This article originally appeared in the April 2012 issue of INTERNET TELEPHONY magazine.

It takes two to tango, even if they’re both machines. But when the music stops, who’ll work out how much to pay the piper?

Today, commerce is commonly transacted between people and machines – one needs to look no further than Cyber Monday (News - Alert), app stores or the Kindle to understand that it’s a late majority market for any demographic that’s connected. More recently, social networking has changed how people interact with people, and this has also profoundly affected commerce. The next wave is machine-to-machine, which is being enabled by two mega-trends that are creating a perfect storm that is surreptitiously redefining the business landscape.

Intelligence is now commonly embedded in objects. We no longer simply build the inanimate. Today, we bestow the power to communicate, if not think. Many durable goods (from appliances to houses) now contain some form of intelligence. And with the advent of super-cheap chips, even disposable goods like boarding passes are becoming more intelligent.

Communications have become nearly universal through inexpensive mobile and IP networks and advancements in radio-frequency identification, or RFID, and the ubiquity of intelligent personal communication devices.

To be clear, there is nothing revolutionary about M2M itself. It’s been around for a while, just like browsers connecting to machines via the Internet were around long before Amazon, eBay (News - Alert), PayPal and Salesforce. Like the prior wave, things only get radical when you consider the new services and business models that M2M enables. It will connect the unconnected. And once goods are connected, they become actors on the global economic and social stage, participants in our own world, inanimate or not.

The emergence of embedded intelligence combined with the existence of universal communications is leading to ubiquitous telemetry – a word derived from the Greek roots tele (which means remote) and metron (which means measure). Telemetry makes it possible to measure consumption of any type anywhere. This creates a tantalizing prospect and a tipping point – the quest for interaction, where all things, rather than just all people, seek to communicate with each other. For businesses, the question is how to monetize the services and new business models that will emerge as a result.

Much already has been written about how the customer experience will change, and it is obvious how efficiency increases (i.e., remote utility meter reading). I’d like to focus on the business model implications through a trailblazer example.

In October 2009 the Utah Transport Authority was awarded the American Public Transportation Association Innovation Award for the development of its new electronic fare collection system. It utilizes contactless cards that wirelessly communicate with readers that in turn wirelessly communicate with a centralized system. This two-hop M2M communication results in significant operational savings, an open payment model, and new products and distribution models.

The system allows riders to pass contactless smart cards over electronic readers when boarding. The smart card can be one issued by UTA, by a third party such as nearby ski resorts, or standard contactless credit and debit cards, including Visa payWave, MasterCard PayPass, Discover Network Zip and American Express (News - Alert) ExpressPay. As a rider boards and exits a vehicle, the rider taps the card against a reader and boards the bus or train. The transaction is wirelessly sent to a centralized server and then on to the open payments network for authorization.

At the end of the ride, the passenger taps off to complete the trip or do an electronic transfer. In a transfer, the rider is able to tap onto a new bus or train without being charged for a new trip (i.e., a journey rather than discrete trips). The final charge is processed through a back-office system that matches up individual card taps within the two-hour transfer window to create a complete trip and calculate the final charge.

Beyond open payments, M2M enabled UTA to improve how it sells and distributes its services. Ed Pass enables University of Utah students and others to use their contactless student ID to ride public transportation. EcoPass allows companies to register their contactless corporate ID cards to encourage their employees to ride public transportation. SkiPass lets ski resorts bundle lift tickets with transportation. The lift tickets themselves are contactless cards.

M2M improves the customer experiences, automates these models, and enables them to be seamlessly monetized. All three of the above products have billing and compensation implications in which institutions negotiate agreements on behalf of their students, employees or customers. In addition to the increased ridership due to the convenience, UTA attributes millions of dollars in cost savings to the open payments approach. UTA estimated roughly the cost of a conventional approach to be between 30 million to 40 million dollars. It was able to cut that cost at least in half, and was also able to cut the time for deployment.

M2M is also creating a huge demand for infrastructure and, given the volumes involved, there is a massive opportunity for value-added application providers, communication service providers, and cloud providers. An example is OnStream, a national grid company that provides gas and electric meter­ing solutions to energy suppliers in Great Britain. It replaced legacy back-office systems for asset man­agement, workforce planning and billing with new, more nimble systems to match the new ways of working. OnStream provides a complete outsourced metering solution for gas and electricity providers. The solution includes everything from the meters to the management of data.

As M2M impacts services, markets, providers, and ultimately humans, businesses will have to adapt to new realities. The race for first-mover advantage to harness the commercial potential of the new landscape will be intense. Agility, speed, nimbleness will become mission-critical assets; size, scale, scope may help less if they are rooted in old world ways of doing business. Today’s IT foundations are unlikely to solve tomorrow’s M2M challenges.

We can anticipate the nature of those challenges because we know something about how communications between machines will be constructed. For one thing, we know that agreements will be key. In the machine-to-machine world, the nature of speech will, rather than being free and spontaneous as in the human world, be agreement-driven and ring-fenced between businesses. The parameters of the conversation will be set, so we will have to design systems that can reflect and accommodate them, whatever they may be. To monetize the potential of M2M commerce, the communication of business terms must be based on agreements between two or more parties. 

This is why, increasingly, we hear the phrase agreements-based billing and compensation in cross-vertical industry circles. Where once monetization was a matter of enabling the predictable, agreements-based billing delivers the ability to monetize potential – the as-yet unknown. It is how M2M will be commercialized, even before it becomes clear exactly what it is that is being monetized.

If we don’t know the exact nuances, we can already grasp the broader topography of M2M commerce. It is certain to involve the fluid negotiation of personalized contracts, multi-party financial relationships, innovative pricing and business models, and compensation of distribution channel and supply chains.

From an enterprise application perspective, this means monetization will call for an open and configurable system, which allows for multiple business revenue models to be supported at installation and then continually evolved, allowing additional models to be added at any time.

Business models with sales-driven, enterprise customer agreements; interrelated, multi-party partnership arrangements; and integrated channel compensation programs must all be configurable, evolved and manageable throughout the lifecycle of the business. The machine-to-machine commercial world will deliver a dynamic, relationship-driven marketplace that is setting the pace for a new generation of commerce. It will also deliver a unique opportunity for those in position to harness it.

Scott Swartz (News - Alert) is the founder and CEO of MetraTech Corp. (www.metratech.com)