Opinion: Jim Ryan, President & CEO, Flexera Software looks at how to monetise the IoT.
Device makers worldwide are feeling the crushing pressure of globalisation and commoditisation. The world is flat. Competition is everywhere. Prices are falling. And it would seem that the only way to survive is to take a bunker mentality by cutting prices and pruning to streamline operations and create new efficiencies.
Device makers are so embattled right now that they are taking this same bunker mentality and applying it to their strategy for tackling the Internet of Things (IoT). A recent Gartner report states that the number of organisations adopting the IoT will grow 50 percent in 2016, reaching 43 percent of organisations overall. But the primary justification for doing so is focused on maintaining the bunker – improving efficiencies, cost savings and enhanced asset utilisation (52 percent of total); versus the externally facing IoT benefits of enhancing customer experience or increasing revenue (40 percent).
Device makers are thinking small – and in doing so, they may find that the grand promises of the IoT – the proverbial pot of gold at the end of the rainbow – never materialises. That’s because the IoT is all about enabling a transformational shift in business models that will enable device makers to massively increase innovation, revenue streams and profits – but only if they think big, and plan accordingly.
Don’t get me wrong – cutting costs, improving efficiencies and streamlining operations is essential to any business. That’s how you stay lean, agile and competitive. But that’s not how you dominate your industry and leave your competitors behind in your wake.
Let’s take a look at one undisputed leader in the IoT space – Tesla. Selling into a crowded conventional, hybrid and electric automobile marketplace, Tesla arguably sells one of the most expensive automobiles in its class – and people are lining up to buy one. How is Tesla accomplishing this feat? Not by being the best cost-cutter. But by embracing the innovation side of the IoT – building their business model around the IoT "magic formula" and aggressively monetising their innovations.
The "magic" formula for profiting from the IoT is simple: Hardware Platform + Apps + Service. This is delivered through a combination of:
– Internet-connected hardware platform
– Software applications that control features, functionality and data generated by the device, as well as services delivery; and
– Software licensing and entitlement management, which controls and manages the features, functions, data and services a customer has paid for and can access.
This model creates tremendous opportunities for innovation – turning the device into a services platform upon which myriad products and services can be sold. It also creates tremendous new revenue streams (and profits) that would have been previously impossible.
Let’s look again at how Tesla leapfrogged its competition by taking advantage of the IoT "magic formula." Under the old 20th century paradigm, an automobile was defined by the physical object purchased on the showroom floor. The buyer had a set of needs, identified the vehicle that fulfilled those needs – and made a purchase. T
hat’s where the manufacturer’s revenue opportunity ended – until the car needed replacement and a new buying cycle commenced. There were few to no opportunities to stay in touch with the buyer, understand their evolving needs, and deliver new products and services to that same buyer. And that 20th century model is where most manufacturers still are – as the Gartner report points out.
But look what Tesla just did. A few months ago it announced that for $2500 it was allowing customers to download a software update that would upgrade their existing automobile with an autopilot feature. All customers needed to do was to pay the fee, and the new software enabling autonomous driving capabilities would be downloaded wirelessly while the car sits in the garage. The next time the owner uses the vehicle – it will be a different product, delivering an enhanced experience aligned to the owner’s evolving needs. And by delighting customers in this way – Tesla just added an additional $2500 to its revenue stream from that vehicle.
What Tesla has done is what every device manufacturer – especially those selling in the Industrial IoT markets – must do in order to truly cash in from the IoT. Tesla has aligned its business model around the IoT magic formula by:
1. Re-thinking product packaging and business models based on how customers want to use the combined products, related apps and services.
2. Tracking and managing which products and services have been purchased. Through the power of a software-driven, licensing centric business model, any device can be configured differently based on individual needs. The only way this is possible is if manufacturers license those specific features, functionality and services, and track which customers are entitled to them based on what was purchased – say via an owner portal. This makes it easy to modify the device according to evolving demands, and get paid for doing so.
3. Automating the entire app, device platform and entitlement lifecycles. These lifecycle processes include: app installation and activation; subscription management; firmware and app updates; device platform provisioning, configuration management, device monitoring and remote management; app upgrades and other changes to entitlements.
Once aligned around this business paradigm – device makers will be prepared to truly profit from the IoT, deliver stunning innovation to their customers, and breaking free from the commoditisation spiral in which they are now imprisoned.
Oh, and one other thing – this paradigm also creates powerful efficiencies and cost-cutting results that enable companies to run lean and agile. But more on that topic for another day….