The total market for smart-city vertical applications is huge and attractive. We estimate that the market size in 2015 was close to USD 1 trillion, and will grow to over USD 2 trillion by 2020. Revenue growth is therefore well over 15% per annum, with many verticals growing by over 20% every year. The four largest verticals in terms of revenues – energy, building automation, transportation & logistics and financial services – make up 70% of the total opportunity. In this article we provide some examples of how telecom operators, utilities and transportation companies can benefit from these growth opportunities.
Telecom operators have started to successfully position themselves within the smart-city environment at various levels. Although not all smart cities have “telco partners,” the underlying infrastructure needs to be in place to offer basic smart-city services. Given the increasing demand for secure and reliable broadband connectivity, telcos will become a key cornerstone for mission-critical smart-city applications and infrastructure. In addition, companies such as Telefonica and China Comservices (a joint venture between the three Chinese operators) have engaged in a “platform-enabling” play, in which they act as “general contractors” and extend their services to data aggregation and analysis, operations and even provide their own products and services to smart-city stakeholders.
We recognize three main smart-city plays for telcos: connectivity, infrastructure and platform. The most obvious proposition that telcos can offer is on the connectivity part – building and operating networks for smart cities, such as city wi-fi services, fixed and wireless broadband and narrowband networks for specific vertical use cases. Telcos have the best experience in setting up and maintaining fixed and wireless networks, so this is the most “classical play” for any operator in the smart-city context. However, the overall value generation opportunities are relatively small (around 10–15% value share of the overall smart-city ecosystem), and given that telcos usually are not exclusive with regards to networks, the “connectivity play” is a “first step” into the smart-city market.
Telcos can also offer planning and management of specific sensor infrastructure, such as parking sensors and backhaul, climate and environmental sensors, and security-camera operations. As they have a very good understanding of network planning according to required bandwidth, latency and criticality, this offering can be a sustainable differentiator in the infrastructure play. On the backside, telcos will likely face competition from global ICT players such as IBM, Cisco and Ericsson, which will result in only a small increase in the overall value share of 5–10%.
In the subsequent “platform play”, telcos do not only operate networks and infrastructure, but extend towards smart-city (IT) platforms, enabling data aggregation and analytics for the city to supply fast and secure operations and immediate triggering of reactions, such as alternative routing of public transportation due to congestion. By entering the platform play, telcos will be able to extend the value share within the ecosystem beyond 30%.
Finally, telcos can act as “general contractors” for smart cities, effectively running and monetizing the overall operations and services. In this play, companies offer own services (either self-developed or sourced) in the name of the city, generating revenues from various business models. The city effectively only has to pay for its own benefits, while businesses and citizens directly pay the telco operator. As the telco is effectively the “service provider” for the city, the value share within the ecosystem is comparably large. However, it will also require significant investments in IT systems, developers and data experts, as well as carving out such an organization in order to manage the complexity of such an “end-to-end” model, including management of the diverse provisioning models and partnerships.
Utilities across the world have woken up to the threats and opportunities that arise from smartization of day-to-day products and services, ranging from smart appliances to transmission and the distribution grid. While significant focus revolves around “smart grid” and “smart meters,” the most successful utilities have reached beyond their traditional business models to offer wide-ranging and holistic smart services, as convergence from adjacent industries make them vulnerable.
The smart grid is an electricity network that can intelligently integrate the actions of all users connected to it – generators, consumers and those that do both – in order to efficiently deliver sustainable, economically viable and secure electricity supplies. The worldwide smart-grid market is expected to surpass USD 400 billion by 2020, with an average compound annual growth rate of over 8%. Software makers, used to analyzing massive amounts of collected data, are set to benefit the most, hence utilities must partner or reposition themselves to capture this opportunity.
Smart meters record electric energy consumption in near-real time and communicate the information back to utilities and end users. Smart meters allow utilities to adopt differential and innovative tariff schemes and demand-side management initiatives, and drive reductions in operating costs due to the automated processes of data collection and integrated data management. In 2013 the global smart-meter market size was estimated at USD 11 billion, and it is now witnessing rapid growth driven by favorable government initiatives that support the installation of these devices.
Large-scale electric-vehicle adoption will allow vehicle and grid integration and enable utilities to add energy to the grid during peak demand using reserves stored in connected cars. At any given time 95% of all cars are parked, and the use of electric vehicles as energy storage could be worth up to USD 4,000 per year, per car, for utilities. Utilities can easily draw on their technical competencies in managing networks, knowledge of consumption patterns and relationships with energy customers to position themselves at the center of the e-vehicle ecosystem. Partnering with automotive and technology companies will be crucial in facing the expected stiff competition. End users will see advantages in the form of supplying back to the grid at higher tariffs, energy arbitrage through charging vehicles with cheaper energy (such as at night or with solar) and using vehicles as backup solutions in case of blackouts.
Smart-lighting systems allow remote management and control of individual poles and can be retrofitted to minimize the impact on the streetscape. These achieve substantial electricity savings in the range of 50–70%, with average payback periods of seven to 10 years due to higher network efficiencies, as well as LED technology, that they incorporate. Systems notify utilities of lamps that require maintenance and even provide GPS localization. Further value-added services, such as wi-fi, air-pollution sensors, remote crowd management, and smart parking sensors enhance the utility of a smart lighting system.
Several applications are changing the home environment, making it more autonomous as well as allowing users and/or utilities companies to manage energy demand remotely. End users enjoy the convenience of smart homes, but for utilities the energy-saving opportunities these devices provide can also be a threat. With margins dropping, utilities will need to create value by developing capabilities beyond their traditional business, often through partnerships with companies from other sectors. By leveraging their relationships with existing customers, utilities could provide smart devices and obtain margins on resale price, as well as gain control of non-vital home appliances to reduce consumption in peak time. Globally, the smart-home market is expected to reach USD 230 billion by 2020.
Transportation authorities and companies
Several cities are developing integrated multimodal solutions that aim to introduce a new experience in urban transportation, maximize the usage and efficiency of public transport, reduce private transportation and increase citizen satisfaction. We are seeing the emergence of integrated mobility platforms launched by public and private transport players, as well as start-ups in different cities, with the support and funding of municipalities. These platforms combine all available types of public and private transport into a single integrated offer/interface, often available through a smartphone app, enabling consumers to plan, book and pay for trips seamlessly.
Cities are the lifeblood of the 21st century – more than half of us live in them, and the 100 largest cities produce 25% of the planet’s wealth. This unstoppable trend is driving double-digit growth in a trillion-dollar global market. There are numerous opportunities for telecom companies, utilities, transportation companies and others.
— Arthur D. Little (@adlittle) March 20, 2017