There currently exists a lot of apprehension about return on investment and making money through Internet of Things (IoT) solutions. 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 returns to turn positive.
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. These could be ad-based revenues (site ads, CPM or cost per thousand impressions, cost per click, etc.) by the consumer Internet industry or subscription and pay-per-access by the media industry. They could also include ‘freemium’ by gaming companies, software-as-a-service (extended to anything-as-a-service) by the software products industry, revenue sharing and capex-to-opex conversion by the telecom and mobile communication industry, cross-selling and upselling by the consumer hardware sector, or pay-for-insights by the data analytics sector.
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Each and every one of these industries has suffered from apprehension and doubt on methodology of revenue generation, and capacity and quantum of returns, in the early stages. Yet, all these are multi-billion dollar industries today—forever changing the way we live.
A closer look at the evolution of the music industry reveals the effect of digitalization on a conventional business model and its successful transformation to alternative 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 the revenue model. Soon after, the digitization of music, piracy and peer-to-peer sharing 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 the popular access mode and one-time purchase as the key monetization model.
Since then, the music industry embraced digital technologies and started adopting multiple revenue models, including subscription, ads, pay-per-access and pay-per-intent (pay-what-you-want). Currently, over 75% of the music industry’s revenue comes from digital platforms with music streaming services such as Spotify, Apple Music and Pandora serving as popular revenue generators with over 40 million, 17 million and 4 million paid subscribers, respectively. The current base of over 63 million paid music subscribers 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 per paid streaming subscriber is $120, much higher than the yearly physical album revenue 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 in the recent past, when companies with web presence and mobile adoption became 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 as an IoT company. And we are already witnessing innovative monetization partnerships and business models being adopted by various companies that are implementing different IoT-based solutions.
For instance, automobile rental start-ups that have integrated various sensors and sensor-enabled devices in their vehicles such as GPS (Global Positioning System) trackers, speed monitoring and control modules, fall detectors and remote fuel sensing modules for their own monitoring, tracking, scheduling and predictive maintenance purposes, have realised 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 behaviour, wear and tear and driving patterns could be useful for multiple government agencies, automobile OEMs (original equipment manufacturers), 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.
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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.
Jayanth Kolla is co-founder and partner at Convergence Catalyst, an Indian research and advisory firm.