The Race to Capture IoT Value

The Internet of Things (IoT) involves many elements, one of the foremost being the optimization of machine performance. The technology stack is becoming increasingly straightforward. The more interesting question is how to capture the associated financial value. Or more importantly… who is going to capture the value delivered by the digitization of equipment?

This is evolving in different ways in every industry, and it is useful to examine this question under the lens of three categories of stakeholders: Machine Manufacturers, Machine Servicers, and Machine Operators.

Let’s consider an example: an MRI Machine Manufacturer (Philips, GE, etc) sells a bunch of MRI machines to an Operator of hospitals (HCA, Northwell, etc). Instead of using the maintenance package provided by the Manufacturer, the hospital network uses a third party Servicer that provides these services for cheaper with better service level agreements (SLAs) than the Manufacturer. This is a common scenario across all industries.

Now let’s examine this example through the application of IoT technologies, and it will be clear that some entities will capture more of the available gains than others…

Suppose the hospital network Operator has a slick engineering department that develops a novel sensor & AI solution for optimizing the uptime of the MRI machines. The Operator can now improve the reliability of its operations, and service the machines on its own. The Operator terminates the contract with the third-party Servicer, and never considers buying the maintenance package from the Manufacturer. Operator productivity goes up, cost line goes down, and it decreases the reliance on external entities – the Operator has thus captured the value.

Suppose the Manufacturer is instead the first one to develop the killer IoT package for monitoring the machines. The Manufacturer can now provide a cheaper cost of service, since it reduces truck-rolls and lays off a portion of the service org. The Manufacturer can now displace the third-party Servicer based on cost and performance, it locks in the service contract from the Operator, as well as all the remaining after-market revenue. As the Manufacturer gathers more data, the analytics models get better, and the ability to deliver uptime and cost savings keeps improving, thus winning more business for this IoT package – the Manufacturer has captured the value (the Operator got a little, too, since the reliability of their machines increased while cost of service decreased).

Suppose the Servicer is instead the one that develops a unique model around machine monitoring and maintenance. The Servicer keeps the original maintenance contract, and meanwhile expands its footprint servicing the machines from the Manufacturer (for other Operators beyond the original hospital network). The Servicer becomes so good with these specific MRI machines that the Servicer can now provide an “as-a-service” model for maintenance and parts service. The Servicer’s channel to the Operators becomes so strong that the Manufacturer has to sell replacement parts at wholesale to the Servicer, which the Servicer then marks up for a profit – the Servicer has captured the value (even more value than it had originally).

This example was an oversimplification, and most value chains (including healthcare equipment) are more complex than this. The above example left out entities like design/engineering firms, distributors, VARS, integrators, etc. Let’s demonstrate how much more complex this could get with a breakdown of the building construction industry…

In many cases, Manufacturers are quite distant from Operators in building construction. Let’s consider the steps between the HVAC equipment Manufacturer and the building Operator. This can take many forms, but let’s consider the building owner to be the final Operator and end-user – although not necessarily the customer, as you’ll see…

The building owner may hire an architectural design firm to design the building. Then the owner may bring in a general contractor to execute the construction of the building. The general contractor may bring in sub-contractors to perform individual aspects of the construction. The sub-contractors may buy their building components from distributors. And this entire value chain may be littered with consultants. Going forward, let’s call all of the entities “Middlemen”.

In this example, any of the Middlemen in this value chain may spec and purchase the HVAC system, hence they are the customer (or perhaps just the “buyer”), but not the Operator. The HVAC Manufacturer needs to provide multiple value propositions across this value chain in order to differentiate and win business with an IoT solution – and at the end of the day there will still be the original notion of the Servicer and Operator competing to capture value once the building is commissioned.

We could go on for days with examples of how this plays out in different industry value chains, but let’s hone in on the key takeaways: Equipment Manufacturers need to market their IoT/digital solutions across the entire potential customer value chain – this includes enablers/drivers for any essential Middlemen, followed by unique value propositions for the end-user Operators.

In many industries, the Manufacturers never have direct relationships with the Operators, and only do business with the Middlemen – in these industries, IoT solutions are enabling Manufacturers to have direct relationships with end customers for the first time. But it’s tough to bypass the existing channels, so initially Manufacturers must somehow enable the Middlemen to make more money from their customers (Operators), and this is how they win. Furthermore, all of this must be accomplished while simultaneously displacing additional third-party Servicers that might come to market with competitive solutions.

And so where does this leave the IoT and digital technology solution vendors? To succeed, these tech vendors need to understand the intricacies of the value chains where they intend to play. A successful technology in this realm is dependent on the ability to deliver value to at least one of the key stakeholders (Manufacturer, Middlemen, Servicer, or Operator) – while simultaneously stealing value from the other stakeholders!

A uniquely disruptive solution could perhaps deliver value to ALL of these stakeholders, but I don’t think we live in a world where that can happen – at the end of the day, this is a zero-sum game (or close to it), and it’s a race to determine who will win in each value chain.

Isaac Brown / VP @ Landmark Ventures