I've long maintained that, as much as the carriers complain about being reduced to "bit hauling" or becoming "bit pushers" with "dumb pipes," in fact this is the role they are not only best suited for, but actually prefer. It's what they know how to do, it's what they know how to continually squeeze more money out of, and it's what they're already scaled to do. This has traditionally been true of the wireline carriers, and it's increasingly true of the cellular carriers as they advance toward 4G bandwidths.
Ironically, the other thing that cellular carriers are good at is working the other end of the deal: Driving purchases of devices through retail outlets. What they're not good at, however, or at least don't seem inclined to get good at, is selling enterprise-grade services to enterprise customers.
I got a vivid illustration of how things are really going in the cellular world when I talked recently with John Horn, president of Raco Wireless, a company that specializes in services and software to the machine-to-machine (M2M) industry, which happens to be one of the hot topics among cellular carriers as 4G rolls out. Horn and most of Raco's team spent several years at T-Mobile pushing M2M. He said that when he approached his bosses at T-Mobile eight years ago and told them M2M was the future of wireless, "They looked at me like I was crazy, but said: Go ahead and give it a shot."
He managed to grow the revenue of T-Mobile's M2M business 100% year over year for five years running, and they improved the "onboarding" process of getting a customer onto a typical T-Mobile M2M service. The process went from 6-12 months when Horn started, to a matter of weeks, to even less now that Raco is on its own.
T-Mobile eventually decided that they were better off with a deal in which Raco became the premier provider of M2M solutions for T-Mobile, and T-Mobile became Raco's primary carrier customer for its services. The arrangement is not contractually exclusive on either end, though at this point each is the other's only partner for the business.
Raco's customers are typically either companies looking for M2M capabilities, or solutions providers/systems integrators looking to add M2M to a client's network. Customers include Audi, Delta airlines, and enterprises in health care and security, among others. John Horn said that in some cases, Raco builds a complete custom system for the enterprise, complete with front-end portals and custom billing solutions; in other cases, the customer comes to Raco needing only wireless connectivity, which Raco then arranges for with T-Mobile.
So here's the thing: If carriers want so badly to be something other than bit haulers, why would T-Mobile look to Raco as a partner, rather than keep a thriving M2M business in house? Not every carrier necessarily takes exactly the same approach, but even in the Sprint example I saw at CTIA a couple of weeks ago, the carrier partnered with a M2M provider.
In talking with John Horn, I didn't get into the issue of why T-Mobile chose to work with Raco rather than keeping M2M as its own business, but I did ask him if the arrangement didn't belie the general carrier complaint about not wanting to become bit-haulers. Horn's response was that there's nothing wrong with being a dumb pipe if you can get good margins for it, which the cellular carriers can. He also made a good point about what the carriers' core competency is.
“It takes a lot of sophistication, a lot of backend tools and knowledge, in order to appear to be a big dumb pipe," Horn said. "Wireless is not easy; it takes a lot of work to make it appear easy.”
Furthermore, as we move toward M2M and the Internet of Things, Horn said, "There’s going to be billions of devices connected. This is going to be hugely profitable for the carriers, and they don't have to control all the services to make a lot of money."
The carriers talk a lot about ARPU (average revenue per unit), but the fact is that even a low raw ARPU figure can generate a lot of money for the carriers if they have a decent margin on each unit.
"These pipes are going to carry a lot of money for the carriers," Horn said.
