Just a few years ago, 3G technology appeared largely unsuitable for M2M. Besides use in a few high-bandwidth applications, there did not seem to be any incentives to switch from the good old reliable and cost-efficient GSM standard.
That perspective, however, came exclusively from price-sensitive industrial customers. For everyone else, 2G is a hassle that one would probably do better without.
Every 2G network occupies valuable radio spectrum, which it uses with relatively low efficiency. As the consumers’ insatiable appetite for streaming media and other data-intensive applications overload the mobile network infrastructure, the mobile operators have little choice other than to reexamine their spectrum portfolio.
AT&T was a first mover in this respect. The US operator’s decision to phase out 2G services through the end of 2016 was completely rational from a business perspective. Why preserve an outdated inefficient network technology which is only in demand for applications with ultra-low average revenue per user?
Priority market segments like the automotive industry were already moving towards 3G/4G. The additional costs related to the transition were perhaps unwanted, but nevertheless bearable for most customers. Indeed, AT&T had already made a similar transition in 2008, when it shut down AMPS, which was then still widely used for critical applications such as security alarm communications.
The effects of the transition were immediate and can be clearly seen in the US market today. In just two years 3G has emerged from obscurity to market leadership in the cellular M2M hardware space, giving a healthy boost to the financial performance of the leading global module vendors by halting the trend of eroding prices and margins.
During 2014 all the leading players expect to ship more 3G devices than 2G devices in North America. In Asia-Pacific, the transition to 3G is already completed in countries such as Japan and Australia. Only Europe lags behind in adoption, as the major mobile operators hesitate to take the leap into the future.
The share of cellular M2M devices connected to HSPA/LTE networks is projected to more than double, from less than 20% at the end of 2014 to more than 50% by 2018, according to a recent study we conducted. In terms of device shipments, 3G/4G is expected to overtake 2G in 2017. HSPA will be the largest technology in an intermediate period until the current price gap to LTE has been closed.
Rising volumes are already being reflected in a narrowing price gap between 2G and 3G, a trend that will accelerate over time and remove all remaining incentives for global device manufacturers to support legacy technology. Due to the greater complexity of future generations of radio modules, the cost of M2M communications will however be likely to stabilize. This means that additional wireless technologies will be needed to support ultra-low-cost use-cases with limited data requirements.
Perhaps the greatest challenge for the burgeoning IoT industry will be how to build a business model for this type of network, which enables them to operate at a fraction of the traditional cost.
— Tobias Ryberg is a senior analyst at Berg Insight.