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The Internet of Things Will Change Your Business Model

The Internet of Things (IoT) goes well beyond human Internet users. Some predict that by 2015, not only will 75% of the world population have access to the Internet, so will 6+ billion devices.

Traditional business models focused on the sale of an item, with post-sale revenue coming from maintenance. The maintenance was usually an on-call service without real-time monitoring. Producers of many devices will still follow this business model, however this model is vulnerable to shrinking profit margins in very competitive markets. Nevertheless, the services market for the devices can produce considerably more profit than what is produced by the original device sale.

However, apart from maintenance, post-sale revenue can be generated by supplying elements that are essential to the usage of the underlying device: Think of your 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. In a similar vein, the iPod was cheap; the profit was in the sale of the music services.

Let's take this thought process further. Assume you produce a device. This device probably runs with little or no human attention. You incorporate sensors throughout the device and then connect these sensors to the Internet. Now 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 go into operation when utility rates are lower, thereby reducing the customer's operating costs. The cloud would be great place to house this service.

The devices need not be big expensive systems. They could be 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 in situations where the devices are scattered geographically and would normally be unattended. Another advantage of the cloud.

The next Internet stage that is emerging is the industrial Internet. This would include a range of services for mechanical and plant engineering. Here again, 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 manufacturer with product management, sales planning, and production. This could also include Smart Homes initiatives. So while generating profits, service delivery can also provide information that makes the producer more efficient and lets them respond faster to usage and market changes.

The device producer already is an incumbent with the customer, so the delivery of services offers leverage for the manufacturer 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 these new services, or work with a third party to create the services. In either case, a cloud service is most likely. I think the larger manufacturers should start changing 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.

A different revenue stream could be generated for, say, an auto/truck insurance company. Devices can be installed in the vehicle that can report, in real time, how the vehicle is driven. The vehicle owner can be charged a fee for the monitoring service. The monitoring service can locate the vehicle via GPS and check the vehicle's speed and driving pattern against a map. The vehicle owner could receive discounts for responsible driving while those with poor driving behavior would pay a high rate. This is better and more accurate than just measuring the average speed of a vehicle to determine the insurance rates.

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 manufacturer 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 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 usually 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.