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Monetizing the Internet of Things:Extracting Value from the ConnectivityOpportunity

Why is it So Hard to Monetize the Internetof Things?Cisco estimates thatIoT has the potential togenerate about 19 trillionof value over the comingyears.Connectivity is not something that is confinedto humans. In fact, the number of connecteddevices has long surpassed the number ofhumans on the planet. And this machineto-machine connectivity is not limited toa select group of super-smart devices.Every-day objects now have sensors whosecapabilities might vary. This fundamental shiftis leading to an Internet that is far grander inscale and opportunity than we previouslyimagined. In fact, Cisco has estimated thatthis Internet of Things (IoT) has the potentialto generate about 19 trillion of value overthe coming years1.The staggering potential size-of-the-prize hascertainly caught the attention of the world’sbusiness community. In a recent survey ofsenior business leaders around the globe,96% said their companies would be usingIoT in some way within the next 3 years,while 68% said their companies are alreadyinvesting budgets in IoT2. However, there isa catch to all of this – most organizationsare yet to derive significant commercialvalue from IoT. Our recent research showsthat 70% of organizations do not generateservice revenues from their IoT solutions(see our report “The Internet of Things: AreOrganizations Ready for a Multi-Trillion DollarPrize?”, 2014)3.We have looked at why organizations arefalling short in monetizing the IoT, and seea combination of external and internalchallenges (see Figure 1). But there is acatch. Over 70% oforganizations do notgenerate service revenuesfrom their IoT solutions.Figure 1: Monetization Challenges for the IoTSecurity andPrivacy ConcernsHinder ConsumerAdoptionKey IoTMonetizationChallengesLack ofStandardsLimits RevenuePotentialSource: Capgemini Consulting analysis2SuccessfulMonetizationDemands SignificantInvestments in AcquiringNew Capabilities,Often without Clear Returns

Security and Privacy ConcernsHinder Consumer AdoptionLack of Standards Limits RevenuePotentialThe IoT creates an intertwined meshof systems and devices, which hugelycomplicates issues of information security.“Hacks” or attacks can happen at multiplelevels. They might be targeted at the deviceitself, or they can be carried out over thecommunication network over which thedata is transferred. The recent example ofa “hacked refrigerator” highlights both thenascent nature of this sphere of technologyand the significant security issues. As partof a large-scale hack attack over a numberof weeks, more than 750,000 maliciousemails were sent from more than 100,000everyday consumer devices, including –astonishingly – one report of a refrigerator4.Customers today are increasingly awareof these sorts of dangers. A recent surveyshowed that 69% of respondents wereconcerned that a connected appliancecould result in data breach of sensitiveinformation5. These issues are a significantchallenge to the consumer adoption of IoTofferings.IoT solutions deliver the most value whenthey are connected to a web of interlinkedservices. For instance, a smart homesolution can deliver significant value onlywhen it integrates the electrical, safetyand surveillance systems. However,our research indicates that only 13%of organizations offer IoT solutions thatintegrate with third-party products andservices (see our report “The Internet ofThings: Are Organizations Ready for aMulti-Trillion Dollar Prize?”, 2014)6. Thisprevents companies from tapping into alarger ecosystem of products and services,and significantly limits revenue enhancementopportunities. Unless standards are agreedupon – spanning industries, vendors andproducts – the potential of the IoT will remainunder-exploited.A recent survey indicatedthat 69% of respondentswere concerned that aconnected appliance couldresult in data breach ofsensitive information.Successful Monetization DemandsSignificant Investments in AcquiringNew Capabilities, Often withoutClear ReturnsMost product-centric organizationsneed to make significant investmentsin acquiring new functional capabilities,before they can sell IoT-based services.For instance, organizations need toaugment their product managementcapabilities with the skills needed todevelop and market services. Moreover,since connectivity reduces the time lagbetween the occurrence of an event andthe time taken for information to reachthe support center, customers are alsolikely to expect faster response times.As such, specialized customer supportteams need to be set up to respondrapidly to customer queries in real-time.Acquiring and building these additionalcapabilities entail significant effort andinvestment, often without a clear returnon investment in the short-term. Thesefactors delay monetization efforts.96% of companies willbe using IoT in some waywithin the next threeyears.It is pertinent to note that these are veryearly days in what is still a very fastdeveloping and immature marketplace.We have tried to capture some initialobservations on monetization in thecoming sections.Only 13% oforganizations offer IoTsolutions that integratewith third-party productsand services.3

How Can Organizations Profit from the IoT?On the conventional Internet, many ofthe current leading players have seentwo broad phases – phase 1 where theyfocused on traction, and a second phasewhere they focused on monetization.On the Internet of Things though, moststartups and incumbents are activelylooking at monetization models rightfrom the start. While these are still earlydays, there are four distinct models thatare emerging (see Figure 2).Product Selling is an Organization’sEntry into the IoT World“Hardware Premium” is the most basicform of monetization model. Here,organizations add connectivity optionsto an existing or new product and offerremote device management in theform of mobile apps. This basic levelof connectivity and control enablesorganizations to charge a premium fortheir product.An example of this model is LIFX (seeFigure 3), which produces remotelyprogrammable LED light bulbs that canbe controlled through a smart-phoneapp. These bulbs are sold at a premium,and are priced around 10 times higherthan a compact fluorescent bulb7.Product selling is anorganization’s entry intothe IoT world.From a consumer perspective, a keydriver for buying hardware premiumproducts is the novelty factor involved incontrolling hitherto standalone devices.Figure 2: Monetization Models for the IoTEcosystem BuildingSimplest model whereorganizations charge aprice-premium for theproduct’s connected featuresEx: LIFX, a remotelyprogrammable LED light bulbcontrolled by a smartphone appCollaborativeServiceRevenueRelationalHardware PremiumRelationship with CustomerEx: SmartThings sells itsown products and serviceswhile creating a platform forother IoT companies to sellservices that interlink with itIn this model, organizationsconvert what has been atraditional product into aservice by tying in a recurringpricing model for specific featuresDataRevenueIn this model organizationsgenerate revenues by sellingpackaged data gathered fromsensorsHardwarePremiumEx: Michelin Solutions packagesinsights generated from the datathat it gathers through sensorsembedded inside customer vehiclesBasicAdvancedComplexity of IoT Monetization ModelSource: Capgemini Consulting analysis4Ex: Volkswagen’s “Car-Net”service offers security features,maintenance assistance andnavigation tools for a setsubscription feeData RevenueTransactionalIn this model, organizationscreate a platform where theyideally make money from bothother product vendors andend consumersService RevenueEcosystemBuilding

Figure 3: LIFX Bulb and Smartphone AppService Bundling GeneratesRecurring Revenues through LongTerm Customer RelationshipsThe service model offers a recurringrevenue stream and, more importantly,creates a relationship with the customerlong after they have purchased aproduct.For example, Volkswagen’s “Car-Net” serviceoffers security features, maintenance assistance,and navigation tools for its customers fora subscription fee of 17.99/month and 199/year (see Figure 4). Customers canalso select from several features – forexample, automatic crash notificationscan be sent to chosen contacts whenairbags are deployed in the vehicle8.Source: Apple App Store listing of LIFX appFigure 4: Volkswagen’s Car-Net ServiceSimilarly, in the B2B segment, smartthermostat manufacturer Nest is using itsLearning Thermostat — a home automationand energy management product — asa platform to offer energy managementservices to utilities. Nest charges utilities 30to 50 per thermostat annually for its service.As part of the service, Nest helps utilitiesbetter understand their customers’ energyusage. Nest automatically reschedulesusage of equipment with high electricityconsumption such as air conditioners. Bydoing so, it has been able to reduce overallelectricity requirement by as much as 50%in peak times thus saving significant moneyfor utilities. Nest is currently installed in over 1million homes and close to 20 utilities havesigned up for the service9.Service bundling enablesorganizations to createlong-term relationshipswith the customer.Source: Company website5