Impact of Internet of Things on Business Models

My last article was on business models for the IoT players. In this article, I will discuss about the impact of IoT on the business models across organizations

Internet of Things (IoT) is being touted as next big thing after Internet itself. I came across an article from McKinsey that talks about IoT can generate up to $3.9 trillion to $11.1 trillion a year in terms of economic value by 2025 if the companies and policy makers get it right. The stakes here are really big and makes me wonder how can the organizations gain from opportunity. A large part of the benefit would come from the efficiency and cost reduction across industries but to be able to fully realize the potential, there is a need to change the business models in the target companies. IoT implementation should not be looked as an IT implementation but as a business decision where the fundamental changes would be made to way of working and the value proposition to the customer/consumer.

I have developed a framework on the future business models enabled by IoT (refer to the chart below). 

With IoT, the organizations would be seamlessly connected, generating enormous data that could lead to fundamentally different business models. This data if used correctly will provide insights that would enable changes to the value proposition to customers  in a way that was not feasible earlier. The data & insights enables to convert many of the existing business models to "as-a-service" business model. The service as a business model would lead to increased productivity and usage of assets. The connected cars tomorrow can lead to car sharing thereby increasing the utilization from daily an hour today to 3-4 hours daily. Would everyone own a car? I don't think so but many more would be able to utilize the services of the car. Do I need to own parking space if I own a car? Think about it.

One might argue that the connected supply chain or organizations have been there since the time of large scale ERP implementations. However, the difference in this wave is the focus on analytics. It’s the ability to securely connect high-value legacy infrastructure with cloud-based analytics, to enable machine learning, predictive analytics and real time analysis that is driving the large scale change in business models delivering the promised economic value of trillions of dollars. The value of IoT is in the analytics which enables taking decisions and actions in ways like never before.

I believe that with IoT, the we are likely to experience emergence many new business models and below are some of the key business models that are already beginning to impact:

Product-as-a-Service

With IoT, it would be possible to collect and analyze actual usage of the product leading to a business model of leasing products instead of outright selling it. Product-as-a-Service combines physical products, accompanying services and monitoring software to enable new offerings where the buyer may no longer own a physical thing—the product is delivered as a service. Instead of a one-time transaction the customer subscribes to the product and pays a recurring fee. The high cost of capital required up front for complex products and the cost of ongoing operations/maintenance, including the skilled resources, would force companies to adopt the "product as a service" model. This model would also be about being responsive to consumer needs and weeding out inefficiencies from the system.

IDC projects that by 2018, 40% of the top 100 discrete manufacturers will rely on connected products to provide product as a service. Forward-thinking manufacturers are already beginning to deliver innovative services, such as assisted operations and ongoing maintenance supported by IoT. There are many examples where companies are already working towards Product-as-a-Service. Rolls-Royce’s pioneering “power-by-the-hour” model, in which airlines pay for the time jet engines are used in flight, rather than a fixed price plus charges for maintenance and repairs. Another example is Michelin's fleet management solution whereby truck tires are sold per kilometer driven. Atlas Copco has a Contract Air service, whereby air compressors are sold per m3 of compressed air delivered.

Data-as-a-Service

IoT is enabling organizations to get into services that were not possible earlier. I am defining "Data-as-a-service" as providing data on a regular basis to the consumer/customer to enhance the utility of the product sold or in other words, converting the revenue stream from one time transaction to recurring revenue streams. The theme of recurring revenues is the same as Product-as-a-Service but here the data is resulting in the recurring revenues instead of the leasing a physical asset. It is important to make a distinction here with the more popular definition of Data as a service which is about big data analytics being outsourced. I am not referring to outsourcing of data and analytics.

Selling tractors for John Deere has long been a one time transaction. Once the tractor is sold to the farmer, they provided only the service support. Since 2012, they have added data connectivity to their equipment giving farmers information about which crop to plan, where and when to plow and even the best route to take while plowing. They are essentially now in the the business of selling data as much as they are selling tractors.

Fitness bands have started to provide trainer/coach who work on the data captured by the band to create a personalized fitness regime. This is a fantastic way of having subscription revenue instead of once time device sales revenue. A few companies have started to build the cost of the device in the service cost itself as this model is turning out to be more profitable in terms of customer lifetime value.

Process-as-a-Service

IoT allows the organizations to monitor the process at customer's end thereby providing better support and maintenance. I am calling this business model as Process-as-a-service. In a connected world, products are no longer one-and-done. Thanks to over-the-air updates, new features and functionality can be pushed to the customer on a regular basis. The ability to track products in use makes it possible to respond to customer behavior. And of course, products can now be connected with other products, leading to new analytics and new services for more effective forecasting, process optimization, and customer service experiences. End-to-end process delivery will become standard. Business services teams will be able to design and drive end-to-end processes.

Providing after sales support is a key part of the value proposition for many organizations. Today, all cars have a fixed maintenance schedule (e.g. once in a year) irrespective of the need. In some cases, the cars can run longer than a year without the need for changing the filter oil while in other cases, the service might be required to be done before one year. If the cars are connected and the vital parameters can be tracked then there is no need to have a fixed schedule. The car can be called for servicing as and when the vital parameters show that it needs servicing. Similarly, if all the lifts are connected to the manufacturer then the maintenance can be provided as and when needed instead of a fixed schedule. In these examples, the after sales process has been converted to process-as-a-service.

Parting Words

The new business models would continue to evolve and many more would come as the technology moves beyond the hype. The business models described above would not be mutually exclusive and c0mbination of all three are likely to be at play in the same organization. It is clear that the "As-a-Service" will be the predominant business model of the future.

Consider this curious example is that of Tesla. Tesla does over the air (OTA) updates for its cars to enhance consumer experience. The company was facing a lot of flak for fire in their S model due to lower ground clearance. Tesla managed to resolve the issue with OTA update thereby increasing the ground clearance in certain scenarios without a product recall. We are used to getting OTA updates on mobile phones that increases the features on the phone but now Tesla is using OTA to improve the features of the car without hardware change. Now, is this product as a service or process as a service?

The views expressed in this article are my personal views and do not reflect the views of my employer. More of my articles can be found at my blog Telecom Circle