Big feature: Historic opportunities presented by smart cities

Source: Robotics and Automation News on January 26, 2017 | Abul Montaqim

Experts from the Arthur D Little consultancy provide a detailed overview of the historic, “trillion-dollar” opportunity presented by the move to smart cities, in this article by Ralf Baron, Morsi Berguiga, Jaap Kalkman, Adnan Merhaba, Ansgar Schlautmann, Karim Taga

The 100 largest cities in the world produce 25 percent of the planet’s wealth. To succeed, more and more cities are going “smart” in order to meet their biggest challenges and enrich the quality of their citizens’ lives.

This unstoppable trend is driving double-digit growth in a trillion-dollar global market.

What are the opportunities for telecom companies, utilities, financial institutions, transportation companies, software developers, equipment manufacturers and others in the smart-city market? 

More and more cities are going “smart” as a response to some of the world’s biggest challenges. The best cities put their citizens at the center of their strategies, enriching the quality of their lives.

This unstoppable trend is driving double-digit growth in a trillion-dollar global market that offers huge opportunities for telecom companies, utilities, financial institutions, transportation companies, software developers, equipment manufacturers and others.

In this article we take a closer look at some of these opportunities for companies.

The challenges facing cities

The uncontrolled and exponential growth of metropolises around the world has led to developments that put mega-cities at risk and turn them into places that, at best, can be difficult to live in and, at worst, could severely limit the world’s future social and economic viability.

Key challenges include the following:

Population density: In 1990 the world had 10 “mega-cities” (those with 10 million inhabitants, equivalent to the population of Greece); today the number stands at 28, and by 2030 the world is projected to have 41. Population growth puts a strain on infrastructure, leading to traffic congestion, delays, inefficiencies and a lack of affordable housing.

Pollution: Eighty percent of the world’s cities with more than 100,000 inhabitants do not meet WHO air-quality guidelines. The release of greenhouse gases not only damages our environment, but also induces illness and causes more than 3 million premature deaths worldwide every year.

Urban health: Studies have found that urban dwellers are subject to higher stress levels, less healthy diets and have a lack of greenery and physical activity. This makes them more vulnerable to obesity, diabetes, depression, arthritis, heart diseases and cancer.

Security issues: Cities are associated with higher crime levels due to the higher concentration of valuable items they contain, as well as the ease of anonymity. Law enforcement has so far been relatively successful at reducing the number of crimes. However, new threats are emerging, such as identity theft through Wi-Fi hotspots or portable contactless card scanners used by thieves on underground railways.

Growing need for connectivity and mobility: Growing cities fuel an increasing demand for continuous connectivity and enhanced mobility, without which cities could grind to a halt. New technologies in sensors and monitoring offer possibilities to manage city operations much more effectively.

What is a smart city?

In order to overcome these challenges, cities will have to become smart, which can be defined as follows:

“A Smart City uses modern technologies and innovative policies to meet the demands of its citizens. Through the provision of more accurate and readily available data it allows communities and government bodies to make informed decisions. Smart city processes must have a positive impact on the local community in terms of efficiencies, innovation and resource allocation.”

How smart city technologies can help

Leading smart cities have policies and strategies that place the individual citizen at the center, improving the quality of life and comfort for users.

Smart city technology and policy innovation can be conveniently grouped in 10 “verticals”, namely:

1. energy;
2. transport and logistics;
3. security;
4. public policy and administration;
5. medical and health;
6. building automation;
7. communication services;
8. education;
9. financial services; and
10. tourism and retail.

In many cases, the private sector is already active and offering solutions within or sometimes across verticals. This especially happens in areas where the business case for particular solutions is clear.

However, in other cases, where the business case is less clear, cities have stepped in to create an environment and an infrastructure where private sector companies can profitably participate.

Which cities are front runners?

Many indices have been developed to measure the “smartness” of cities. Examples include IESE Cities in Motion Index (IESE Business School), Innovation Cities Index (2thinknow Global innovation agency), or Smart City Index Master Indicators Survey (Boyd Cohen, Universidad del Desarrollo & Fast Co, ESADE Institute for Public Governance and Management).

All of these Smart City indices (and many others), measure how “ready” or “mature” cities are regarding their status and/or ability to become “smart” in general or with regard to selected vertical industry segments.

To provide a more holistic view, Arthur D. Little has developed a combined index based on existing indices, economic/socio-demographic sources and our expertise from consulting on various smart city projects around the globe.

Below, we highlight 15 selected cities across four maturity stages.

Platform stage: In Arthur D. Little rankings, Nanjing, Barcelona, London, Rio de Janeiro, Seoul, Dubai, Copenhagen and Manchester come out on top in the “Platform” stage. These leading cities follow an integrated approach, enabling service providers to use a common open platform through which services and data can be offered to, and shared with, governmental bodies and businesses, as well as citizens and visitors alike.

Vertical stage: Cities in the “Vertical” stage have launched projects across verticals, including sub-platforms such as mobility- or water- and waste management platforms. The vision to move towards a city-wide platform approach is to a large extent communicated but not yet realized.

Pilot stage: Cities in the “Pilot” phases have launched projects in individual verticals, but a cross-vertical platform approach has not yet been achieved.

Marketing stage: Cities in the “Marketing” phase (such as in Africa and India) have just announced their Smart City visions and strategies.

Our analysis has shown that the leading smart cities share a clear vision, a long-term strategy and strong governance, and a horizontal, open platform to enable the creation of new, cross-vertical business models.

Today’s leading smart cities have not only understood that openness, integration and interoperability will be key ingredients for leading smart cities in the future, but also that revenues will predominantly come from new business models focusing on service enablement and provisioning for its citizens and businesses.

Where are the opportunities for companies?

The total market for smart city vertical applications is huge and attractive. We estimate that the market size in 2015 was close to $1 trillion, and will grow to over $2 trillion by 2020.

Revenue growth is therefore well over 15 per annum, with many verticals growing by over 20 per cent every year.

The four largest verticals in terms of revenues are:

1. energy;
2. building automation;
3. transportation and logistics; and
4. financial services.

Together these four sectors make up 70 per cent of the total opportunity.

Below we provide some examples of how telecom operators, utilities and transportation companies can benefit from these growth opportunities.

Telecom operators as a service

Telecommunications operators have started to successfully position themselves within the smart city environment at various levels.

Although not all smart cities have a telco partner – as Stockholm or Vienna have – the underlying infrastructure needs to be in place to offer basic smart city services.

Given the increasing demand for secure and reliable broadband connectivity, telcos will become a key cornerstone for mission-critical smart city applications and infrastructure.

In addition, telcos such as Telefonica and China Comservices (a joint venture between the three Chinese operators) have engaged in a “platform-enabling” play, in which they act as general contractors and extend their services to data aggregation and analysis, operations and even providing their own products and services to smart city stakeholders.

There are three main smart city plays for telcos:

1. connectivity;
2. infrastructure; and
3. platform.

The most obvious proposition that telcos can offer is on the connectivity part is building and operating the networks for the smart city. For example, city Wi-Fi services, fixed and wireless broadband and narrowband networks for the specific vertical use-cases, and so on.

Telcos have the best experience in setting up and maintaining fixed and wireless networks, so this is the most “classical play” for any operator in the smart city context.

However, the overall value generation opportunities are relatively small – around 10-15 per cent value share of the overall smart city ecosystem – and given that telcos usually are not exclusive with regards to networks, the “connectivity play” can be seen as a first step into the smart city market.

An additional service that can be provided by telecom operators includes the planning and management of specific sensor infrastructure. Examples include parking sensors and backhaul, climate and environmental sensors, security camera operations, and so on.

As telecom operators have a very good understanding of network planning according to required bandwidth, latency and criticality, this service offering can be a sustainable differentiator for telecom operators in the infrastructure play.

On the back end, telcos will likely face competition from global ICT players such as IBM, Cisco and Ericsson, resulting in only a small increase in the overall value share of 5-10 per cent.

In the subsequent “platform play”, telcos do not only operate networks and infrastructure, but extend towards smart city IT platforms, enabling data aggregation and analytics for the city to allow for fast and secure operations and immediate triggering of a reaction – alternative routing of public transportation due to congestion, for example.

By entering the platform play, telcos will be able to extend the value share within the eco system beyond 30 per cent and thereby become critical players in the smart city.

Telcos could even extend beyond the “enablement”, bringing own service offerings into the equation.

This could consist of data analytics and monetization solutions, such as providing data to external third parties, as well as subsequent provisioning models.

Although this position requires significant investments in IT systems, the additional value generation is around 10-20 per cent, as data aggregation and analytics opens up the possibility to monetize the information and allow cross-vertical enablement.

In the final stage, a telco could act as the “general contractor” for the city – effectively running and monetizing the overall smart city operations and services.

In this play, telcos would offer own services – either self-developed or sourced – in the name of the city, generating revenues from various different business models.

The city effectively only has to pay for its own benefits, while businesses and citizens would directly pay the telco operator.

The “Smart City as a Service” model effectively can be deployed in cities with limited smart city budgets and can be scaled across various verticals over time.

As the telco is effectively the service provider for the city, the value share within the ecosystem is obviously comparably large – but it will also require significant investments in IT systems, developers and data experts, as well as the likely need to carve out such an organization in order to manage the complexity of such an end-to-end model, including the management of the diverse provisioning models and partnerships required.

Utilities reach beyond traditional business models

Utilities across the world have woken up to the threats and opportunities that arise from “smartization” of day-to-day products and services, ranging from smart appliances to transmission and the distribution grid.

While significant focus revolves around smart grid and smart meters, the most successful utilities have reached beyond their traditional business models to offer wide-ranging and holistic smart services, as convergence from adjacent industries make them vulnerable.

Examples include smart grids, smart meters, vehicle-to-infrastructure connectivity, smart street lighting, and smart home technology. Details are given below.

Smart grids: The smart grid is an electricity network that can intelligently integrate the actions of all users connected to it – generators, consumers and those that do both – in order to efficiently deliver sustainable, economically viable and secure electricity supplies.

The worldwide smart grid market is expected to surpass $400 billion by 2020, with an average compound annual growth rate of over 8 per cent.

Software makers (used to analyzing massive amounts of collected data) are set to benefit the most, hence utilities must partner or reposition themselves to capture this opportunity.

In the Americas, various cities have deployed smart grids, including Austin, Boulder and Ontario.

In the EU, Enel and EdP are leading the smart grid initiative with country-wide implementations. The Dutch Smart Energy Collective has been building city-scale smart grids.

China, South Korea, India and Brazil are planning to spend billions in the deployment of smart grids over the coming years.

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