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Telefonica (TEF - Analyst Report) announced that it has entered into a connectivity deal to provide machine to machine (M2M) service to Tesla Motors Inc.’s (TSLA - Analyst Report) cars in Europe. M2M world alliance partner KPN is also a party to the deal.

Telefonica will provide connectivity to Tesla's Model S via its O2 network in Germany and U.K. and through Movistar in its home country, Spain. Meanwhile Dutch incumbent KPN will connect the U.S. car maker’s vehicles in the Netherlands and Belgium.  

Madrid-based Telefonica’s M2M platform, which is powered by Jasper Wireless, will provide connectivity for Tesla’s in-car infotainment and telematics service, which includes music streaming, navigation and Web browsing. Further, the remote diagnostics service from Telefonica will offer added security with information on safety and performance.

The M2M business is fast gaining popularity among telecom operators which have identified connected car business as a major area of focus.  According to a report by Machina Research, the number of connected cars will increase from 10% in 2013 to 90% in 2022.

Based on the growth prospect, operators are busy entering into alliances with auto makers to enhance their connected car business. U.S. based AT&T Inc. (T - Analyst Report) has also tied up with a number of carmakers, including big names like Chevrolet, Audi and Tesla. The carrier has even launched a new automotive platform called Drive along with opening a new connected car centre in Atlanta.

Tesla is also not far behind. This leading electric car manufacturer signed a similar deal with Swedish carrier TeliaSonera to provide M2M service in the Nordic countries of Sweden, Denmark and Finland, apart from covering Estonia and Latvia.

Given the gradual recovery in the European economy and strong demand for Tesla cars in Europe, we believe the deal is expected to strengthen Telefonica’s position in the M2M business.

However, the company will face strong competition from Vodafone Group plc (VOD - Analyst Report) in M2M business, which announced last month that it has entered into a deal with German automobile manufacturer Volkswagen AG and its subsidiary Audi to supply connected car services in Europe.

Telefonica currently carries a Zacks Rank #5 (Strong Sell).

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