It is a next-generation world. So what does that mean for M2M?

There is long-term value and strong ROI in a second-generation embrace of machine-to-machine applications

Across the broad spectrum of the mobile world, most of the breathless hype is focused on the networks, devices and applications that the fourth generation of mobile technology is making possible, and the future generations that are not far behind. All that momentum about what’s next is typical of a fast-moving industry that has plunged ever-forward and is rarely nostalgic about its past.

That focus on the future, however, is widening the gap between the machine-to-machine (M2M) sector and the rest of the mobile industry. M2M is an anomaly in the wireless world in the sense that the networks, technologies and devices that comprise it aren’t necessarily made better by generations of mobile technology that improve spectrum capacity. So while the rest of the industry is eager to move to 4G, M2M is content to stay in the second generation.

That’s not to say that M2M isn’t an evolving sector of the mobile industry: The M2M space grows and diversifies every year. As traditional subscriber adoption reaches saturation, carriers are eager to find new areas of growth. Consulting firm Analysys Mason recently forecasted that the number of M2M device connections will grow from 62 million in 2010 to 2.1 billion devices in 2020, for a 36% year-over-year growth rate. That’s significant growth. And the range of potential applications for M2M technology—along with the number of vertical industries in which those applications can save money, resources and time—gets broader every year.

While few in the mobile industry would dispute the importance of the M2M business model, the fact remains that network operators want to and need to use their spectrum more efficiently. And they know they can do that by moving M2M applications to their 3G and eventually 4G systems. In a recent report, The Yankee Group characterized 3G/4G evolution in the M2M sector as “a delicate issue” given the choice carriers face: do they continue to provide 2G network coverage, or do they migrate M2M traffic to 3G and 4G to increase overall spectrum efficiency?

When the M2M applications in question are focused on video—in scenarios such as residential security or medical diagnostics, for example—using more spectrally efficient 3G networks make sense. But the vast majority of M2M applications simply don’t require spectral efficiency: for 99% of them, second-generation networks are perfectly acceptable. And by migrating those applications to 3G and 4G systems, carriers face the prospect of creating higher cost for next-generation M2M devices that potentially threatens end-user acceptance of the applications.

That’s the challenge, then, for network operators: Establish a usage cap for M2M applications on 2G rather than shutting it down all together. Once they reach that cap, they migrate to next-generation networks. That includes applications like telemedicine, where hospitals are using video diagnostics for remote patient monitoring, remote security that relies on video and any type of interactive gaming and remote infotainment that requires more bandwidth. In those scenarios, the cost of next-generation devices is justified.

For the thousands of other M2M applications now being used or not yet envisioned—applications that have to do with simple asset management or tracking and require very little bandwidth—second-generation capacity remains sufficient. Carriers can re-farm the majority of their 2G spectrum for 3G and 4G, but they must leave enough to continue to support the millions of deployed devices on second-generation networks.

Why? As carriers supporting M2M services know well, revenue per user is small. What makes M2M profitable is long-term usage—devices that are deployed and sit there for a very long time supporting the applications they’re deployed to support. If solution providers have to replace devices repeatedly, that will destroy M2M’s ROI for the vast majority of applications.

The irony of those who argue against continuing to support 2G networks is that once a network is installed, it costs more to tear it out than to leave it. The issue is that spectrum is valuable, and carriers want applications off their 2G spectrum so that they can get more calls and more data on the same spectrum using next-generation technologies.

The fact is, again, that carriers can have most of that spectrum for consumer smartphones. The remaining 2G spectrum required to support M2M devices will use little data (one smartphone can use more data than 10,000 M2M devices), so there’s no reason not to leave a little behind to support M2M.

The ability of M2M to be a reliable, long-term provider of revenue for carriers is indisputable. In a volatile world of ever-changing consumer behavior and spending cycles, M2M applications are rock-solid. The challenge now is for carriers to recognize the value of M2M services and—like T-Mobile—take steps to support the 2G networks that are so critical to their business value.

John Horn joined RACO Wireless as president in May after serving as a leader at T-Mobile for more than nine years. He started T-Mobile’s M2M Channel and during the last six years, he has focused on the carrier’s go-to-market strategy, helping them earn recognition as the market leader for M2M services. John is heading the migration of the T-Mobile M2M business to RACO Wireless, a T-Mobile partner for 10 years.