How Much Value Can The Internet of Things Add For AT&T?

The Internet of Things (IoT) is touted to be the next big thing for the technology industry, driving growth for a broad spectrum of tech companies ranging from semiconductor manufacturers to cloud computing providers and software developers. IoT is expected to benefit wireless carriers as well, as their networks provide connectivity for a growing number of networked devices. AT&T (NYSE:T) is betting big on the space, as it looks to find new avenues for growth amid increasing saturation in its bread-and-butter mobile business. In this note, we take a look at what AT&T is doing in the IoT space and examine how much value the trend can add for the carrier and the broader wireless industry.

We have a $37 price estimate for AT&T, which is about 10% ahead of the current market price.

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How Big Is The IoT Market?

The term Internet of Things refers to the idea that everyday products ranging from home appliances to industrial equipment are connected to the Internet and are able to communicate with one another, broadly helping to improve efficiency and convenience. The Internet of Things market is expected to nearly triple to $1.7 trillion by 2020, according to IDC, with devices, connectivity and IT services accounting for a bulk of the market value. ^[1] The installed base for IoT devices is projected to grow from roughly 10 billion connected devices today to as many as 30 billion devices by 2020. The second-order effects of the technology are also likely to be massive, and the McKinsey Global Institute estimates that IoT could have an impact of as much as $6.2 trillion on the global economy by 2025. ^[2] While the various research studies vary in terms of the exact estimated market sizes and impact, it is clear that the long-term opportunity is very large for tech companies.

What’s In It For Wireless Carriers?

It’s slightly more difficult to size up the IoT opportunity for wireless carriers. Although there are billions of connected devices deployed globally, only a fraction of these devices require the wide-area cellular connectivity provided by wireless operators. A bulk of the devices – such as connected appliances and industrial products – could operate on shorter-range communications technologies such as Wi-Fi. With that said, the addressable market for carriers could still be sizable, since the potential for embedding networked intelligence spans from automobiles to logistics to civic infrastructure. Over the long term, it’s possible that the cellular device connectivity market (excluding smartphones and tablets) could actually surpass the broader mobile phone services market in terms of number of connections.

However, data consumption is becoming an increasingly important revenue driver for carriers, and it’s unlikely that IoT devices will help carriers very much on this front. Typical machine-to-machine transmissions may carry just a few bytes of data at regular intervals. Data consumption is likely to be minuscule when compared to smartphone and tablet connections, which often use several gigabytes per line each month. While most large carriers don’t provide pricing details for their IoT services and often create custom pricing packages for major customers, pricing is only expected to run into a few dollars per device per month, on average. For perspective, U.S. Cellular, a regional U.S. player, charged between $6.99 per month for 1 MB up to $119.99 for 10 GB for its machine-to-machine operations in 2014. ^[3]  So overall, IoT is likely to be a volumes game for carriers, providing a large number of wireless connections with low per-device revenues.

Where Does AT&T Stand?

A bulk of AT&T’s IoT exposure currently comes from two segments, namely machine to machine (M2M) and Connected Cars. The M2M – or Industrial IoT – business connects disparate devices to a network, enabling the bi-directional exchange of information. The carrier noted that it had roughly 23.4 million connected devices as of Q2 this year. ^[4] Based on a projection from the GSMA, the number of M2M connections in the U.S. was estimated at 41 million in 2014, implying that AT&T could be holding roughly 50% of the market. ^[5] Over the course of this year, the carrier also struck IoT agreements with over 136 companies in diverse verticals including agriculture, automotive, aviation, energy, healthcare, transportation, security and supply chain logistics.

Connected cars have also been a big part of AT&T’s IoT strategy. The carrier added a total of 1 million connected cars during Q2 2015, and holds a total base of 4.8 million connected car subscribers. AT&T typically has two avenues for monetization from its connected car deals. Firstly, it has wholesale relationships with auto manufacturers to gather and deliver on-time and real-time information to and from cars. Secondly, the company is looking to add cars as another connected device on its Mobile Share Value Plans.

Despite AT&T’s first mover advantage and sizable market share, the carrier’s revenue from connected cars and M2M is only expected to touch $1 billion this year, according to a report from Chetan Sharma. ^[6] While this is just a drop in the bucket at the moment for AT&T – which is on track to post revenues of over $150 billion this year – the margins are likely fairly high, considering the low incremental bandwidth and infrastructure requirements. Given its market-leading position, as well as the healthy margins and projected growth in the space over the next few years, the Internet of Things could become very accretive to AT&T’s earnings in a few years.

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1. Explosive Internet of Things Spending to Reach $1.7 Trillion in 2020, According to IDC, IDC, Jun 2015 [↩]
2. The Internet of Things: Sizing Up The Opportunity, McKinsey [↩]
3. U.S. Cellular launches M2M pricing and solutions, plans tower sale, FierceWireless, September 2014 [↩]
4. AT&T Q2 Earnings Press Release [↩]
5. GSMA: U.S. leads M2M market, but global growth could skyrocket to 2B M2M connections by 2020, FierceWireless, September 2014 [↩]
6. US Mobile Market Update – Q1 2015, Chetan Sharma [↩]