Business models for Cellular IoT

How to handle the extra costs of Cellular IoT connectivity? In this article, we present three different business models.

In my last article, I discussed how the extra cost of Cellular IoT connectivity needs to be considered in the product definition and company strategy.

Here, I will look at the pros and cons of different business models for Cellular IoT products. Three different business models can be identified.

1. Pre-Connected Product

The product is bundled with a subscription to the LTE network (NB-IoT /LTE-M) for the entire lifecycle.

Let's look at an environmental sensor that needs to upload some information to the cloud periodically.

Knowing the functionality and the lifetime of the product, and the amount of data to be transmitted, it's easy to predict the total data required throughout the product's life cycle.

The product manufacturer can pre-buy a data plan from an MNO, bundle it with the product, and sell it as “pre-connected.”

From product design and manufacturing perspective, this is the most straightforward approach, since the manufacturer is the one negotiating the data plan with the MNO and can integrate the right SIM technology already during production. The manufacturer has full control over the connected product.

From a customer point of view, this approach also makes sense: The product is plug and play, without any need for the customer to think about connectivity and data plans/subscriptions.

However, integrating these costs will increase the price to such a level that the end customer may consider other products more convenient.

For end-customers who need to buy a vast number of devices, this approach may not scale up. Typically, this would be a case for advanced electricity meters, where the utility/DSO company has enough muscles to negotiate data plans directly with MNO while buying only hardware from electricity meter vendors. In this case, the next business model could be more appropriate.

2. Connectivity-Ready Product

The product manufacturer sells an LTE-ready product with a SIM slot or an eUICC (eSIM) and the end customer is responsible for choosing the MNO and a connectivity plan.

In some cases (for instance, when buying many devices), the end customer can ask the manufacturer to plug or solder the chosen SIMs directly during the production or, if the device is equipped with an eUICC, it can be programmed remotely.

This model adds complexity to the customer side. Not only do they need to negotiate data plans with the MNO, but they will also have to carefully define the connectivity specifications of the product they want to buy. It forces the end customer to make choices which may be outside their core competencies:

• Shall the connectivity be NB or M1?
• Which power-saving features are needed, and which MNO supports them?

The manufacturer was responsible for both product and connectivity in the previous scenario, thereby taking these aspects into account. In this model, the ownership of the solution is not as clear:

• If many devices are out of coverage or not working correctly, does it mean that the product wasn't built according to specifications, or that the end customer has defined wrong specifications or chosen wrong MNO? 
• What happens if the device requires more data transmission than negotiated?

The complexity leaves this type of approach viable only for large and structured buyers. It’s slightly less demanding for the manufacturer, leaving out the need to choose a data plan. For the same reason, the product is commoditized, and the price is likely to be the main buying driver.

On the product definition, product design, and production side, this approach may still not be trivial. Indeed, the manufacturer aims to make a standard product for all customers and to allow some remote configuration the first time the device connects. However, aspects of the connectivity, like MNO and SIM, may force some customization made on a project basis. Thus, the possibility to come up with a standard product “on catalogue” is limited.

Even if the introduction of eUICC should solve some of these challenges, the business model remains valuable mainly for large projects with large customers.

3. Connected Product as a Service

The manufacturer sells the connected hardware at an initial fee, offering a subscription for value-enhancing services, such as extended warranty or a maintenance plan.

Similar to the first approach, the manufacturer chooses the MNO, negotiates data plan, and adds connectivity to the device. A service-oriented approach is used when selling the product, charging only a relatively small fee as initial CAPEX for the hardware. The data plan is not included, but the cellular connectivity is already enabled and ready to be activated. In addition to the initial fee, the manufacturer will offer services as a recurrent OPEX fee, not necessarily related to the cost of the data plan, but rather to the added value provided by the service.

The customer will never need to worry about connectivity-costs/data plans as they are included in the service fee for which they opt in on the preferred tier, while the manufacturer will pay the MNO only when the customer subscribes for the service and thus uses data.

This approach solves the price/positioning issue of the first model. The manufacturer can still sell the product at a reasonable price and not need to charge in advance for all the data transmitted during the lifetime of the product. The manufacturer can even decrease the upfront price relying on new revenue streams enabled or improved by the connectivity.

This business model is a good fit for products that may need services/maintenance, products for rent, or products that may run on long distribution chains.

As an example, by connecting an industrial tool, it is possible to predict maintenance or when worn-out parts need replacement. Warranty plans can be customized to each customer, thanks to the embedded connectivity.

For most industrial applications (and for many consumer products), I believe the latter model is far more likely to be accepted by the customer (low CAPEX, and predictable OPEX). The manufacturers also capitalize, since they're not paying MNOs unless the end customer signs up for the service agreement.

Connectivity an opportunity

Overall, lacking connectivity will lead to a kind of obsolete product. Adding cellular technologies, whenever possible, is essential to stay relevant in the market. For this reason, cost should not be an obstacle but rather an opportunity to explore different approaches to the market.

Read more: What is cellular IoT?

If companies don't want to lag, they need to choose the business model that matches their strategy to afford the implementation of connectivity into their products.