The keys to monetizing the Internet of Things
At CES 2014, then Cisco CEO John Chambers declared during a keynote address that the Internet of Things (IoT) would be a $19 trillion market within the next couple years. McKinsey predicts a value of between $17 trillion and $33 trillion by 2025, but Gartner sees IoT representing a paltry $1.7 trillion by 2020. In addition, in a series of new reports released this week, IDC predicted that the worldwide market for IoT spending will grow from $655.8 billion in 2014 to $1.7 trillion in 2020.
To put these numbers in perspective, consider that $17 trillion was the estimated combined GDP of the United States, China and the European Union during 2014. If the Internet of Things were a country, it would likely be the third largest economy by 2020, surpassing all countries except the United States and China.
These are staggering figures. Even by conservative standards, it’s likely that the global IoT marketplace will generate more wealth than any single technological “revolution” in history. The Industrial Revolution, the internet revolution, the mobile revolution—they all may pale in comparison by the year 2030. I find this difficult to digest, the figures simply too large to visualize. Perhaps that’s why I love using the gold rush analogy.
I grew up in the San Francisco Bay area, and the name of my favorite football team is a reminder that in 1849, San Francisco was undergoing a radical transformation that would change it from a small settlement of 200 in 1846 to a city of 36,000 by 1852. The discovery of gold in 1848 fueled an unprecedented boom to the region as more than 300,000 people descended on the area in hopes of striking it rich, often leaving their families and possessions at home, traveling light and strategizing only minimally about how best to navigate an unknown, risky future.
When I consider the state of the IoT market today, I see many similarities between those gold-crazed pioneers and today’s modern-day technologists hoping to strike it rich in the Internet of Things gold rush. And today, just like back then, one of the real challenges will be figuring out how to strike it rich in an environment that’s filled with confusion, changing rapidly and becoming increasingly competitive by the day.
I’d like to highlight one point up front. The Internet of Things is not a disruptive technology. It’s a set of nearly ubiquitous technologies that together, when applied at scale, create a disruptive business model. Once again, the Internet of Things is not a disruptive technology—it’s a disruptive business model.
In 1979, Harvard Business School Professor Michael Porter wrote about how competitive forces shape strategy, and he went on to introduce his five forces analysis as a framework for analyzing levels of competition within industries and business strategy development. In November 2014, Porter addressed competition again in a fantastic HBR article entitled “How smart, connected products are transforming competition.” In it, Porter introduces the notion of smart, connected products as the bulk of IoT:
These new types of products alter industry structure and the nature of competition, exposing companies to new competitive opportunities and threats. They are reshaping industry boundaries and creating entirely new industries. In many companies, smart, connected products will force the fundamental question, “What business am I in?”
Porter astutely observes that with the explosion of smart, connected products, a correlating explosion of data will be produced—data in unimaginable volumes, providing insight into virtually anything worth exploring. These data will, as Porter goes on to explain, will
raise a new set of strategic choices related to how value is created and captured, how the prodigious amount of new (and sensitive) data they generate is utilized and managed, how relationships with traditional business partners such as channels are redefined, and what role companies should play as industry boundaries are expanded.
The key concept here is that IoT is redefining business models, relationships with business partners and, perhaps most profound, industry boundaries themselves.
With sweeping change in the near future, and with so much money at stake, how does an organization monetize the IoT? How do you strike it rich in the IoT gold rush?
Start with a sensor. Sensors, whether embedded in a plane engine, attached to a water heater or inserted into the topsoil of an organic farm, all sense, detect and eventually transmit data. Those data are typically stored, then communicated to some central repository—most likely, to the cloud. That repository is busy collecting data from many other sensors, and the data from all these sensors are sorted and transformed into a consumable format. In their consumable format, the data are analyzed, ideally revealing interesting, valuable insights.
It is with these insights that we commonly start to think about the monetization process. Monetization starts here, for without insight, we don’t know anything. But after we understand what the data are telling us, we can use those insights to either drive down costs or increase sales—or, ideally, to do both.
If you sell products that collect data or that will become able to collect data, and if there’s someone who may be interested in those data, then you’ve struck gold. Connected traffic signs, connected cars, connected medical devices—all stand to bring benefits from the collection and resale of data. Municipalities, state and local governments and the insurance industry are all interested in learning more about their citizens and customers, and they may well be willing to pay to do so.
If you manufacture and sell physical products that can break and subsequently stand in need of servicing, you’ve struck gold. You can offer preventative maintenance services, monitoring services and value-added products and services that you previously couldn’t, creating entirely new product categories. You can charge for such products and services, or you can differentiate yourself from your competition by allowing end users to benefit from these new features at reduced cost or even for free. Connected appliances, industrial equipment and most electronic products all stand to benefit from greater insight into how products are used and when they’re going to degrade and will all be able to capitalize on new services, preventing product downtime.
If you sell products through a distribution network, or if you see your product priced down by the existence of middlemen, you’ve struck gold again. Unprecedented insight into use patterns will open up a direct relationship with the end user, allowing for proactive selling of replacement products and parts. Cross-selling, upselling and improved customer engagement will be highly profitable for such organizations. Appliance makers, consumer electronics providers and most manufacturers will see their core business models shift and expand as they are forced to ask, as Porter says, “What business am I in?”
If your business model relies on risk within the physical world, you’ve likely struck gold. Insurance companies and the agents that sell insurance policies traditionally hampered in entering new markets because of the absence of large volumes of data necessary for building risk models, will finally have the opportunity to enter such markets, capitalizing on the newfound trove of IoT data. Expect an explosion of new insurance products from your agent—everything from “insurance on demand,” or insurance by the day, to highly creative policies allowing businesses to insure against unforeseen events. With an explosion of IoT data, insurers will now find themselves able to generate insights and build risk models in areas that were previously unknown.
If your business operates in a high-friction marketplace, you’ve likely got gold in your future. IoT data will likely liquefy high-friction markets by unlocking unused capacity while connecting buyers and sellers. Uber did this to the taxicab industry and Airbnb to the hotel industry—and IoT will likely continue this trend, taking it several steps farther still. If you own or manage hundreds of thousands of square feet of office space, or if you manage concert venues, shopping malls or airports—in short, anywhere where physical space is costly, underused and difficult to optimize—you’re likely going to benefit greatly from IoT. Imagine office-on-demand businesses that allow customers to enter an office building, log in and be directed to a conference room or office cube—whatever suits their needs among the physical space available for that day. Concert and sports venues will have the data and insight to make more efficient use of space, targeting less profitable spaces through mobile push advertisements and promotional offers, seeking to extract additional revenue streams from less profitable areas.
If you’ve got a second home or own a car that you don’t drive often, or if you have other unused physical assets that you’re open to monetizing, you may have struck gold in your personal life as well. AirBnB springs to mind, but a more IoT-related scenario might see you monetizing your unused car, unleashing its driving capacity through IoT-related technologies and services—a scenario I have described elsewhere in detail.
There are a number of schools of thought on this topic, and much is being written about it, a great deal of which can easily be read online. I encourage anyone interested in finding answers to this question to develop his or her own point of view through research and by speaking with organizations that specialize in IoT transformation. There’s still a lot we don’t know—which is both exciting and scary.
I’d love to hear feedback. I certainly don’t have all the answers, so I’d love to hear additional ideas about how to monetize IoT projects, products and services. Feel free to reach out via LinkedIn or on Twitter @peter_ryans.
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