An ABI Research colleague recently asked about arbitrage opportunities in the provisioning of cellular M2M connectivity services. He asked whether MVNOs in the M2M market could simply buy data from MNOs at an equivalent rate to what the mobile operators charge smartphone users, and mark that up for sale to M2M customers at a rate less than what MNOs would charge for M2M data. This becomes a very valid question because, as has increasingly been mentioned by analysts and the media, M2M data connectivity services can actually be a fairly high margin business. This is counter-intuitive and paradoxical, given the very low ARPU (average revenue per user) typical for most M2M applications, relative to traditional smartphone and notebook PC cellular connectivity.
So, is there an arbitrage opportunity to be had, and if so, why aren’t MVNOs taking advantage of it?
The short answer is: yes – there would be an arbitrage opportunity, if the MNOs weren’t pressing into the M2M market directly themselves.
Unfortunately for the MVNOs, the MNOs are invested heavily in developing their M2M market operations. It took many of the MNOs a number of years to realize the full extent of the opportunity in M2M – in terms of both scale and margin. Part of this was figuring out how best to organize and deploy resources to offer M2M connectivity services efficiently, and cost-effectively, and in a manner that optimally matched the needs of the market. Now, however, MNOs are fully committed to M2M, many having formed M2M business units, deployed M2M-specific platforms and core network infrastructure, and some have even established M2M development centers and formed partnerships with cellular embedded module vendors to reduce the costs of modules.
Consequently, the MVNOs face a competitor – who is also their supplier – who will always be able to undercut them on price. This point was driven home to us recently in a discussion with two different CSPs – one an MNO, and another an MVNO. The MNO quoted a price for smart meter connectivity at around $0.40 per meter per month, for a smart meter connected directly to the cellular network. In contrast, the MVNO quoted a price roughly 150% higher, and about $1.00 per meter per month.
Consequently, both MNOs and MVNOs have figured out that charging a premium for M2M connectivity – along with cost reduction measures – can make M2M a very attractive business proposition. In practical terms, however, this is not an arbitrage opportunity for the MVNOs, because not only do both MNOs and MVNOs want to avoid a cost war, it is a war the MVNOs would lose.