Is Telstra wrong to bet big on the Internet of Things?

One thing the tech industry does extremely well is hype. Probably the most hyped set of technologies at the moment is the Internet of Things (IoT), where almost every IT and telecommunications company on the planet, including Telstra, is staking its future.

Consulting firm Gartner tracks the industry’s ebbs and flows of with its Hype Cycle, which describes a somewhat predictable path where fevered commentary around a new product or concept becomes more intense as it reaches a peak of heightened expectations.

From that peak the hapless product tumbles into what Gartner calls "The Trough of Disillusionment", where the lack of hype allows smart folk to figure out what the technology is really good for. It then becomes an established part of the IT industry’s furniture and a fond memory for tech industry reporters and PR people.

Peak expectations

In this year’s Hype Cycle, Gartner’s consultants nominated the Internet of Things as being right at the lofty peak of inflated expectations.

The Internet of Things and the related machine to machine (M2M) technologies are certainly in the giddy heights of inflated expectations as industry pundits are predicting these technologies will do everything from fix congestion in cities to give early warnings of disease and drought.

Possibly nowhere is expecting as much from the IoT as the boards and senior managements of the world’s telcos and equipment manufacturers struggling with structural shifts in their marketplaces.

Telstra looks to the IoT

At Telstra’s annual results announcement last week chief executive David Thodey declared how he saw the IoT as being the driver of the company’s future revenues. "Every PC in the country will become a tablet, every car and every bit of machinery," Thodey said. "Suddenly the addressable base goes out to 80-90 million devices."

Despite Telstra’s impressive results -- net profit increased nearly 15 per cent on the back of 6.1 per cent income rise -- there is a worrying trend for the world’s telcos as mobile phone markets mature and the SMS river of gold starts to slow.

At the same time David Thodey was discussing Telstra’s results, China Mobile released its half-year accounts, which illustrated the industry’s dilemma. The Hong Kong-listed mainland telco reported its first profit decline in 14 years due to what it cited as competition from "over-the-top applications" -- smartphone messaging apps -- and a more competitive market place.

In the face of the decline in what’s been a healthy business for the last two decades, it’s not surprising the telcos see salvation in the IoT, particularly when Ovum Research predicts global M2M revenues will grow to reach $US44.8 billion over the next five years.

However, the telcos aren’t the only players in this industry as the equipment manufacturers see the IoT as being their salvation as well. Leading the charge is Cisco Systems chief executive John Chambers, who last year described IoT as the greatest opportunity he’s seen in his career.

Cisco needs that opportunity, with the company last week reporting a 6 per cent fall in sales this year and Chambers flagging 6000 redundancies as costs are cut. However, Cisco is not the only vendor chasing the IoT. Apple and Google are using their deep pockets to push their smart home and health strategies, while Samsung last week acquired home automation company Smart Things to complement its home appliance and wearable technology products.

Then there’s BlackBerry chief executive John Chen who sees the trend as the key part of his company’s long-term success. Earlier this week, BlackBerry announced it was moving its IoT and secure communications products into a "high growth" business unit.

The grand internet battle

Will all of these companies positioning themselves for the big battle brewing over the revenues generated by the IoT, it’s not a given the telecommunication companies will be the businesses best positioned to reap the profits.

For telcos, another complication is that M2M services aren’t as profitable as the mature mobile voice and SMS markets; Telstra, for example, makes on average just over $40 a month for each mobile phone customer compared to only $7.60 a month from M2M services.

That rate will undoubtedly come down as right now those M2M subscribers are high-value early adopters. As these technologies are rolled out, companies will demand cheaper services.

Computing in a fog

At the same time, the idea that every container on a train or each sprinkler on a farm will have its own SIM card and M2M service is probably not going to happen at the cost of several dollars a month. It’s highly likely companies will employ distributed computing to carry out much of the IoT’s work without needing every device to be connected to the internet. Cisco’s term for this concept, "fog computing", is another contender for the hype cycle in coming years.

While the IoT and M2M technologies will be important revenue streams for telcos in coming years, the market is going to be much more complex and competitive than what the incumbents have been used to.

The last 20 years have been good to telcos, with massive income through SMS and voice services. Now those happy days are ending, the telco sector is going to have to work a lot harder.

Without doubt the IoT and M2M technologies are today overhyped, but they will be an important part of day to day business by the end of the decade. The winners in that market though could be very different to today’s incumbents.