of the technology and the ecosystem providing and using it. Spectrum costs too much to use for low ARPU devices and technology providers’ competing to increase the portion of their IP in the cellular technology stack drives the cellular sunsetting ever onward.
Here are simple and effective solutions to the carriers IoT conundrum:
1. Unlicensed spectrum, when used correctly by the right technology, can rid carriers of the spectrum costs.
2. The technology costs can be removed by investing in an IoT wireless technology that is incentivized to not change every nine years.
Ingenu is uniquely incentivized to serve the needs of IoT devices. IoT devices are our only customers, we have no voice/data needs competing with the needs of our devices. We are not subject to standards bodies changing and rewriting RPMA — Ingenu owns the IP stack. We completely understand the need to guarantee longevity to IoT devices. Our technology is the only LPWA technology that is capable of serving the long-term needs of the IoT.
By all accounts, Ingenu’s incentives, culture, and technology are perfectly aligned with the needs of IoT devices. And this is by design. Through Ingenu’s RPMA technology, today’s current cellular ecosystem can tap into Ingenu’s unique position to serve the IoT. They can establish a parallel network for less than the cost of software upgrades, not compete with their core business, all while capturing the benefits of the exploding IoT. With Ingenu’s RPMA technology, cellular carriers can truly have their cake and eat it too. And that’s because Ingenu exists exclusively to connect machines. It’s what we do.
To find out more about Ingenu’s LPWA technology, RPMA, contact us.
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