The IoT Monetization Problem

on August 4, 2015

While everyone’s talking about the exciting potential of the IoT market, one fundamental question seems to be getting overlooked. Who’s actually going to make money with IoT?

I’d argue the question is actually very difficult to answer on several levels. First, at a core philosophical level, the Internet of Things is supposed to be about making connections between all kinds of different devices. Inherent in that viewpoint is the assumption someone is going to be willing to actually pay for the connectivity between devices—because it isn’t all free. Yes, there will be plenty of essentially “free” WiFi and Bluetooth connections between nearby devices but there are also going to be a lot of cellular and other wide-area connections that are not free.

Taking the argument a step further, lots of different business models are being developed to justify why one side or the other in a physical connection should be burdened with the costs. Essentially, the thought is one side will provide “value” to the other and that will validate the charges one side places on the other.

In certain instances, this will definitely be true but, in many cases, it will not. There will be many situations in which value is a very grey area and either party could reasonably argue the value of the service or data they are providing. For example, when it comes to the tracking of personal information via wearables, the companies collecting the data could (and have) argued the collection and analysis of the data is worth something to the consumer. At the same time, there’s a growing movement which argues if personal data is being collected, the person providing it should be compensated.

The monetization challenges in IoT extend well beyond this simple example, however. Another key application that’s been discussed is the widespread use of very low-cost, sensor-equipped endpoint devices that will generate enormous amounts of data which, in turn, will be analyzed to generate meaningful insights. Creating an enormous number of low-cost endpoints doesn’t sound like a very attractive business for either device or component makers, however. As a result, it’s going to be very difficult for those of companies to make long-term, ongoing investments into this area when there’s little chance for meaningful profitability. On the analytics side, there are also a number of challenges. As I’ve discussed in the past, analytics in IoT isn’t always very easy nor can it necessarily generate an ongoing revenue stream. In many cases, it’s one and done.

Plus, there’s the question of which companies really have all the capabilities to put together a complete solution in-house and then turn it into a profit-generating business. Yes, there are many companies that can offer a piece to the IoT puzzle but only those companies that can offer a complete end-to-end IoT solution will be able to profitably benefit from it. The truth is, at best, there are only a handful of those companies.[pullquote]Yes, there are many companies that can offer a piece to the IoT puzzle, but only those companies that can offer a complete end-to-end IoT solution will be able to profitably benefit from it.”[/pullquote]

And if all that wasn’t tough enough, it’s still not clear a real, demonstrated benefit from a self-created, platform-driven solution will guarantee success. This became clear to me recently when I met with a commercial smart lighting company called Enlighted Inc. The company has a smart lighting solution for commercial buildings they can fairly easily prove will guarantee impressive energy savings (often measured in hundreds of thousands of dollars per year) when installed. In addition, the system can even be used for things like determining traffic flow inside buildings and generating more efficient paths for workers moving around large warehouses all day. On top of that, the company boasts an impressive array of clients including Amazon, HP, Google, and more.

Yet, in spite of these benefits, the company discovered they couldn’t just sell the solution on its own merits because of the upfront costs and challenges of integrating it into existing environments. Instead, they had to develop a clever, though very complicated, business model called Global Energy Optimization (GEO) that involves purchasing/financing energy credits from utilities via financial institutions and then essentially offering their products to their customers at no cost, with the promise of receiving a portion of the energy savings their customers generate. Needless to say, this doesn’t lead to short sales cycles or simple purchase orders (POs). To their credit, Enlighted appears to be making a decent go of it, but it’s not clear how many other companies can or would be willing to follow in their footsteps.

Don’t get me wrong. IoT has the potential for enabling some amazing new products and services. But before we all get caught up in the hype about its potential market size, it’s important to take a realistic look at the financial potential.