IOT’s Biggest Impact? Business Models

on November 3, 2015

The more time I spend delving into the world of the Internet of Things (IOT), the more convinced I am that it’s biggest impact won’t be technological, but business related. Of course, we still have to get off the crazy hype cycle that IOT is on before this can really happen (and we’re likely still several years away from that.) But the changes will come, and they will be big.

To be sure, there are some profound technological developments that will both drive and be derived from the world of IOT. Add intelligence to lots of devices and connect them all together, and the result becomes nearly inevitable.

However, the manner in which business will need to occur—and how companies can react to those new business environments—will likely have an even bigger impact on the tech market landscape. It’s a classic case of disruption, and it’s bound to lead to both the downfall of some current tech giants and the birth/maturation of new ones.

Even now, in the early stages of IOT, we’re starting to see big impacts on business models, especially when compared to traditional IT products. For example, classic TCO (total cost of ownership) and ROI (return on investment) arguments for many critically important IOT products aren’t having the same kind of impact we’ve seen with IT products.

In the past, if you could build a strong-enough TCO/ROI case for a big IT tech expenditure, then you were well on your way to solid sales and success with that product. However, solid TCO/ROI models for IOT-driven solutions like saving energy costs on lighting or HVAC are not translating directly to sales for companies like Enlighted Inc. The company, which sells sensor-driven lighting and occupancy awareness systems for commercial buildings, instead has been forced to build complicated business models that take into account things like future energy credits. Not exactly a simple thing to sell.

The problem for these types of commercial IOT companies is that to really get the benefits of IOT, you often need to do very large (and very expensive) deployments. Smart cities sound like a great concept, for example, until you realize that to truly get the payback for a smart city, you would have to do massive deployments of sensors, gateways, software, services and more. Sure, the results could be great, but there are few cities that have the money to spare to tackle such a project.

This also highlights one of the current fallacies of IOT. While there’s been a great deal of talk about new revenue generation possibilities—such as for smart cities—the fact is, the few real success stories in IOT have been around cost reductions. Now, decreasing operational costs is still a good thing, but it’s very different than increasing revenues, and businesses need to build their business models and business approaches to reflect that reality.

The business model challenges extend beyond complete IOT solutions to devices and components, as well. Semiconductor vendors like ARM, Intel, Qualcomm, nVidia and others like to talk about the tens or hundreds of billions of connected devices that they can power in this new world of IOT. But, to make that happen, they have to move from a financial model where their revenue could be measured in hundreds or at least tens of dollars per device, down to one measured in single-digit dollars, and soon, cents per device. To put it more bluntly, 50 billion devices with 50¢ of semiconductor content, does not a growth business make—compared to today’s 1 billion+ devices at $25-$35 per device.[pullquote]There are still enormous questions about where the real value in a multi-component, multi-vendor IOT solution actually resides.”[/pullquote]

Network vendors like Cisco who tout the enormous amounts of network traffic that these billions of devices will generate won’t necessarily fare much better. Semiconductor improvements and practical realities are going to demand that more of the analytics and data analysis that are a core part of the IOT experience happen at an intelligent endpoint, and don’t need to, nor should (for security reasons), traverse a network.

On top of all this, there are still enormous questions about where the real value in a multi-component, multi-vendor IOT solution actually resides. Is it with the systems integrator, the software maker, the carriers, the network providers, the device makers, or some combination thereof? Divide the pie into too many pieces, and the shares start to get pretty small. Plus, it’s not clear that companies (or individuals, in the case of consumer-focused IOT) will be willing to pay for any additional hardware. Finally, each IOT project will have to address who gets access to the data, and who and how they can monetize it (if at all).

Answers to these kinds of difficult questions—like the fully realized potential of IOT—are still many years away. However, they do start to suggest that companies which have been in more traditional hardware or software businesses, will have to start rethinking their revenue generation methods. It’s likely that they’ll have to create ongoing services that somehow leverage the unique characteristics of their traditional offerings and start charging for those services instead of their traditional products. This transition won’t be easy, but it typifies the kind of challenges that IOT will be bringing to the tech market overall.