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What is Verizon Thinking: $3.4 billion spent in IOT the Past Two Months. Ouch!

By James Brehm August 25, 2016

About three years ago, Verizon shocked the world when it announced it was acquiring Hughes telematics for $612 million. Many speculated it was to bolster their OEM telematics practice. Some speculated it was to block competing carriers from partnering with Hughes. But at the end of the day, when the dust had settled, Network Fleet had emerged as Verizon’s branded go-to offering for small to medium fleets.

Early on, as Verizon’s sales teams positioned Network Fleet as their lead solution, many Verizon telematics partners became upset at Verizon for having entered the competitive world of Software-as-a-Service (SaaS) solutions. Network Fleet positioned Verizon to gain traction and capture software recurring revenues normally reserved for those participating “up the stack”. But as time wore on, many realized Network Fleet customers were smaller fleet operators, and while Verizon improved its position in Fleet Management, it wasn’t a formidable competitor to solutions like Omnitracs, Fleetmatics or PeopleNet targeting large scale fleets.

And in time, the uproar died down and things went back to business as usual for Verizon and the rest of the ecosystem…until a little over a month ago.

The Big Bang
Boom! Like a bomb piercing the silence of a ceasefire, Verizon announced the acquisition of Telogis. A rumored $930 million dollars was offered up for a company that claims over 80 of the 100 largest for-hire fleets as customers and has more than 300K vehicles under management.

Now, Verizon’s business development team will have a large-fleet solution to offer alongside NetworkFleet. Additionally, Telogis has a good offering for OEM Embedded Fleet vehicles. Having worked with both GM and Ford on OEM Embedded solutions, Telogis could reinvigorate a connected car business at Verizon that’s been waning since the loss of OnStar as a customer more than a year ago.

An Even Bigger Bang
And just as the dust was settling on the Telogis acquisition, and semi-hidden by the Yahoo! Acquisition, Verizon made another big move announcing it was acquiring Fleetmatics for $2.4 billion.

When you add Fleetmatics to Telogis and NetworkFleet, Verizon effectively has rolled up 18% of the current market.

 And there are rumors that there are more to come. With companies like MiX and Novatel on the open market and undervalued and several other Fleet companies in exploratory talks with investment banks on doing formal processes, Verizon may very well own 25% market share by September.

But at What Cost?
Let’s just look at Telogis and Fleetmatics. Those two acquisitions total $3.33 billion dollars. THREE POINT THREE THREE BILLION DOLLARS???

Did Verizon even do a “back of the envelope” calculation?

Here Comes the Math
Let’s just use some really, really round numbers here. If the average subscription for fleet software solutions is $25 per month (and dropping 5% per year), and Verizon has 300k Network Fleet subscribers, 700k Fleetmatics subscribers and 300k Telogis subscribers.

That’s 1.3 million subscribers times 12 months times $25 per month or $390 million per year.

If the market is growing at 20-25% per year, then breakeven happens in year 6 (and that’s with ZERO churn). 

How Much Churn?
But we know churn is GOING to happen. How do we know this, you might ask?

Because approximately 20% of the vehicles using Telogis software have an AT&T logo on the side of them. Do you think AT&T will want Verizon knowing where their fleet vehicles are driving to and from each day? Probably not. Look for some immediate churn to happen.

Based upon end-user research, the average fleet vehicle remains on network and under subscription for approximately 3.5 years. (The average lifecycle of a fleet vehicle is 7.8 years, however the average number of registered owners is 1.9.)

Additionally, we also know that approximately 50% of the 1.3 million subscribers Verizon acquired have contracts for connectivity using AT&T. If this is the case, then Verizon has to pay connectivity fees (probably around $1.05) to AT&T for network access. While some would say that’s not much, we do estimate it totals somewhere between $12 and $28.5 million.

One scenario is that many of these newly acquired endpoints will naturally age-off the AT&T network organically. When this happens, their companies usually bid-out hardware, software and connectivity solutions. Those vehicles could very well end up on Sprint with Geotab or US Cellular with Actsoft.

Another scenario, unlikely as it seems, has Verizon paying AT&T for use of AT&T’s network services. This is not very likely and is the $12 to $28.5 million cost we talked about before.

Finally, if Verizon wants to forego paying AT&T anything (which is likely), they’ll probably need to pay mightily to get a Fleet subscriber to switch out the GPRS or HSPA hardware in their vehicle to accommodate Verizon’s technology. This would cost anywhere from $100-200 per device and $50-75 per installation. And if history is any indication of the future, Verizon will do just that, instead of paying AT&T for network connectivity services.

Another $97 Million
That means on top of the acquisition costs for Telogis and Fleetmatics, Verizon could spend an additional $97 million to avoid paying AT&T between $12 and $28.5 million for connectivity.

How much? Did you really just say that?

Yes. Verizon could spend $97 million to avoid paying AT&T between $12 and $28.5 million for connectivity.

So when we tally up the costs for Telogis and Fleetmatics and add on the money Verizon will spend to push the connections off of AT&T’s network, Verizon’s grand total spent is roughly $3.427 billion. And this is all before integration costs of trying to add two new companies into the Verizon platform. In our estimation, Verizon has overspent by several hundred million dollars at a minimum, or more likely a billion dollars or more!

It is likely that Verizon may not see a positive return until after 2025.

How Could $3.5 Billion have been Better Spent?
Let’s look at a list of publically traded companies to see what Verizon could have spent three and a half billion dollars on, if they would have looked a little harder.

First, there are some companies that need experienced management and will benefit from the stability of a larger acquirer and the economies of scale that could be gained. On the list is Digi, MiX Telematics, Numerex, and Novatel.

These companies are a mix of hardware and software companies. Three of them have significant professional services backgrounds. And given that M2M and IoT is very complex, adding experiences professional services resources sounds like a good idea right now, especially at these costs.

Next on the list are the mid-cap movers and shakers CalAmp, Orbcomm, Sierra, Telit, and Sequans. These companies, while some of the biggest names in M2M technology, are not well known or widely traded on Wall Street. They are mid cap stocks that are restrained a bit by reporting rules that their similarly sized privately held peers don’t have to deal with. Being acquired by a larger organization would be a blessing, as they would have access to the ready capital that forced them into an IPO situation in the first place and would lose the costs (which are probably in the tens of millions) that regulation and reporting force them to bear.

What the Nine Companies Get You
All told, the nine public companies above have combined market caps of $2.965 billion.

They represent $2 billion in annual revenue.

They have a combined 4.4 million to 4.6 million subscribers.

And what’s more, they have a combined $980 million in cash, receivables and short term investments.

Summary
What that really means is that you could approach the boards of each of the nine public companies above, offer a 50% premium to Monday’s opening market valuation, and walk away knowing you have better value than Telogis and Fleetmatics alone. And as a kicker, you own a couple of the vendors used by Fleetmatics, Telogis and NetworkFleet.

Sometimes companies make a rush to judgement and buy things they think they need because they want to avoid the paralysis of analysis. Confronted with disruption in their face, the pause and stare blindly like a deer in the headlights. Then, when an area becomes suddenly and shockingly successful (like NetworkFleet), a rush to recreate occurs instead of analyzing the triggers and understanding the why behind the what. What ends up happening is not an inability to take action, rather it’s the inability to understand the market and take appropriate action.

With an influx of private equity money in IoT, a 25% plus CAGR, over 1,000 companies participating in the market, and relatively low interest rates, M&A is sure to be a theme of the industry well into 2017. Taking appropriate action will be the key to success. And the key to taking appropriate action is arming yourself with pragmatic, fact based, quantitative and qualitative information.

About the author: James Brehm is CEO and Chief Strategist of James Brehm & Associates  a market advisory and consultancy focused on Machine-to-Machine (M2M) technologies and the Internet of Things (IoT), and is a regular speaker at industry conferences and one of the leading voices in IoT and M2M toda


Edited by Ken Briodagh

Founding Analyst and Chief Technology Evangelist

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