Machine-to-machine (M2M) communication is poised to change the way critical services are delivered over the next decade, from healthcare to transport to energy. Significant barriers remain however, including overcoming technical complexity and regulatory hurdles that will pave the way for innovative products and services. These are among the major findings of a new Economist Intelligence Unit report based on in-depth interviews with 18 key players in the industry.

The report, Rise of the machines: Moving from hype to reality in the burgeoning market for machine-to-machine communication, sponsored by SAP, examines the business models behind successful M2M applications across sectors, identifies the factors that will drive further take-up, and puts forward action points for businesses and governments to address in order to overcome barriers to widespread adoption.

"M2M is beginning to fulfil its promise, with several successful applications already in the field," says Jason Sumner, senior editor at the Economist Intelligence Unit and editor of the report. "The next step is to create a platform for innovation by standardising technologies, forming partnerships within the industry and demonstrating the benefits to consumers."

Following are the other main report and survey findings:

M2M market forecasts vary, but all predict big growth potential. Forecasts by analysts promise anything from 12bn to 50bn devices connected by 2020, up from just 1bn in 2010. One analyst firm predicts revenue of €714bn (US$948bn) by 2020, including hardware and connectivity, a nearly eight-fold increase from €91bn (US$121bn) in 2010. Although such forecasts can often prove over-optimistic, they are whetting the appetite of many eager participants.

Cheaper technology and smaller devices will drive take-up. Sensors, microprocessors and wireless technologies that once cost hundreds of dollars per unit are now available for as little as the cost of a cup of coffee. Cloud computing and the ubiquity of smartphones will also drive adoption. Regulation is forcing uptake in some sectors such as energy and automotive.

M2M business models based on proven efficiency and cost savings will see the most growth in the near term. Energy, automotive, healthcare, retail and manufacturing are just some of the major vertical markets actively deploying M2M-based applications today. Greater efficiency and cost cutting are benefits that attract particular attention during tough times, such as automatic fleet tracking or operating driverless forklifts. Yankee Group, a technology research firm, forecasts that market segments focused on cost cutting will see the greatest growth, of some 17% per year between 2011 and 2015.

Long-term growth and innovation will come from experimentation within individual sectors, but many firms either do not understand M2M technologies or have doubts about their true business benefits. M2M’s breakthrough potential lies in entrepreneurs and existing companies using the technologies to create wholly new products and services, or in adding better quality of service to existing ones. However, a recent poll of businesses by Gartner, a technology analyst firm, found many with no plans to adopt M2M, largely owing to lingering doubt over its ability to provide measureable business value.

In the coming decade telecommunications operators will need to standardise platforms, explore new partnerships and advance the sophistication of their offerings, all while making it simpler for end users to compare which packages best fit their needs. Operators and systems integrators must standardise technology platforms and develop open protocols to allow for tighter integration between sensors, devices and other hardware. Partnerships, sometimes with competitors, will be key in achieving this. Operators and their partners will need to overcome IT challenges too, such as ensuring that the new multitude of M2M data flows can be integrated into existing enterprise IT systems.

Governments will need to address growing spectrum congestion, help simplify technology standards and consider streamlining regulations in some sectors to foster innovation. Although in some sectors, such as energy and automotive, regulations are a driver, in many sectors they are a hindrance to further adoption and innovation. Regarding simplifying technology standards, this should ideally be done in parallel with other countries to ensure consistency across borders.

Customer concerns about privacy and security will determine the viability of many M2M applications. Businesses will need to experiment through pilots and close attention to customer feedback to understand what customers will accept. Just as the emergence of social networking has created a debate about the boundaries of privacy in society, a connected world will also test social limits. So far customers have proven willing to allow personal information, such as present location or driving behaviour, to be shared on a limited basis in return for savings on car insurance premiums, for example, and assurances that their data are protected.

Rise of the machines: Moving from hype to reality in the burgeoning market for machine-to-machine communication is available free of charge at: