Download a free copy of “Building a Hardware Business,” a curated collection of chapters from our IoT library. Editor’s note: this post is an excerpt from “Enterprise IoT: Strategies and Best Practices for Connected Products and Services,” by Dirk Slama, Frank Puhlmann, Jim Morrish, and Rishi M. Bhatnagar, which is included in the curated collection.If you did a Google search for “IoT” in 2012, the top results would have included “Illuminates of Thanateros” and “International Oceanic Travel Organization.” A search for “Internet of Things” would have produced a results page with a list of academic papers at the top, but with no advertisements — a strong indicator, if ever there was one, that in 2012, few people spent marketing dollars on the IoT. Two years on, and this had changed dramatically. In 2014, the IoT was one of the most hyped buzzwords in the IT industry. IT analysts everywhere tried to outdo each other’s growth projections for 2020, from Cisco’s 50 billion connected devices to Gartner’s economic value add of $1.9 trillion.
Until we have reached this point in the future, no one can tell just how realistic these predictions are. However, the excitement generated around these growth numbers is significant, not least because it highlights a general industry trend, while also creating a self-fulfilling prophecy of sorts. We saw something similar happening with the auctioning of new mobile spectrum in the early 2000s. Literally billions were invested in the mobile Internet. And although it took longer than expected (remember the WAP protocol?), the mobile Internet eventually took off with the launch of Apple’s iPhone, and has since exceeded market expectations.
Meanwhile, Google — another major player in the mobile Internet sphere — has bet heavily on the IoT with its acquisition of Nest and Nest’s subsequent acquisition of DropCam. 2014 also saw many large IT vendors, such as PTC with its acquisitions of ThingWorx and Axeda, pushing themselves into pole position in the race for IoT supremacy. On the industry side of things, many central European manufacturers and engineering companies rallied around the Industry 4.0 initiative, which promotes the use of IoT concepts in manufacturing. GE heavily promoted the Industrial Internet and spearheaded the establishment of the Industrial Internet Consortium. Many industrial companies began implementing IT strategies and launching IoT pilot programs. And slowly, the first real results emerged.
Thus, at the time of writing, it seems that the final verdict on the significance of the IoT is still out. However, it looks as though industry is determined to seize the opportunities promised by the IoT. The authors of this book believe that the IoT (or whatever it will be called five to 10 years from now) will become as fundamental as the Internet itself. It took the Internet about 25 years to become as ubiquitous as television and the telephone system, and to transform a large number of industries. The situation in 2014 is reminiscent of the climate in the early 1990s, when we had our first exposure to Mosaic and later Netscape, and the promises they stood for. Just think what a long way we have come since then, and where we stand with the IoT at the present time.
Customer perspective: Value-added services
From the customer’s point of view, the main benefit offered by the IoT will be new services enabled by connected products and (potentially) back-end services based on big data. Within different ecosystems (we call them Subnets of Things, or SoTs), assets (or devices that are part of an asset) are connected to a cloud or enterprise back end. New services are emerging with software running both on the asset and in the back end. For example, the Connected Horizon is a technology that has been developed by Bosch. It provides a back end that combines traditional map data with additional data, such as traffic signs and road conditions, and then uses this data in the car to provide the driver and the vehicle’s various control devices with important advance information that enables safer driving. This is a good example of an SoT that already integrates a multitude of devices and external data sources. Integration between different SoTs can occur at multiple levels. Assets can communicate with each other directly, for instance in Car2Car, Car2X, etc. Alternatively, integration can take place in the back end, with examples such as Cloud2Cloud, Cloud2Enterprise, and so on.
For the end user, the advantages are value-added services based on connected assets and devices. Big data can provide contextual information, as seen in the Connected Horizon example. Furthermore, big data analytics can be used to initiate additional customer services, such as recommendations based on customer profile and current location. There is no shortage of ideas for new business models based on these new technological capabilities.
Manufacturer perspective: Connected asset lifecycle management
From the manufacturer’s point of view, the potential impact of the IoT is equally as vast. Most manufacturers today hear very little about their products once they leave the factory. In fact, this was traditionally seen as the best possible outcome, the most likely alternative being a costly product recall. The ability to connect (almost) any kind of product to the IoT has the potential to fundamentally transform the value chain of product manufacturers. The traditionally disconnected asset lifecycle will become a fully connected asset lifecycle.
As we discuss throughout this book, the capabilities provided by the IoT require a new appraisal of product design. How can new products leverage these new capabilities? How can value-added IoT services be created based on existing physical products? How can data received from connected products be used to optimize product design? How can we reconcile the different development times typically found in the worlds of physical products and software services? How can we align diverging development models — for instance, a waterfall model for physical products and an agile model for software services?
New real-time and long-term analytics of usage data from connected products on the demands and behavior of product users will also have a dramatic impact on sales and marketing, as it provides new insights into usage patterns and value creation. Moreover, the IoT also has the potential to fundamentally change business models and value propositions, by moving from an asset-centric transactional sales model to a relationship-oriented service model, for example. In turn, this will require new organizational capabilities in sales and marketing. More than anything else, the combination of physical products and digital services has the potential to generate significant revenue after the sale of the initial product or service. Consider, for example, a service that allows the customer to upgrade their car’s engine performance for a weekend trip by temporarily reconfiguring the engine software.
Servitization: The next logical step?
Taking things one step further, many people in the IoT community see “servitization” as the next logical progression in the evolution of the IoT. The concept of servitization has been around since the late 1980s, but is currently experiencing a boost thanks to new capabilities such as connected asset lifecycle management. The basic idea of servitization is that manufacturers move from a model based on selling assets toward a model in which they offer a service that utilizes those assets. For example, Hilti offers a service that guarantees customers access to required power tool capabilities for as long as they are needed, wherever they are needed. The monthly fee — which includes costs for tool provisioning, service, and repairs — makes financial planning much easier for customers. Similarly, Rolls-Royce, GE, and Pratt & Whitney offer aircraft engines as a service (for a fixed rate per flying hour). One immediate benefit of such models for customers is that instead of earning money for each repair, suppliers are now highly incentivized to reduce the need for repairs because they have to carry the costs themselves. And fewer repairs means greater uptime for customers. In addition, the customer can focus on their core competencies, such as running an airline. Finally, a recent study shows that servitization customers are reducing costs by up to 25-30%.
However, servitization does not come for free. Many manufacturers are focusing on product features and capabilities instead of taking a customer perspective focused on outcomes. Instead of focusing on products, the focal point of servitization must be solutions. Instead of emphasizing output, suppliers need to take a customer perspective and think about results. Single sales transactions are converted into long-standing customer relationships. All this requires numerous changes — from strategy and business models to technologies and organizational setup.
Prerequisite: Operator approach
All of the approaches discussed above — from connected asset lifecycle management to servitization — have a common prerequisite: manufacturers must adopt an operator approach in order to implement them successfully. This is something that should not be underestimated because it requires a completely different infrastructure, organizational setup, and set of processes from those found in a traditional manufacturing business. Operating an IoT-based service is not just a technical challenge; operational considerations can go far beyond the operation of an IT service infrastructure. An example is provided by the real-time car-sharing services that we will discuss in the next section. These services need an efficient fleet management process and service structure, which a manufacturer may not be able to establish and operate alone. For instance, it is no coincidence that BMW set up a joint venture with car rental company Sixt to operate the DriveNow service. It is clear that BMW is relying on Sixt’s experience in operating a very large fleet of rental cars and car rental stations, and in managing customer relationships. For companies striving to conquer the IoT, it will be vital to learn from these kinds of examples in their transition toward becoming service operators.
Impact: Disruption versus evolution
We believe that the IoT has the potential to disrupt many industries in the future, just as the Internet did over the last few decades. Take as an example real-time car-sharing services. A number of companies such as DriveNow, Car2Go, and ZipCar are now offering customers real-time car-sharing services. Instead of owning a car, customers can simply locate and reserve the nearest available car using an app on their smartphone, open the car with a chip card, use a specialized on-board unit in the car to manage the rental process, and simply lock and leave the car once they have reached their destination. Currently, these services are mainly limited to urban areas. However, with many young urban consumers no longer viewing a car as the ultimate status symbol, these kinds of services are becoming increasingly popular and have the potential to transform the entire automotive industry over the coming decades.
Another potential disruptive aspect of the IoT concerns data-driven business models in formerly asset-centric business areas. Google’s Nest giving away thermostats for free, and then earning money by means of house owners’ behavior profiles, would be one example. Another scenario goes back to the example of car-sharing. Imagine your service provider offering you 50% off the cost of a ride if you agree to listen to targeted advertisements while you drive. Combining your customer profile data with location-based information could be very attractive for local businesses eager to target you with special offers. In fact, this could even develop to the point where your local mall offers to sponsor your ride entirely, provided you use the car to drive to that specific mall. If we then add autonomous driving to the mix, the automotive industry will be changed beyond recognition, as it will truly have transformed into a transportation business.
Not all use cases supported by the IoT are necessarily disruptive. Many companies today are looking at more evolutionary use cases — including Remote Condition Monitoring (RCM), remote maintenance, and predictive maintenance as well as highly specialized service add-ons for existing assets, such as the eCall Service, which notifies emergency services in the event of a car accident. The important and potentially huge impact that these more evolutionary IoT-based servitization use cases will have on existing organizational structures should not be underestimated. Transforming a large service and support organization to make efficient use of remote services, such as remote condition monitoring and remote maintenance, will unquestionably require significant organizational change, and it may well take a number of years before the positive effects of these new capabilities are fully leveraged.
Critical: Security and data privacy
The excitement surrounding digital models of the physical world, including the collection of new customer usage data and product data, also creates concerns for many users — and rightly so. Security is one such concern. Not only do we need to ensure that all of this “big” data in the back end is managed in a secure fashion, in a distributed environment such as the IoT, we need to secure the connections between the different participants as well as the hardware and software running on the assets. Stuxnet and the hacking of the Tesla Model S electric car by Chinese students in 2014 illustrate just how important this issue will become. Imagine a hostage situation where criminals hacked into a pacemaker or seized control of an aircraft in flight.
The other side of the equation is less concerned with external intruders and hackers, and more focused on the corporate policies and governance processes regulating the newly obtained customer and product data. One aspect here is compliance with regulatory and legal requirements in different countries. Another aspect is transparency and respect for customer rights and preferences. Many users rely on social networking services such as Facebook and LinkedIn to use their social media data to generate relevant updates and recommendations. However, these same users are frequently frustrated by the complex and ever-changing data usage policies enforced by such companies.
Given the nature of the data that could potentially be acquired by IoT solutions — not just social data submitted more or less voluntarily, but data captured by possibly hidden sensors and vital systems — it will be absolutely essential for the IoT industry to handle security and data privacy efficiently. Otherwise, there is a huge risk that customers will not accept these new IoT solutions out of fear of an Orwellian dystopia.
Timing: Why now?
Finally, many people ask: why now? We have been waiting for hockey-stick growth curves in the M2M market for nearly a decade; why is the IoT taking off now? The answer to this question has partly to do with momentum, partly with business models, and partly with technology. In 2014, we could see that the IoT had gathered a momentum not shared by M2M. Business magazines like Forbes and Der Spiegel dedicated lengthy articles to the topic, creating a high level of visibility. Many large businesses have now instructed their strategy departments to devise IoT-based business models — even if we are still in the learning phase in this respect. Initial business successes can be seen, with examples such as ZipCar, DriveNow, and Car2Go. Most large IT players now offer dedicated IoT implementation services, IoT middleware, or IoT hardware (or a combination of all three). Finally, a combination of different technologies seems to have reached a point where managing the complexity of IoT solutions has now become more feasible and cost-efficient:
- Moore’s Law: Ever-increasing hardware performance enables new levels of abstraction in the embedded space, which provides the basis for semantically rich embedded applications and the decoupling of on-asset hardware and software life cycles. The app revolution for smartphones will soon be replicated in the embedded space.
- Wireless technology: From ZigBee to Bluetooth LE, and from LTE/4G to specialized Low-Power Wide-Area (LPWA) IoT communication networks — the foundation for “always-on” assets and devices is either already available or in the process of being put in place.
- Metcalfe’s Law: Information and its value grow exponentially as the number of nodes connected to the IoT increases. With more and more remote assets being connected, it looks like we are reaching a tipping point.
- Battery technology: Ever-improving battery quality enables new business models, from electric vehicles to battery-powered beacons.
- Sensor technology: Ever-smaller and more energy-efficient sensors integrated into multi-axis sensors and sensor clusters, an increasing number of which are pre-installed in devices and assets.
- Big data: Technology that is able to ingest, process, and analyze the massive amounts of sensor-generated data at affordable cost.
- The cloud: The scalable, global platform that delivers data-centric services to enable new IoT business models.
While nobody knows for sure exactly how many billions of devices will be connected by 2020, it looks as though the technical foundation for this growth is maturing rapidly, inspiring new business models, and making this an extremely exciting space to work in.