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Your Internet of Things (IoT) Business Model

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A business model is how you generate revenue and profit. It has now moved to a point where services are a major source of revenue. But another change has occurred, software is more important and hardware has become less relevant. The next change in business models will be stimulated by the network that interconnects the billions of IoT devices.

Traditional business models focus on the sale of an item with little revenue following the sale except for maintenance. The maintenance was usually an on-call service without real time monitoring. Producers of the devices will still follow this business model. However this model does not produce a high profit margin especially in very competitive markets. The services market for the devices can produce considerably more profit than what is produced by the original device sale.

Think of you printer. Printers are cheap. It is the ink cartridges that cost a lot but are relatively cheap to produce. The profit is in the ink, not the printer. The iPod was cheap. The profit was in the sale of the music services.

Let’s take this thought process further. Assume you produce an IoT device for another business. This device probably runs with no human attendance. You incorporate sensors throughout the device and then connect these sensors to the Internet. You can offer your customer a continuous monitoring service that can measure the effectiveness and efficiency of the device in real time. You can then offer a service where the device can initiate its own call for maintenance, change its operation to avoid failure, or operate when utility rates are lower thereby reducing the customer’s operating costs. The cloud is a great place to connect the IoT devices to this service.

The devices need not be expensive systems. They could small appliances that are used by business as part of their operation. Offering a service that includes the small less expensive devices in a package offloads the service function from the business’s staff at a lower cost. This would be even more attractive if the devices are scattered geographically and normally unattended.

We know the consumer Internet. Now we have the industrial Internet. This would include a range of services for mechanical and plant engineering. Manufacturing the device does not produce the highest profit margin. Servicing that device over the Internet can deliver considerably higher profits. Keeping track of the customer’s devices can also help the producer in product management, sales planning, and production. So while generating profits, service can also deliver information that makes the producer more efficient and respond faster to usage and market changes.

The device producer already is an incumbent with the customer. Since they are already a customer, the delivery of services offers leverage for the producer so that it can deliver a rich set of extra features as part of the monitoring and service agreements.

A major conclusion is that the device producers have to either create software divisions to deliver the services or work with a third party to create the services. In either case, a cloud service is most likely. I think the larger producers should change their profit models to reflect the growing service model. They may even deliver the devices at a low cost, nearly no profit, and generate the profit through the service agreements. The value of the service agreement is the continuous and predictable revenue stream for the device producer.

We have the Internet. What we need is standards for the wide range of devices that will be connected. If there are proprietary devices, then the producer of the devices is the only one who can deliver the monitoring service which will probably cost more than if multiple monitoring companies compete. I also wonder whether the information collected will be used for legal purposes such as meeting SLAs or in court cases. This adds a dimension of accuracy and information storage and collection that the IoT service provider may not be prepared to offer. 

I also wonder about the service itself. Let’s go back to the printer. My printers notify me when they need ink cartridge replacement. It turns out this is not correct. I can run the printers satisfactorily for a while before I really need to replace the cartridge. The indicator is a false signal. If a company includes the cost of the replacement in their agreement I am happy. If however, the cost to replace components like the cartridges is an extra cost, then the incentive for the service provider is to push me into purchasing ink cartridges before I really need them. I think I can trust the service providers to collect the monitoring information. Can I trust the conclusions they draw from the monitored data? It will depend on the overall service agreement of who pays for what.




Edited by Maurice Nagle
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