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Monetizing the IoT

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WHITE PAPER

As businesses in all corners of the world grapple

with the Fourth Industrial Revolution and digital

transformation, it’s clear the Internet of Things

(IoT) will continue to play a fundamental role.

However, IoT is still maturing and, while initial

trials and pilot projects are proving the value

IoT apps can add, more needs to be done to

enable better IoT business models and to achieve

optimized monetization. This new report by

IoT Now with support from Flexera explores the

challenges that enterprises face in developing

business and monetization models for IoT.

Many industries, including telecommunications,

medical, manufacturing, retail and transportation

are undertaking IoT initiatives to capture their

share of the trillion dollar IoT market. Some IoT

deployments are moving beyond initial trials

to implementation and some are just getting

started. The challenge now, is how businesses

can generate revenue from these IoT initiatives.

Revenue in this case encompasses efficiency

gains, cost savings and net new IoT profits.

The vendor landscape is also transforming.

Traditional hardware manufacturers that are

looking to become IoT providers and offer

hardware, software, connectivity and services to

enterprise organizations will be presented with

a series of monetization challenges. There is

much to consider and several different business

models and approaches are emerging to take

organizations into the profitable world of large-

scale IoT offerings.

Monetizing the IoT

The Potential for the IoT Market Is Enormous

Research firm IDC’s Vernon Turner has said that, by 2025, approximately 80 billion devices will be connected to the internet. Today, about 11 billion devices connect to the internet, and IDC predicts that will nearly triple to 30 billion by 2020 before almost tripling again to hit 80 billion devices five years later.

Machina Research has projected that, between 2014 and 2024, there will be a total of US$1.3 trillion in IoT revenue available to companies that have sophisticated monetization capabilities — a significant part of the total anticipated revenue opportunity of US$4.3 trillion.

Global management consultancy McKinsey & Company estimates the wider IoT to generate between $4 trillion and $11 trillion by 2025.

In spite of these glowing prospects, there may be a disconnect between the expectation and the reality. In a recent survey, Cap Gemini Consulting uncovered that while 96% of business leaders globally said their companies would be using IoT in some way by 2017, 70% of organizations do not generate service revenues from their IoT solutions.

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Monetization For ManufacturersWhy are traditional device manufacturers transitioning to IoT offerings? Overall, the consensus among most analysts is that IoT will be the new norm. IoT is increasingly cited by management as critical to the future success of their organizations. For many traditional manufacturers, this means becoming a software and services provider to support their IoT offerings. Manufacturers are making the leap so they can:

• Grow profits by driving top line growth and recurring revenue streams — to survive in this fast paced and emerging IoT world, manufacturers need to rethink and transform their business models to create new IoT offerings through product innovation and differentiation via software, services and data. The value is no longer in the device but in the software, services and data and manufacturers that capitalize on this by offering and monetizing service models can build recurring revenue streams through subscription models as well as usage or outcome-based business models.

• Streamline manufacturing costs and operational efficiencies — in today’s highly competitive market, devices are commoditized and manufacturers are seeking ways to reduce manufacturing costs and simplify hardware production processes. Many manufacturers are adopting technology to electronically control and provision device capability and capacity while at the same time implementing remote device monitoring to streamline support and service processes. This is a baseline for success for IoT solution providers.

• Deepen relationship with customers and deliver an excellent customer experience — with software and services playing a major role in IoT offerings the requirements regarding customer experience change completely. Manufacturers, channel partners and customers alike need complete visibility into what each customer owns and is entitled to in terms of upgrades, maintenance and services — through multiple tiers of distribution.

Hardware to Software + Services transition is critical for IoT success. Manufacturers that can become more strategic and provide IoT solutions to deepen relationships with customers will be well positioned to grow profits and truly capitalize on the IoT. For many traditional manufacturers the transition to software, services and data will not be easy. This shift brings with it a whole new set of business requirements that are very different from managing a traditional hardware business. Couple that with an expectation of increased pace of IoT innovation and high customer expectations; it’s a daunting task.

Figure 1: Software monetization drives innovation

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The good news is that manufacturers of internet-connected devices are poised to reap the rewards of higher profit margins and recurring revenue streams from hardware, upgrades, applications, data and services if they can adopt processes and technology platforms to drive the transformation. Flexera has defined the ingredients of a successful formula the combination of a hardware platform, software and services, and a purpose-built software monetization platform:

• Hardware platform — This is made up of the device and its component parts.

• Software and services — These enable manufacturers to add value and achieve differentiation by utilizing SaaS, cloud and mobile apps, as well as deriving value from collecting device and software usage data for analysis. Control and provisioning of features and functionality for hardware, software and services are also part of this category.

• Software monetization platform — This encapsulates automated and secure processes for licensing, software delivery and updates as well as in-product analytics. In addition, an entitlement management system manages which device features, functions and services a customer has purchased and is entitled to and provides end customers with a self-service portal.

Manufacturers that adopt an approach that encompasses the above are poised to create tremendous opportunities for innovation and success in transitioning from a traditional manufacturer to a platform and services provider. Monetizing software and services is essential to profitability — and the ability to monetize every single product capability and capacity is key to profitability.

Figure 2: Example for an Anything-as-a-Service model - Public Safety

“ The IoT is creating a new type of software vendor for whom licensing and entitlement management (LEM) is vital to protect, differentiate and monetize their offerings. We expect that by 2020, a failure to put in place a LEM (software monetization) system will result in a 20% drop in potential revenue generated from software for device manufacturers connecting to the IoT.”

L A U R I E W U R S T E R— R E S E A R C H D I R E C TO R AT G A R T N E R

IoT offers opportunities across many industries. Some interesting use cases include:

Anything as-a-service — In this scenario, the producer started to monetize embedded and server software across an entire public safety value chain from radios and cameras to video processing and jail management. In this IoT model, the solution is delivered as a service model and priced per public safety officer per year.

Expand value with an ecosystem approach — In this scenario, a casino expanded its value within a broader ecosystem and maximised revenue per patron with software-driven gaming machines integrated with casino management software and digital signage.

Capture usage — In this use case a high-end medical device manufacturer wanted to secure per

New IoT Business and Monetization Model Use Cases

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procedure revenue and utilised metered, pay-per-use or overdraft models, to capture more revenue and make it more affordable to address variable market needs.

Monetize connected and managed devices — This example involves a medical device manufacturer that embedded software in medical infusion pumps and monetized it based on connection to EMR/EHR systems and management software.

Improve competitive position — A manufacturer that makes sensors, valves and software to monitor, track and manage the flow of oil and gas pipes started to monetize value-added software via a usage-based model. This enabled pricing flexibility

during turbulent times — such as during depressed oil prices — by aligning value to revenue model and enabling customer organisations to adopt pay-as-you-go/grow. They also monetized on optimisation, fault detection and operator training system usage runs thereby enhancing customer lifetime value.

Reduce manufactured device variants to one — A consumer electronics device manufacturer configures devices with software in order to lower manufacturing and inventory costs, turn features on and off for targeted solutions and enable field upgradeable devices.

What Should Manufacturers Ask as They Transition to IoT Offerings?While many manufacturers are familiar with software and how it interacts with their hardware, most of them are not yet experienced enough in running a software business. The idea of monetizing software, services and data as part of an IoT offering by implementing subscription, consumption models like pay-per-use, pay-for-burst, pay-for-overage as well as outcome- and value-based revenue models is foreign to most manufacturers. When you couple that with managing entitlements, sending software and firmware updates to customers electronically and collecting how customers use your products through in-product analytics, many manufacturers need help and guidance in defining a path forward.

One of the first things that traditional manufacturers need to do is to stop thinking of their products and offerings as fixed assets, a one and done mentality. They need to start thinking like a software company and service provider, one that constantly delivers new value and innovation to accommodate ever-changing customer needs. Flexera suggests the following questions for manufacturers to ask in order to formulate their digital transformation strategy:

• What do I need to run an IoT/software and services business?

• How will I protect and monetize my intellectual property (IP)?

• How do I implement a supply chain that supports hardware plus software and services?

• How do I establish predictable and recurring streams?

• What revenue model(s) should I adopt to ensure customer acceptance?

• If revenue is based on outcome/value, what metrics should I apply?

• How do I get the software to my customers to ensure timely revenue recognition?

• How do I make sure only those who purchased the software and/or a maintenance agreement get access to the right software and updates?

• How do I give my customers and channel partners 24x7 visibility into what is owned, entitled and consumed?

• How do I capture how customers are using my products and features and turn that insight into new products and services?

• How will my customer support organization need to change?

• Will I need to adjust my sales compensation plan to support my IoT initiatives?

Figure 3 — A single device, with software-controlled variants

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How to Transition from Hardware to Software + Services and IoT OfferingsThis is a multifaceted transition that involves moving from a traditional model of hardware deployment into a more flexible and agile digital lifecycle. It’s important to recognize that the transition is a journey that needs to be handled in stages in order to keep the project on track and gain results along the way. Some tips from Flexera for starting down the path to success are below:

Figure 4: The digital goods lifecycle

Understand the value of your software and create new revenue streams

• Determine the value software provides to your customers —factor in the value and cost of delivering and supporting your software offerings

• Gain visibility into margins and price your software and/or software services to be competitive and profitable

• Manage the financial implications of transitioning from a perpetual to a flexible (subscription or pay-per-use) revenue model

Harmonize architectures, design principles and development processes

• Establish common architectures and shared services for your software products and services to promote reuse, and to accelerate your development and product lifecycles

Get your software as a business model right• Standardize and streamline monetization models (concurrent,

subscription, payfor- use) and delivery models (physical distribution, electronic distribution, SaaS)

Know what your customers are entitled to and get paid for it• Establish comprehensive, full lifecycle visibility of the usage of

your software and tracking of licenses to minimize revenue leakage

• Institute entitlement and software support strategies to minimize warranty and support costs, and to maximize cost recovery opportunities

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ConclusionThe IoT train has now left the station and is well on-track to hit the projections of analyst and research firms. Perhaps this will take longer than initially expected but it is apparent that IoT is already becoming a fundamental business foundation for the Fourth Industrial Revolution and beyond.

As we have discussed in this paper, this has a huge impact on manufacturers. The shift is seismic and requires them to significantly re-engineer their business models away from a traditional model of selling hardware to selling the hardware, plus the software and apps as a service. A good example would be General Motors or Ford moving away from selling you a car and instead charging you a monthly fee for using their vehicles. The consumer could be charged on a per mile basis with add-on services such as insurance, infotainment and many others bolted-on to the service fee. The car maker continues to be in the business of making cars but the model moves from having customers make a large capital purchase every few years to one of them paying a continuous fee.

The model shift that manufacturers need to make is the same. If done well, it opens up new opportunities with many more ways to monetize than a simple one-time purchase. This flexibility and the more granular approach to monetization models gives organizations a real chance to serve their customers’ needs more effectively, to create differentiation in the market place and to enjoy the monetization capability they create by building a better business model for the IoT age.

This is simply said but challenging to achieve. However, the questions we have set out in this paper will help manufacturers and others prepare their businesses for the new models that IoT is enabling. There will be challenges to overcome but the upside of highly optimized monetization is well worth the effort. In any case, failure to transform will result in being left behind.

Security Considerations in the IoT WorldSecurity and data protection are topics that will have to be considered in every IoT project. Software can support and contribute to data protection by ensuring that applications on devices cannot be hacked easily (through application hardening) as well as calling home to the manufacturer from the field, so that functionality can be validated to protect against piracy. Flexera suggests that security can be effective if it is designed into the product and applied in layers. In the past, hardware vendors normally would rely on physical security but as more vendors move away from proprietary hardware, security plays an

enormous role in both hardware and application development. Now manufacturers need to look at all the security layers that make up the IoT.

Most importantly — because hacking is always a threat and possibility — the key requirement is to make sure that manufacturers have self-healing and self-updating capabilities so that a secure fix or patch can be deployed to customers quickly. But the reality is that many device/IoT manufacturers often don’t have these processes and technologies in place. This is something they should look at sooner rather than later.

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