This Analyst Note provides a potential business and revenue model structure for the evolving IoT ecosystem by analyzing the key learnings from multiple digital technologies of the last two decades.
There exists significant apprehension regarding returns on investments and making money through Internet of Things (IoT) solutions, currently. Companies and decision makers do not see a clear path to revenue generation and profitability, and are clueless about how long it would take for positive returns.
Although we are witnessing some early adoption and custom IoT solutions being implemented (especially in the Industrial IoT space), IoT as an industry is still nascent in terms of its evolution and is 7 to 8 years from going mainstream.
In the last two decades, we have witnessed almost all digital technology-based industries pioneer a new and unique business model. Be it Ad-based revenues (site ads, CPM, CPC, CPA, etc.,) by consumer internet, Subscription and Pay-per-Access by media industry, Freemium by gaming, Software-as-a-Service (and extended to Anything-as-a-Service) by software products industry, Revenue share and Capex-to-opex conversion by telecom and mobile communication, Cross-selling and upselling by consumer hardware and Pay-for-Insights by data analytics industry… Each and every one of these industries, in their early stages suffered from apprehension and doubt on methodology of revenue generation, and capacity and quantum of returns. Yet, all these are multi-billion dollar industries today, along with forever changing the way we live.
A closer look at the evolution of music industry reveals the effect of digitalization on a conventional business model and its successful transformation to alternate models. The music industry peaked at over $14 Billion in 1999, with physical album sales as the popular access mode, and one-time purchase as revenue model. Soon after, the digitization of music, piracy and peer-to-peer sharing has started to adversely impact the industry’s revenues, before iTunes and Pay-per-Download stopped the collapse of the industry. At its nadir, in 2010, the industry size was $6 Billion, with singles downloads as popular access mode and one-time purchase as the key monetization model.
Since then, the music industry embraced digital technologies, started adopting multiple revenue models including Subscription, Ads, Pay-per-Access and Pay-per-Intent (Pay-What-You-Want). Currently, over 75% of music industry’s revenues are digital platforms with music streaming services such as Spotify, Apple Music and Pandora being popular revenue generators with over 40 Million, 17 Million and 4 Million paid subscribers respectively. The current size of over 63 Million paid music subscriber base is expected to grow to 200 Million by 2020, and the industry size is on an uptick (since 2010), clocking close to $8 Billion revenues by 2015. The most significant trend is that the average yearly revenue from paid streaming subscriber is $120, much higher than the yearly physical album revenues per buyer of the pre-digital era. This is an example of an industry adopting multiple monetization and business models and successfully transitioning to the digital era.
Just like companies in the recent past, with web presence and mobile adoption have become digital businesses, going forward, they are going to be IoT companies. By the definition of integrating sensor-enabled data collation touch points, connectivity, computing (cloud, fog and edge) and analytics, every company will evolve into an IoT company. And, we are already witnessing innovative monetization, partnership and business models being adopted by various companies that are implementing different IoT-based solutions.
For instance, automobile rental startups that have integrated various sensors and sensor-enabled devices in their vehicles such as GPS tracker, Speed monitoring and control module, Fall detector, Remote fuel sensing module, etc., for their own monitoring, tracking, scheduling and predictive maintenance purposes have realized that the data generated by these sensors and associated analytics and insights could be useful for their ecosystem partners. Data and analytics around Road infrastructure, Vehicle behavior, Wear and tear, Driving patterns, etc., could be useful for multiple government agencies, automobile OEMs, banks and insurance companies to help improve their core offerings. And, these rental companies are forging win-win relationships with all their ecosystem partners through multiple revenue models, and the revenue thus generated is being used to subsidize the end consumer payouts. Also, the capital investments needed to procure vehicles and sensor-enabled devices are being converted into opex/revenue-share agreements. This is an example of how business models are expected to evolve in the connected, IoT era.
In future, every company will need to assess its partnerships, both on the supply and demand side, identify value triggers at every level and forge mutually beneficial partnerships. Conventionally, the value chains in most industries have been linear, and many value chain players aspired to integrate either one step forward or backward to evolve as a key industry player. But, going forward, in an IoT era, with multiple touch points, the value chains will be more matrix-based (beehive structure), and companies that adopt the role of ecosystem enablers and drivers forging innovative, mutually-beneficial partnerships will evolve as eventual winners.