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Ericsson-Aeris Deal Reflects Broader IoT Market Trends

  • Large companies Like Google, SAP, IBM, and Ericsson have quit loss-making IoT businesses.
  • Ericsson’s failure highlights the fragmented IoT value chain, which makes it difficult for players to capture a significant portion of the value.
  • Aeris is expected to benefit from the scale of its operations following the closure of the deal with Ericsson.
  • Further industry shakeout is expected in 2023 as an unsustainable number of players are trying to get a pie of the lucrative IoT market.

Ericsson has announced that it will be exiting the Internet of Things (IoT) market, joining a growing list of companies that have decided to quit this space. The Swedish company has agreed to sell its IoT connectivity management and connected vehicle cloud platform IoT Accelerator to Aeris for an undisclosed amount. Aeris is an MVNO purely focused on providing cellular connectivity for IoT.

Google IoT Core, SAP, Bosch Device Management, and IBM Watson are among the other major players that have decided to cease IoT operations in 2023. Ericsson’s decision is a reflection of the challenges and setbacks the company has faced in this market, as well as the broader challenges that the IoT industry has been grappling with.

Why Ericsson decided to hang up?

Ericsson’s announcement comes after several quarters of disappointing financial performance of its IoT business. Despite investing heavily in IoT technologies and solutions, the company has struggled to break even. Ericsson’s IoT business saw a loss of around SEK 1 billion ($98 million) on revenues of SEK 0.8 billion($78.6 million) in the 2022 full year. Ericsson attributes the limited returns on its investments in the IoT market to the fragmentation of the market, which has resulted in the company only capturing a small part of the value chain. As a result, Ericsson has decided to focus its resources on other areas, such as enterprise 5G and 5G private networks, that will continue to cross paths with IoT.

Aeris gets scale with acquisition

Aeris is a leading IoT MVNO having partnerships with major communication service providers such as Vodafone, AT&T, and SoftBank, as well as leading automotive OEMs. The recent deal is beneficial for Aeris as it will immediately increase the scale of its operations. Upon closure, Aeris will gain 95 million connected devices in addition to its current 5 million devices, while the number of customers is expected to increase from 400 to 9,400. The deal will also shift to Aeris Ericsson’s global connectivity agreements with 35 mobile operators. In a nutshell, Aeris will get the scale and geographical reach. However, the transaction is more like a reverse merger, which may bring new challenges for Aeris as it will have to manage operations at a much larger scale while rationalizing them to drive the combined company toward profitability.

Aeris is planning to combine its intelligent, software-defined IoT network with Ericsson’s connectivity management platform to create synergies and provide new value-added services. Aeris would be looking to bring down the operating costs by consolidating the platforms. However, execution of this strategy may be difficult, as Aeris may face the same challenges as Ericsson unless it partners with companies that bring complementary capabilities to the IoT value chain.

Our take

Despite challenges, the IoT market is expected to continue growing in the future. The increasing adoption of IoT technologies in various sectors, such as healthcare, transportation, and manufacturing, is likely to drive the market’s growth. Additionally, the development of new technologies, such as 5G and edge computing, is also expected to open up new opportunities for IoT companies.

Ericsson’s decision to exit the IoT market not only reflects the challenges and setbacks that the company has faced in this space but also the broader challenges faced by the IoT industry. These challenges include a lack of clear business objectives, a fragmented value chain, and the inability to generate decent returns on investments. This has led to many players leaving the IoT market, and it is likely that further consolidation or exits will occur in 2023. An industry shakeout would be healthy for the IoT market’s growth as an unsustainable number of players are trying to get a pie of the lucrative IoT market.

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Can Semtech’s Acquisition of Sierra Wireless Change Offerings in IoT Space?

US-based semiconductor manufacturer and LoRa pioneer Semtech announced a $1.2-billion deal on Wednesday to acquire Canada-based cellular IoT module and device supplier Sierra Wireless. The deal comes after last week’s merger deal between Telit and Thales’ cellular IoT business. The IoT module market has entered a consolidation phase and we can expect a few more announcements in the near future.

The IoT module market is fragmented. Many brands are struggling to improve performance, scale up products and face competitors. Some players are moving towards services, which comprise 77% value of the total IoT value chain, for better revenue opportunities instead of sticking to hardware only. For example, u-blox acquired Thingstream in 2020 to generate more revenue and offer complete IoT solutions, from chipset to cloud. In some cases, companies are trying to build up their own supply chain ecosystem through integration. For example, Quectel entered the IoT antenna space last year. In the future, we may witness some large players offload their cellular IoT module business which is not a core business for them.

Sierra Wireless IoT module market share Counterpoint

The Semtech-Sierra Wireless deal is an important announcement for the IoT space. It can change offerings in the IoT industry. Here are some key takeaways from this deal from Counterpoint analysts:

  • Sierra Wireless is mainly focused on the cellular business, whereas Semtech is focused on the non-cellular business. The ultra-low power benefits of LoRa and higher-bandwidth capabilities of cellular networks will bring innovation to IoT use cases. They can also solve problems faced in massive IoT adoption across all segments.
  • International brands such as Sierra Wireless, Telit, Thales and u-blox were struggling to compete with Chinese module vendors such as Quectel, Fibocom and MeiG in terms of scale and bringing innovation to the field.
  • Sierra Wireless divested its auto business in 2020 to focus on the router/CPE segment but the COVID-19 pandemic, supply chain disruptions and ransomware attack hit Sierra Wireless’ efforts to regain its market share last year. Interestingly, the automotive spin-off business was acquired by a consortium led by Chinese module vendor Fibocom.
  • We also witnessed a corner-room change at Sierra Wireless to revive brand glory when Phil Brace replaced Kent Thexton as the CEO in July 2021.
  • This year, Sierra Wireless divested its Omnilink offender monitoring business to Sentinel for $37.6 million. This was not a core business for the company and it offloaded Omnilink to focus more on the services industry. Product segments can generate revenue for one time, whereas services can generate revenue on a recurring basis. That is why we have been seeing many IoT module players shifting towards IoT platforms, cloud and services.
  • According to its chip-to-cloud strategy for IoT adoption, Semtech aims to offer solutions across the IoT value chain. However, it has no good presence in the module, device and platform categories. Moreover, LoRa isn’t suitable for each IoT application. LoRa and cellular technologies may complement each other in serving segments across the IoT value chain.
  • Sierra Wireless will bring a rich experience of cellular IoT modules, cellular gateways and cloud service platform to Semtech, while Semtech will offer LoRa chips, LoRa gateways and cloud services. In the future, we may see more hybrid cellular+LoRa solutions instead of dual cellular module-based solutions. In this type of application, the cellular module can be used for data communication and LoRa can be used for device management and other applications where a low payload is required. This can change offerings in the IoT module space and help Semtech increase its market share in the cellular space too.
  • Semtech already has a good hold on smart meter, smart city, industrial, smart grid and asset-tracking applications through LoRa solutions. The addition of Sierra Wireless products will help Semtech target high-end markets such as security cameras, gateways, fleet and PC.

IoT Value Chain Counterpoint

Outlook

The combined entity is looking for a 10x growth opportunity to reach a $10-billion serviceable addressable market (SAM) by 2027. To achieve this figure, IoT platform and cloud services will play a pivotal role as these can contribute revenue on a recurring basis. At the same time, Semtech needs to be careful not to disrupt the standalone LoRa ecosystem partners and customers. We believe cellular+LoRa-based industrial applications such as security, smart campus, factory and private networks will be a big opportunity for Semtech.

Related post

The Big Acquisition: Lenovo acquires Motorola

The Big Acquisition:

The world’s leading PC manufacturer Lenovo acquired Motorola Mobility from Google for ~ USD 2.91 Billion. With this deal, Lenovo acquired the MOTOROLA brand and Motorola Mobility’s portfolio of smartphones such as Moto X, Moto G and the DROID™ Ultra series. In addition to current products, Lenovo gets ownership of the future Motorola Mobility product road map. However, Google retained ownership of the vast majority of the Motorola Mobility patent portfolio, including current patent applications and invention disclosures.

Opportunities:

With this deal, Lenovo will not only be able to expand its current portfolio of handsets, add a rich heritage of mobile handset design, engineering and manufacturing expertise but. Also gains Motorola’s brand and access to key North America & Latin America markets. This instantly makes Lenovo almost the third largest smartphone player in the global smartphone segment competing head-on with Huawei. Following table highlights the global smartphone sales and market share of the two companies in 2013 (Source: Market Pulse Service):

Chart 1: Global Smartphone Sales and Market Share, Jan-Dec 2013 (in million units)

Global Lenovo and Motorola Smartphone Sales and Market Share, Jan-Dec 2013 (in million units) 

Learning from the past, Lenovo efficiently utilized the brand value of IBM ThinkPads after acquisition and maintained it well, hence we expect Lenovo to maximize advantages of this acquisition and boost its competitive edge on a global level.

According to our quarterly Market Monitor service, Lenovo is the second largest smartphone vendor in the world’s biggest market, China. Lenovo is making strides to expand its presence outside of China entering into key emerging markets such as India, Russia and South East Asia. To become a global smartphone player, Americas market presence and growth is the key. Lenovo will look forward to leverage Motorola’s strong brand presence, mind-share and strong carrier relationships to succeed. Although Google retained Motorola Mobility’s key patent portfolio, including current patent applications and invention disclosures; still these companies together can offer handsets having innovative features and applications.

Strategy:

In light of the deal, Lenovo has stepped up promotions for its flagship Vibe X not only ahead of Chinese New Year season but also is evident in newspapers and roadside billboards in markets such as India to gain maximum mind-share. Lenovo has been pretty aggressive with its pricing in its domestic market which is evident from the wholesale ASP for this Chinese vendor. Lenovo’s portfolio and hence sales are heavily skewed towards the high-growth sub-US$100 segment. What Motorola deal could help Lenovo is to first create a strong mid-tier to high-tier smartphone portfolio.  This would help Lenovo boost its ASP, top-line and bottom line. For comparison, Motorola has been commanding healthy ASPs for its portfolio thanks to premium portfolio across key US carriers and generous subsidies. But, lately Motorola with Moto X & G has looked to create “affordable premium” portfolio which could disrupt the market and chimes well with Lenovo’s low-cost strategy.  Following is a snapshot of Motorola & Lenovo’s wholesale ASP over the past several quarters, sourced from Counterpoint Research’s Market Monitor service.

Chart 2: ASP, 2012Q1-2013Q3 (in USD)

Counterpoint Research - Lenovo Motorola Smartphones Wholesale ASP

Challenges:

Along with Motorola’s brand, engineering expertise, strong presence in Americas, Lenovo inherits a company which is operationally challenged. Motorola over the last several quarters have generated steep losses. This will remain a challenge for Lenovo on how it not only becomes the third largest vendor by volume but also becomes a profitable global smartphone brand.  Thus moving up the price-tiers in smartphone segment and gaining foothold in key subsidy driven markets will be   the key to become profitable by generating enough scale and balancing overall costs.

Furthermore, when such an acquisition occurs, human resources of the acquired company is impacted the most. There will be changes in terms of organizational structure, culture, company policies, etc. Moreover, employees at Motorola initially faced some challenges getting accustomed to Google’s culture over the last one year and now they will have to align to a Chinese company’s culture which might take a huge toll on these key resources. Brain drain effect and retaining key Motorola talent, as a result of acquisition, is going to also be one of the big challenges for Lenovo.

Also, acquiring Motorola does not necessarily mean that Lenovo will get instant access to the US operators’ selves and subsidies budget. The company will need to prudently leverage Motorola’s existing strong relationships with American channel partners to first get foot-in-the-door and then prove its low-cost leadership for long-term success.

Recommendations:

We believe the company should retain the name ‘Motorola’ or even the brand name “Moto” to reap maximum benefits and launch new premium products with this brand especially in key Americas markets. Lenovo should follow the same co-branding strategy as they did by co-branding with “Thinkpad” brand and maintained the mind-share and market share in global enterprise PC market Furthermore, Lenovo should continue its “affordable premium” and “low-cost” aggressive strategy in key emerging markets to offer more value to the consumers and capture maximum market share and gain scale.  The next logical step for Lenovo would be to invest in software and services as well as R&D (for cellular IP) to compete with bigger players such as Samsung, Apple and Nokia.

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