ACG RESEARCH FORECASTINTERNET OF THINGS

1H 2014 WORLDWIDEEXECU

TIVE SUM

MARY

The Internet of Things (IoT) market opportunity w

ill be worth $138.4 billion by 2018 w

ith a com

pound annual growth rate (CAG

R) of 33.2 percent.

The key service provider (SP) verticals are connected car, home, industrial IoT, utilities, and

wearable technology.

The market is very fragm

ented with m

any players from a w

ide range of industries and fundam

ental approaches.

Industry standards bodies and consortiums, such as O

neM2M

, IEEE-SA, ITU-T and IIC, are

working on setti

ng a single set of core standards to drive the industry.

All vendors are striving to position themselves as key vendors though none currently have a

complete solution. Ericsson, Cisco, and ALU

have horizontal IoT platform solutions that address

early and late SP adopters.

Ericsson leads the EP platform sales w

ith 1Q14 and 2Q

14 revenue total of $26.7 billion.

Service providers are a key part of the IoT value chain and are attem

pting to define their position for m

aximum

advantage.

To be successful, ACG recom

mends that SPs continue building out their core IoT horizontal

platforms by focusing on the com

mon service entity functions.

Use cases that give the m

ost value to SPs have the following att

ributes: highly managed,

mission critical, life dependent, w

arrant high liability, and regulatory demands.

INTRODUCTION

Internet-of-Things communications (IoT) has caught the attention of the information technology sector because it promises to transform many industries by delivering higher energy efficiency, improved operational efficiency, less supply chain friction, more powerful analytics, and better communications with customers. Although there is little disagreement that IoT will be transformative, there is little standardization on how to define or segment the market. Also, vendors and service providers are working on developing optimal technology approaches, and profitable business models. This report focuses on the total addressable market as it applies to the cellular service provider/telecommunication carrier opportunities.

Although IoT is not technically a new segment, (examples of early IoT include SCADA, industrial automation, airline engine management, and telecom network management), interest is surging because the confluence of cost, form factor, and pervasive connectivity is enabling new applications (wearables) and services that were not possible just a few years ago.

We see this transformation occurring in two phases. In Phase I, SPs are transforming their network infrastructures from monolithic to hybrid virtualized architectures to maximize management, orchestration, and agility. In Phase II, SPs will naturally focus on monetizing these networks. These phases are not necessarily evolving sequentially.

To date, ACG sees that awareness and clarity is needed on IoT and what it can bring to the SP and enterprise markets. One big issue that fuels this confusion is the problem of mixed standards, new approaches to old or existing issues, and interoperability issues between vendors and SPs. The IoT market is isolated in that each service provider is producing services within verticals and is finding it hard to create a horizontal service infrastructure fast enough to address the market. Complex ecosystems develop and are fragmented not only in business development but in different verticals and platforms deployments, creating uncertainty for the residential and enterprise customer. This uncertainty has created the “quadruple trust” factor: acceptance of protection, security, privacy, and safety of a user’s assets.

Service Provider Trends

SPs are realizing that to dispel these fears and compete with over-the-top (OTT) providers, they need to demonstrate automation, security, and governance within their networks. SPs are now forced to look at what was once linear monolithic services as full solution outcomes or as outcomes as a service (OaaS) where the entire platform can be offered as a service with actionable benefits to the customer. This move will require the core of the SPs’ networks to change, for example, SPs are investing in solutions from their equipment providers (EP) and are finding that they need to develop solutions that offer growth in the cloud, software defined networking (SDN), network function virtualization (NFV), and big data analysis for core networks. With this shift in the core network we see vertical markets starting to emerge and converge, for example, wearables with health care and connected home with utilities.

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SPs are slowly building out their virtualized infrastructures, which accounts for the increase in SPs’ operational expenses q-q. SPs are open to various purchasing models as long as they are saving them cash and gives them the functionality they need in an organized way. Whether this increase will prompt all SPs to emphasize and itemize the IoT spend in their financial reports remains to be seen.

Machine to Machine Connections by Wireless Provider

Connected Devices Rank 1Q 2014 2Q 2014 3Q 2014AT&T 1 17,025 17,203 18,482 Verizon 2 15,500 15,696 15,923 T-Mobile 4 7,361 7,582 7,934 Sprint 3 8,033 8,000 8,018

Table 1. M2M Connections Status (in 000s)

The connections status shows AT&T leading with 18.4 million machine to machine (M2M) cellular connections. Verizon is second with 15.9 million connections. Sprint, third, has 8.0 million, and T-Mobile, forth, with claims 7.9 million connections.

Equipment Provider Trends

To enable ubiquitous connectivity of these various devices and services, 5G access solutions will play a more significant role. EPs, such as Ericsson, Cisco, ALU, are building out small cell solutions that will create density in the network landscape to accommodate the billions of devices. SPs are trying to see how to utilize and manage free space in their network (whitespaces, AWS) to make this happen.

To assist SPs in addressing capital expenses (capex) and operation (opex) spend, EPs are beginning to virtualize their offerings with SDN/NFV architecture solutions within cost-effective hardware. EPs are building complete partner ecosystems to fill in the infrastructure needed for SPs to deploy services. Some of the key components outlined in the OneM2M specifications that EPs are focusing on are the Application Entities, Common Service Entities and the Network Service Entities. This will be discussed further in the IoT Segmentation section.

FORECAST

ACG’s worldwide TAM opportunity for IoT focuses on cellular wireless connections because they will give the best opportunity for revenue for the SPs. We project worldwide revenue of $ 138.4 billion in 2018.

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Figure 1. IoT Regional Forecast

Figure 2. WW IoT Regions

By 2018 the APAC market will dominate the world market with the most revenue from IoT: $76.40 billion, 55 percent of the market. This is principally because of the increase in cellular activity from the influx of affordable cellular phone devices and IoT device manufacturers. Europe’s revenue is expected to reach $44.70 billion, 32 percent of the market share. The Americas’ revenue is predicted to reach $17.30 billion, with 13 percent market share. Though we see a smaller increase in the Americas, most of the innovation will be in this sector of the region because of the capital expenditures of the leading carriers.

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Figure 3. IoT Verticals

Figure 4. WW IoT TAM

By 2018 the wearable vertical of the worldwide IoT market will edge out the automotive vertical by approximately 4 percent because the wearables market actually has a few subsegments that graph between several verticals. For example, there will be wearable devices that will reside in healthcare, transportation, government, and manufacturing verticals. The wearable vertical also has a range of pricing from $10 to $1000. Wearables revenue that will flow through SPs is forecasted to be $22.8 billion by 2018, 24 percent of the overall market.

Transportation vertical will reach $19.4 billion, 20 percent market share. This includes fleet services and automotive companies with embedded 3G and 4G devices offering subscription services. Europe will see a steady increase in remote telematics because of regulatory laws governing the need for roadside remote services, such as OnStar in every vehicle.

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The health care vertical will post revenue of $16.2 billion, 17 percent market share. This vertical will have use cases that are mission critical, life dependent, high levels of regulations, and strict network management service level agreements. This presents a prime opportunity for SPs with managed services to handle use cases in this vertical.

Manufacturing is forecasted to grow to $12.9 billion, 14 percent market share. We will see industrial IoT initiatives flourish in this vertical as test beds from the IIC come into play. Companies such as Microsoft, Cisco, IBM, and HP that are serious players in this space are targeting manufacturing companies with solutions from hardware devices to open big data analytic embedded solutions.

The government sector will grow revenue to $8.7 billion, 9 percent market share. Driving this growth will be countries looking at public safety measures, asset tracking and management services, defense solutions, and disaster recovery methods.

Utilities vertical will post $8.6 billion in revenue, 9 percent market share. Smart grid, smart meters, data management, production/renewable monitoring, control and demand side management, energy efficiencies, and ecological benefits are drivers in this space.

Telecommunications is expected to grow to $4.4 billion, 5 percent market share. This vertical includes connected home services (security systems), smart buildings, and network mgt.

Retail/Wholesale vertical will increase to $2.3 billion, 2 percent market share. Retail and online vendors such as Best Buy, Wal-Mart, and Amazon are gearing up with their own IoT enabled products. This vertical will probably see the most innovation of gadgets and “things,” but economically it will be at such a low price point it will most likely not make much of a dent in the market.

Natural resources vertical is expected to increase $.2 billion, having a negligible percentage of market share. Products and services within this space deal with agriculture, forestry, fishing, mining, and oil refineries. Examples of innovation: fisheries are adding sensors to their fish pools/ponds to monitor the temperature and chemical balance of the water; this data is fed back into an analytics system to give actionable data to farmers. Pipeline companies are enhancing their SCADA systems to remotely control and diagnose issues in the field.

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Figure 5. IoT Y-Y Revenue (Billion)

IoT Y-Y revenue from 2014 to 2018 will see a sharp increase at a CAGR of 33.2 percent. There will be an inflection point as worldwide awareness grows around 2016.

Figure 6. WW IoT Connection Forecast

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Figure 7. WW Connections by Vertical

CONCLUSIONS

The M2M/IoT market is growing and poised to transform the world in many beneficial ways. However, SPs have to continue to transform their network infrastructures to be able to adapt to the new business models that are destined to occur with the new service offerings. They must address the core CSE functions in their networks, namely the OSS/BSS, provisioning, policy, reporting, security, governance, data management, application management, diagnostics, and security management. They need to adopt virtualization and the sale and service models being offered by the EPs, such as cloud services, SDN, NFV, big data analytics, and edge solutions not only at the customers’ premises but also in the RAN and the back office.

SPs must also educate and build trust with existing and new customers. Customers (enterprise and consumers) are not informed about M2M/IoT/IoE opportunities and are affected by the quadruple trust factors of protection, security, privacy, and safety of their assets. To address these concerns SPs may have to partner with EPs such as Cisco, Ericsson, and ALU, which have products, services, and ecosystems that have proven track records and are focusing on outcomes as a service. Once installed SPs can demonstrate the resilience, flexibility, and security of their new virtualized platforms by supporting highly managed use cases.

SPs will need to fight the urge to implement old M2M practices of developing isolated vertical platforms for specific revenue opportunities. These practices fail to prepare their networks for horizontal virtualized platform solutions, which will enable them to handle all vertical revenue opportunities more efficiently. SPs are conducting trials of various platform solutions. If they are doing so for the purpose of choosing the best horizontal solution then that is acceptable. For EPs possibly the best way they can demonstrate the abilities of their solutions is to solve a particular use cases/issue needed by the

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prospecting SP. Once this issue is solved, they can further demonstrate their horizontal solutions by extending them across other SPs’ verticals.

When will IoE become viable? For the service providers the uptake will occur after the hype phase clears and the fear and disillusionment dissipates. The lowest point will be around 2016. Just before the rebound, there will be many mergers and acquisitions as companies and investors run out of money and focus. Standards bodies will converge, the horizontal platforms will be solidified for service providers, true solid business/use cases will emerge, and the industry will move forward.

During the rebound phase, key verticals will merge, for example, health care and wearable technology, collectively forecasted to be $35 billion by 2018. Utilities with connected car, home and smart cities could reach approximately $27 billion. Manufacturing is projected at $30 billion.

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IOT SEGMENTATION

The carriers’/service providers’ packet cores are going through a major transformation. The following is ACG’s view of the SPs’ network virtualization framework as it applies to IoT:

Figure 8. Network Virtualization Framework

SPs’ physical infrastructure is being virtualized as old hardware is being replaced by faster and less expensive software defined networking (SDN) and network function virtualization (NFV) hardware and software components. This shift is happening in real-time. The IoT market will begin to evolve as industries establish protection, security, privacy, and safety (quadruple trust) in SPs’ networks and confidence that they can deliver the services they need. In order to gain that trust SPs are transforming their networks to meet the needs. SPs need to build a trusted network to focus on what the OneM2M standards group calls the Common Service Entities (CSE) within the network:

BSS/OSS Management Reporting Management Provisioning Management Policy Management Data Management Security Management Diagnostic Management

Once these entities are stabilized and agile enough to accommodate different verticals solutions as one platform they will equate to true business to business (B2B) and business to business to customer (B2B2C) activities. Use cases will test the integrity of the CSE infrastructures.

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PHASE I SEGMENTATION

Figure 9. Segmentation

Application Entities: Represent an instantiation of application logic for end-to-end IoT solutions, for example, instance fleet tracking, and power meter application.

Common Service Entities: Represents an instantiation of a core set of common functions of the IoT environment, for example, data management, subscription quadruple trust, location service quadruple trust, and billing.

Network Service Entities: Provides underlying network services to the Common Services Entities (CSE), for example, device management, and device triggering.

SAMPLE SOLUTION PROVIDERS

Some of the sample solution providers representing these entities:

Application Entities Common Service Entities Network Entities• HP• Ge• IBM• Kaggle• Ayasdi• SAP• Wipro• Rockwell• Knewton• Splunk• GNIP• Evolv• Others

• ALU (Motive ) • Cisco (CiscoOne, ACI,

APIC)• Ericsson(DCPaaS,

OneCloud)• Eurotech (M2M Int)• Gemalto (App

Enablement)• LogMeIn/Xively (Conn

Obj Cloud)• Numerex (Numerex

platform)• Oracle (Oracle IoT)• PTC (Composer)• Quake Global (Quake

Cloud)• RacoWireless (Omega

• Cisco (IoX,Sourcefire)• Ericsson• ALU• Adtran• Edgewater• Palo Alto Ntwks• Symantec• FireEye• Checkpoint• Guidance SW• Intel• Others

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IoT (B2B Infrastructure)IoT (B2B Infrastructure)

Application IntegrationApplication Integration Data AnalyticsData Analytics

Application Entities Application Entities

BSS/OSS Mgt

BSS/OSS Mgt

Common Service Entities Common Service Entities

Reporting Mgt

Reporting Mgt

Provisioning Mgt

Provisioning Mgt

Network Service EntitiesNetwork Service Entities

Policy Mgt

Policy Mgt

Data Mgt

Data Mgt

Security Mgt

Security Mgt DiagnosticsDiagnostics Network SecurityNetwork Security Device/

Connectivity MgtDevice/

Connectivity Mgt

Mgt Suite)• Sierra Wireless

(AirVantage)• Intel IoT Platform• OthersTable 2. Solution Providers

These entities are not all physical devices. To decrease capital expenses and operation expenses SPs and EPs are beginning to virtualize their offerings with SDN/NFV solutions within cost effective hardware.

EPs are deploying architectures to assist SPs to support their bottom lines. According to Juniper Research operators stand to lose $14 billon in 2014 because of OTT services over their networks. M2M and big data revenues could compensate for this deficiency.

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