Reality Check – The Cost of M2M Data Services

The M2M industry is still relatively small and new, and consequently many application developers are planning and developing their first M2M application. Many of these developers’ only prior experience with the cost and capabilities of cellular service is through their personal experience using consumer cellular appliances, particularly smartphones, tablets and data cards for laptops. In particular, their frame of reference for the cost of cellular data comes from its cost with these devices. Their assumption is that if they can develop an M2M application that uses a half or a tenth or less of the data of these consumer appliances, the cellular cost of will also be proportionately lower.

And in this assumption they will be wildly wrong.

The cost of cellular data service on personal devices has declined significantly over the past five years as the popularity of intelligent connected devices has increased, and as the range of available appliances has also grown. Smartphones generally did not exist five years ago, and cellular data services were largely confined to PC cards that were inserted into laptops. Phones had Internet access back then, but it was cumbersome and lightly used. Now smartphones with downloaded applets make up over 40% of US mobile subscribers in late 2011. On top of that, tablets have experienced explosive growth in adoption, along with e-book readers, digital picture frames and other graphical devices, many of which have cellular data connections.

It is easy to see what pricing conventional wireless data users expect. With smartphones, it is tricky to isolate just the cost of the data plan from the overall cost of the service since the monthly charges for smartphones include voice and text messaging services, along with amortization of the subsidized purchase price. The data plan price on a smartphone is an incremental price. With that caveat, the minimum incremental data plan price for an iPhone, at the end of 2011, is $15 for a 2 GB data plan, which works out to $0.0075/MB per month. More “pure” data plan pricing offerings exist for the iPad. Monthly data plan prices on the iPad range from $15 for 250 MB to $25 for 2 GB, which calculate to monthly data costs of $0.06/MB to $0.0125/MB respectively. The iPad pricing is 2x to 4x the incremental data pricing on an iPhone, and is the better example of wireless data pricing on a consumer data-only device.

The situation in M2M applications is markedly different. M2M applications use significantly less data per month than do consumer devices. There are a number of M2M applications that require miniscule data traffic, less than 100 KB per month. Even many verbose, “high volume” M2M applications require no more than 1 MB to 5 MB of data monthly. In general, M2M applications use at least two orders of magnitude (i.e., 100 times) less data than are used by consumer appliances.

Given their lower data usage, you would expect the monthly service cost for an M2M device to be lower -- and it is, but not as low as the consumer device benchmark would suggest. Typical M2M pricing for a device using a miniscule 100 KB of data monthly is $2 to $3. That is the equivalent of $20-$30 per megabyte. Higher data volume M2M applications, which consume 1 MB to 5 MB monthly, also have relatively low monthly charges of $5 to $8 respectively. Those monthly charges, however, are the equivalent of $5/MB to $2/MB.

Clearly if an M2M application only needs to use 100 KB or 5 MB of data service monthly, then M2M pricing from carriers is less expensive than putting the device on a standard consumer data plan. But the price for M2M data is extremely expensive, by comparison, when measured on a per megabyte basis. In fact, the price per megabyte of data service for an M2M device is two to three orders of magnitude (i.e., 100 to 1,000 times) more expensive than the price charged for data for consumer appliances. An order of magnitude difference is a glaring difference – two or three orders of magnitude is huge. This pricing difference is one of the reasons why new M2M application developers are shocked when they calculate how much their application is going to cost each month, given how little data service they are using.

Both sets of devices – consumer appliances and M2M devices – are using the exact same cellular network with the exact same data communications facilities. So why do carriers appear to charge 100 times more for the capacity used by M2M devices compared to that used by consumer appliances?

One major difference between the two sets of devices is breakage. Breakage reflects the fact that subscribers almost never use their full data plan allowance each month. Because cellular users of all types – both businesses and consumers – hate to pay the overcharges incurred when they go over their plan allowance, cellular users invariably sign up for a plan that provides more data than they need. The difference between the allowed usage in the plan and the user’s actual data usage is called breakage. An iPad subscriber on a 2 GB plan may only use 500 MB of data in a month. The unused 1.5 GB allowance is lost, which makes the iPad user’s actual data cost that month $0.05/MB, not the $0.0125 that optimal, full usage of the data plan allowance would provide. (As an aside, some carriers instituted “rollover minutes” to reduce breakage on cellular phone plans as an effective price reduction. There are not currently any “rollover megabyte” plans in the industry).

Breakage differs significantly between M2M devices and consumer appliances. Because consumers do not understand their data usage very well, and because carriers only provide a few data plans of significantly different sizes, most consumers pay for a much larger data allowance than they need. Average breakage on consumer data plans is probably over 50%, and may be as high as 80%. By contrast, M2M application developers usually know exactly how much data their devices will consume each month since the application behavior is tightly defined and controlled. Also, M2M data services are usually available in a large number of pricing tiers so that the application developer can select more closely the appropriate data allowance for the application. And finally, some M2M pricing plans are available as “pooled” plans across a large number of devices, in which the under usage one month by one device can be used to offset the over usage that month by another device, thus largely avoiding overcharges. Consequently, breakage on M2M data plans is much less than 50%, and probably closer to 20% on average.

The difference in breakage then may mean that M2M data is only 75 times more expensive than consumer appliance data, rather than 100 times. It does not begin to explain the wide variance in the cost of cellular network data capacity implied by the two sets of pricing.

Another consideration is that M2M applications place a proportionately larger load on the signaling capacity of the cellular network than do other data applications. Signaling is used on the cellular network to start and stop data communications sessions. Carriers only charge for the data contents of the session, not for the signaling transactions themselves. An M2M device using 1 MB of data over the month may have the same number of data sessions as a consumer appliance (say, 1000 separate sessions). The carrier is collecting more money from the consumer appliance’s higher data traffic to cover the “cost” of the signaling than from the M2M device, which is only consuming a relatively small amount of billable data for the same signaling. Consequently, carriers are probably charging more for the measurable, billable M2M data to help cover the signaling overhead costs incurred by M2M applications.

The fact, though, is that neither of those reasons, nor any other cost driven explanation can justify the extravagantly higher price that carriers charge for M2M data compared to any other data service. M2M applications do not incur two orders of magnitude more load on the cellular network per megabyte of data communicated (or at least, per megabyte of data allowed).

The explanation has to be that carriers are value pricing M2M data. They are grabbing as much revenue as the market can bear. Because the M2M market is still relatively small, because M2M applications give the lowest monthly revenue per device that carriers see, and because carriers do not believe that lower pricing will generate significant new revenues quickly, they feel no need to compete in the M2M market based on price. To some extent, carriers still view true M2M applications as more of a nuisance business that they reluctantly agree to accommodate. A carrier’s business is not going to be significantly impacted if high pricing keeps a million $5 per month M2M devices from being developed and deployed on their networks (and by the way, there is not a single 1 million device M2M application deployed in the US today – most are much smaller than that). Carriers reserve their most aggressive data pricing for those devices that look more like smartphones – tablets, e-book readers, etc. – which individually provide more revenue per month or which can be sold in very large volume to one entity (e.g., Amazon).

Carrier value pricing of M2M data will eventually give way to more aggressive price competition as the M2M market grows large enough to be worth chasing. Until then, M2M application developers will have to closely watch the ROI of their solution and design their applications to minimize on-going data costs.