Digital Transformation Conversations

Digital Transformation Conversations

Monetizing the Machine: Business Models for the Internet of Things

Everything about the Internet of Things (IoT) is big. It promises a world where “everything is connected” and where billions of interconnected devices will be monitoring everything from the factories that produce our goods to the oceans that surround us.

And the potential revenue prize offered by the IoT is of similar scale.  Cisco recently estimated that it has the potential to generate about $19 trillion of value over the coming years. Given the size of this prize, it is perhaps not surprising that organizations are making it a priority. In a recent survey of senior business leaders around the globe, 96% said that their companies would be using IoT in some way within the next 3 years, while 68% said their companies are already investing budgets in IoT.

However, there is a gap between the promise of IoT and the delivery of hard results. Most organizations are yet to derive significant commercial value from IoT. Our recent research shows that 70% of organizations do not generate service revenues from their IoT solutions.  In short, beyond the exciting promise of the IoT, there’s the simple question of how to make money from it. While these are early days in the IoT’s evolution, we see four emerging business models.

Adding Connectivity.  What you might call the “hardware premium” is the most basic monetization model. Here, organizations add connectivity options to an existing or new product and offer remote device management in the form of mobile apps. This basic level of connectivity and control enables organizations to charge a premium for their product. LIFX, for example, produces remotely programmable LED light bulbs that can be controlled via a smart-phone app. These bulbs are sold at a premium and are priced around 10 times higher than a compact fluorescent bulb.

Bundling Services. This model offers a recurring revenue stream and, more importantly, creates a longer-term relationship with the customer after they have purchased a product. For example, Volkswagen’s “Car-Net” service offers security features, maintenance assistance, and navigation tools for its customers for a subscription fee. In the B2B segment, smart thermostat manufacturer Nest is using its Learning Thermostat — a home automation and energy management product — as a platform to offer energy management services to utilities. Nest charges utilities $30 to $50 per thermostat annually for its service. As part of the service, Nest helps utilities better understand their customers’ energy usage. Nest automatically reschedules usage of equipment with high electricity consumption such as air conditioners. By doing so, it has been able to reduce overall electricity requirement by as much as 50% in peak times, saving significant money for utilities. Nest is currently installed in over 1 million homes and close to 20 utilities have signed up for the service.

Harvesting Data.  IoT devices generate large volumes of sensor data. For many organizations, the ability to capture, package and sell this data offers a potential monetization model. Once this data has been aggregated and anonymized, organizations can choose to sell it raw, package insights from it or monetize it using advertizing. For instance, Michelin, through its Michelin Solutions unit, packages insights generated from the data that it gathers through sensors embedded inside customer vehicles. Customers pay Michelin on a per-vehicle, per-year basis. These insights help its customers achieve a variety of goals including reducing costs and carbon footprint among others.

Building Ecosystems.  The IoT thrives in a connected ecosystem – the bigger the ecosystem, the greater the value generated for all stakeholders. In an ecosystem, the focus is not on selling a product or a service, but on providing a shared platform to other players in the ecosystem – hardware manufacturers, software developers, service providers and the like. In such a model, the platform promoter ideally makes money from both end customers as well as other platform users. Platform users pay the promoter for listing and the promoter also gets a share whenever a product is sold to the end customer on the platform. A shared platform brings multiple benefits to participants. For instance, with the APIs provided by the platform provider, independent companies that have IoT products/services can develop custom applications. SmartThings, for example, addressed the need for a central cloud, app, user experience and platform for the Internet of Things and the connected home.

The IoT is a mega-innovation that will usher in a new age of connectivity. While there are numerous agile start-ups emerging from this fertile ground, the IoT also offers an unprecedented opportunity for traditional organizations. Currently, we are at evolutionary stage where making money from machine-to-machine is still a challenge. However, once organizations do get it right, the rewards of a connected world should be worth the wait. Everything about the IoT is big, and it can have the rewards to match. For more analysis, read our thought-piece at “Monetizing the Internet of Things: Extracting Value from the Connectivity Opportunity

About the author

Jerome Buvat

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