* Machine-to-machine seen as growth driver for telcos
* E-health, cars, energy, transport show promise
* Multiple challenges for telcos to turn tech into profit
* Telefonica sees annual M2M sales of 500-800 mln by 2015
By Clare Kane and Leila Abboud
BARCELONA, Dec 6 (Reuters) - In Barcelona's Hospital Del Mar, Telefonica is doing more than connecting phone lines - it is also developing a lucrative new business keeping patients' hearts in good shape.
A heart-monitoring programme put in place by Telefonica is just one kind of machine-to-machine (M2M) technology that telecom operators are racing to develop for sectors including healthcare, automotive, transportation and energy.
Carriers such as Vodafone, Deutsche Telekom , AT&T, Verizon, China Mobile, and France Telecom are betting that M2M will be a significant source of growth as the number of connected devices climbs to 12 billion or more by 2020.
In cars, for example, mobile technology can be used to automatically call emergency services after a road accident. In offices, France Telecom uses it to tell companies when their coffee machines need re-stocking, while energy companies are equipping homes with 'smart meters' to track consumption and permit differential pricing.
The potential prize is billions of dollars in new business for telecom groups, many of which are otherwise faced with declining sales, and the promise of big cost savings for their customers.
Yet turning the 'Internet of Things' into a real business will not be easy for big telcos, since the market is far more complicated than their traditional sales of mobile and Internet contracts to consumers and companies.
To succeed, they have to develop an understanding of a range of industries, their specific needs and regulatory constraints. They also have to outfox a phalanx of new competitors such as start-ups in Silicon Valley, app developers, and corporate giants like IBM, General Electric and Philips.
Analysts' forecasts vary widely on the size of the M2M market and how much of it telcos can win, since the biggest opportunity comes not from putting a mobile SIM card in devices but from providing the software and services to make them work.
Machina Research predicts revenue of 714 billion euros ($933 billion) by 2020 for M2M overall. Informa Telecoms & Media's Jamie Moss says the market is growing slowly and will reach 217 million connections and $9.3 billion for telcos by end 2014. They earned $5.7 billion from M2M this year, dwarfed by the roughly $1.14 trillion from mobile services in the same period.
"I am very convinced that M2M will be a profit driver," said Matthew Key, who heads Telefonica's digital unit, which aims to earn 500-800 million euros in annual M2M revenue by 2015.
"But we need to sell more than just basic connectivity by adding know-how and a complete service, and build the business locally step by step."
The opportunity and the challenges for telcos in M2M are on display at the Hospital Del Mar.
Every morning, patients recovering from heart attacks use equipment installed in their homes by Telefonica to weigh themselves, take their blood pressure and answer a few questions on their symptoms via a touch screen. The information is transmitted to nurses at the seaside hospital's cardiac unit who follow up by phone if they have any concerns.
The programme has had a positive effect on mortality rates, reduced hospital visits and saved 9,000 euros per cardiac patient since it began two years ago, according to doctors.
Nurse Ana Linas said the system was so simple to use that an illiterate elderly woman was among the patients able to use it.
Yet the hospital, which experienced some video connectivity problems that were quickly resolved by Telefonica, has no plans to expand the project because of the costs involved.
"You have to hire trained people so that it all works. Although costs fall a lot later on, the initial investment is high in staff and equipment," said doctor Cristina Enjuanes.
With budgets under pressure and doctors often reluctant, getting the investment needed to roll out telehealth schemes can be an uphill struggle.
Telefonica wants to roll out the heart-monitoring programme elsewhere in Spain and is also investing heavily in projects in Britain with the National Health Service.
"I cannot tell you when it will ramp up. What I can feel is that we are getting closer to it ... We will know soon the speed at which demand will move, and whether there is finally an opportunity to create a totally new (business) category," said Jose Perdomo, head of Telefonica's e-Health division.
Telefonica has had more success rolling out e-health in Latin American markets such as Brazil and Chile, where more medical care is provided via the private sector than in Europe.
The M2M gold rush has sent some telcos on the acquisition trail to get technology and expertise. AT&T bought U.S. start-up Xanboo and has used its technology to develop security services for the home, as well as tools for homeowners to control their heating, lighting and appliances from a mobile phone.
Verizon paid $612 million in June for Hughes Telematics and plans to build on the company's expertise in M2M software for tracking truck fleets, as well as crash detection, emergency calling, and maintenance needs for cars. Hughes has a worldwide contract with Volkswagen and a U.S. contract with Mercedes.
John Stratton, Verizon's vice-president for enterprise, said the Hughes deal would allow it to gain know-how in the software needed to boost the profitability of M2M contracts beyond the few dollars earned from the connection itself.
"If we only transport the bits of data in M2M projects, that has relatively modest value, less than 10 percent of the market opportunity overall," he said in an interview.
"The next big piece is the solutions on top, which is what motivated us to buy Hughes."
Korea Telecom's experience launching a taxi fleet management service powered by M2M technology demonstrates the point. Initially it earned about $5 a month per taxi for tracking taxi locations with mobile technology. It boosted that to $50 per month and signed five-year instead of two-year contracts by selling a software platform and call centre as a package with the taxi tracking.
Telefonica invested 2 million euros in a Spanish start-up called addFleet that makes a free taxi-calling app for consumers, and a paid version for taxi owners to track cars.
"There is no global market for taxi cabs, so you need to go local first," said Telefonica Digital chief Key.
Martin Garner, an analyst at consultancy CCS Insight, said telecom operators would have to adapt if they are to succeed in making M2M a mass technology, adding that for now the market was growing slower than they would have hoped.
"We do think there is a big world in M2M for the telcos," said Garner. "But they have to go and take it: it will not come to them."