Jan 31, 2013

Sierra Wireless reinforces its M2M strategy


I have been tracking corporate developments in the M2M market over the past few years. They are useful for performance benchmarking while also providing insights as to how companies are implementing strategy and committing to this market.

To date, every initiative has been expansionary involving a mix of acquisitions, distribution agreements, innovation and partnering. The divestiture by Sierra Wireless of its AirCard business, announced on 28 Jan 2013, therefore triggered something of a database classification challenge. In essence, the company sees a tremendous growth opportunity in the M2M market while also acknowledging that the data-card business is on the decline, especially as increasing numbers of Internet enabled devices already include ‘embedded mobile’. Sierra Wireless has therefore chosen to exit this business and to direct its investment capacity towards more promising M2M opportunities.

The company’s most recent financial statements for its M2M and its Mobile Computing (primarily AirCard) business segments go some way to justifying this course of action.

 
Specific points to note are:

1.   The M2M business unit grew at an annual rate of 19% between 2009 and 2011, after adjusting for one-off customer developments (Barnes & Noble’s e-Reader).

2.   The company’s faith in platform solutions (to facilitate provisioning and managed connectivity, for example) looks promising with a 32% annual growth rate. 

3.   However, the Mobile Computing (AirCard) business unit has experienced annual revenue falls of 6% after adjusting for one-off customer developments (Clearwire) between 2009 and 2011. While AirCard device revenues have fallen, Sierra Wireless did benefit to some degree from the shift from 'plug-in' to 'embedded' modules.

Sierra Wireless’ divestiture coincides remarkably with another January announcement. This came from Option, one of the pioneers of the data card market. In a formal financial notification, Option announced that it is looking to raise cash in order to secure itself as a going concern while the company continues to focus on reducing its cost base and diversifying its sales- and marketing efforts.

In an important message to other companies in the mobile eco-system, Option’s CEO has previously commented that “Mobile broadband is increasingly seen as a utility. The market has moved to a point where today it is not enough to simply enable broadband connectivity, it has to be connectivity with a purpose”. This dynamic does not apply exclusively to ‘mobile broadband’ and is an important lesson for executives in the M2M (and LTE) markets.

Sierra Wireless is not the only module supplier to have taken this message to heart. Over the past few years, its main competitors have also sought to strengthen their competitive position in the M2M market. This has been addressed by extending their role along the value chain and by entering the market for M2M enabling services. 

The following extract from our corporate initiatives database illustrates, by way of a timeline of events, how Cinterion (which has recently started to trade under its parent brand, Gemalto) and Telit have expanded their presence in the M2M market employing industry-consolidation and new-service oriented strategies; each block-entry indicates the focus for each given transaction e.g. acquisition of M2M-module capabilities, M2M service support platforms, GPS and M2M value-added services.

 
The management of Sierra Wireless has demonstrated considerable proficiency to consolidate its position through some sizeable acquisitions in pursuit of its M2M strategy. Its current challenge is to decide on how much of its divestiture gains, if any, should flow directly to shareholders and how much should be invested in business expansion initiatives.

Platform services look attractive based on Sierra Wireless revenue growth record. However, many of the large mobile operators in its addressable market have already announced platform commitments. Now that horizontal consolidation opportunities look limited, there do remain several other possibilities to explore. These include, for example: value propositions in areas such as M2M outsourcing; value-added connectivity and applications services; and, IoT related markets (I view IoT as a different category of business from traditional M2M).

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