Show Me The Money – Who Really Makes Money In IoT?
May 25, 2016
A couple of days ago, a senior executive at a large telco asked me this question, “Who really makes money with IoT?” Sounds simple enough – I work with a large team of experts that cover every level of the IoT ecosystem – I should be able to answer this question easily. However, the question, though it sounds simple, has a very complicated answer. The simple answer – everyone makes money but not everyone profits.
To explain this response, I decided that it would make sense to look at the IoT ecosystem and figure out how to elaborate and tackle this complicated subject.
Frost & Sullivan has a global team of ~300 analysts and consultants that track IoT applications, vertical markets and enabling technologies. This coverage ranges across the spectrum of consumer technologies, business solutions and smart governance. Our IoT coverage illustrated below:
For more information about the Frost & Sullivan Internet of Things Program: CLICK HERE.
For the purpose of this insight, let us ignore the left side of the preceding graphic. On the right side, we find 8 different layers in the IoT ecosystem. Let us go through each layer to see where companies actually show an impact on their bottom line.
Chip/ Modules/ Semiconductors/ Embedded Devices
A very small portion of the cost of an IoT solution really gets attributed to the cost of sensors and semiconductors. While every endpoint has one or many of these sensors and semiconductors, not all IoT applications are flying off the proverbial shelf. Think of a vehicle. Each vehicle has dozens of sensors. There are millions of vehicles sold each year. There are over 900 million vehicles on global streets and highways. This of course means that there are close to (if not more) than a billion sensors sold each year. The problem is the economies of scale. Cost per sensor has been declining for many years now and typically account for a few cents per sensor. The margin on these sensors is minimal and constantly shrinking. So unless any sensor company sells billions of sensors a year, they are likely not making much money (R&D investment needs to be paid off first). The same is true for connectivity modules and chipsets. So in reality, these companies are facing intense pricing pressures. While revenues may be up from previous years, margins are either stagnant or declining.
The story for hardware devices is similar. Over the past several years, hardware device prices are declining. In addition, competitive products are always emerging. R&D costs for developing new hardware continues to increase. Hardware costs account for a significant portion of the cost of an IoT solution (between 20-30 percent). However, competitive pressures force suppliers to constantly provide rebates on list price to win bids. Take, for instance, Apple vs. Samsung. Globally, Samsung sells more smartphones than Apple. However, Apple iPhone retails at cost (unless a solution provider is willing to discount these devices by taking a hit), while Samsung offers significant discounts to capture market share. In the world of smartphones, Apple and Samsung are the only companies to show profits – economies of scale and brand value play a huge role.
In the IoT world, very few companies have the brand recognition to charge a premium (Nest thermostats comes closest). It is very easy to replace one product for another. While hardware accounts for 20-30 percent of IoT deployment cost, margins from said hardware is minimal. So again, these companies are struggling to achieve profitable returns from selling IoT solutions.
From all the marketing on IoT (and machine-to-machine before that) from the carriers, it would seem that the carriers make a lot of money with IoT. However, if we peel back the marketing machine, the truth is that connectivity is not really much of a revenue generator. When evaluating the applications for the Internet of Things, very few applications generate over a dollar a connection per month. Applications such as smart meters (AMIs) or home security typically generate between $0.75 and $1.50 per connection per month. An application like digital signage might generate between $5 and $10 per connection per month. However, there are very few connected digital signage devices today. Connectivity margins are diminishing as customers want to spend less and less per month on connectivity but want more connected devices. And this is just on the cellular front. It is much harder to generate revenues for fixed line, ZigBee, Z-wave, Bluetooth, Wi-Fi and other devices. Revenues for those communication protocols are typically a few cents to fractions of a cent.
This explains the push from larger carriers to move away from simply connectivity to ‘solutions’,, platforms, and systems integration. As purely a communication service provider (CSP), revenues and margins are a race to zero. To provide value, CSPs must move up the value stack and develop value-added services that differentiate them from others in the industry.
Application Development and Service Delivery Platforms
Platforms are a huge buzz word in IoT today. Both emerging and established vendors typically call themselves ‘platform providers’. Platforms are the core foundation upon which all devices and software are developed. From application development to connectivity management to user interfaces and middleware for integration, platforms enable IoT solution development and integration. So logic dictates that platform companies are the ones that make all the money. In a sense, that is true. Platforms for certain applications can be very lucrative. However, platform vendors are competing with companies that give away their core IoT platform for free (or for a minimal investment).
An example of this would be a company like Jasper. Jasper recent got acquired by Cisco for $1.4 billion. By all estimates, Jasper had revenues in the range of between $70-80 million. That means that they were acquired for 20x revenues (and close to 50-70x margins). What makes Jasper such a valuable company in the eyes of Cisco (and their investment bankers)? Jasper is the platform that powers AT&Ts Control Center and helps manage 10s of millions of IoT connections for AT&T (25 million cellular connections and 10s of millions of fixed-line and Wi-Fi devices). In addition, Jasper manages devices for over 10 carriers globally, which represents over 20 million cellular connections. For Cisco, mobile device management was a gap in their portfolio that they have now filled.
Data storage vendors have significant opportunities from IoT. In 2015, approximately 5 billion devices were connected. In 2020, this is expected to grow to almost 23 billion devices. This 360% increase in the number of devices in 5 years will result in millions of petabytes of data transmitted and stored. Data storage vendors will see a massive increase in storage solutions being sold over the next few years. Even companies that do not actively play in the IoT space will see an uptick of storage solutions sold. And, this is not just onsite storage or datacenters. There will be a significant increase in cloud storage solutions adopted over the next few years. Data storage companies are one of the key ecosystem companies that will benefit from the addition of billions of devices to the network.
For the purposes of this insight, we are only including platforms that utilize the cloud as the backbone in this discussion (cloud for storage is discussed under data storage). Vendors such as Microsoft Azure and Amazon Web Services (AWS) have played a critical role in supporting the development of applications on their cloud platform for the past 10 years. Microsoft has a history of over 20 years in the IoT space (though they only started marketing themselves in the IoT space over the past 2 years). These vendors give away the use of the cloud-based platform and all the APIs necessary for application development away to create a massive ecosystem. The money for these companies is not in the platform. The money is in the ability to find their platform available in every home and business. Once they achieve that goal, organizations have no choice but to work with AWS and Microsoft in the Enterprise Management space. Microsoft is one of the largest Enterprise Management software vendors out there and generates billions of dollars in revenue from that segment. The platform is part of a larger goal to generate revenues either from storage or from the Enterprise Management software services market.
Data analytics is an interesting component of the ecosystem. Big Data analytics would not be necessary if billions of devices were not capturing millions of petabytes of data. Similarly, without analytics, IoT data is just a whole lot of unorganized noise. Data analytics is the layer of intelligence that will evolve IoT from where it is today (reaction to events and incidents) to the next level of IoT 2.0: Predictive Computing (proactive in knowing where the problems will arise with preplanned response to events). Today, most service providers develop IoT solutions without a complete plan that includes data analytics. In many cases, organizations decide to develop their own proprietary data analytics solution or pick a vendor after the IoT solution has been deployed. This leads to millions of dollars in sunk costs and unsuccessful IoT deployments. For an IoT deployment to be successful, a data analytics solution must come into the forefront from the planning stages and remain the main focal point throughout the deployment cycle.
Device & Network Security
Device & Network Security is one of the most critical layers in successful IoT deployments. The old adage, “A chain is only as strong as its weakest link” holds very true. Companies such as Cisco, AT&T and Verizon have made great strides in protecting networks. However, devices on the network are not that secure. With so many emerging vendors developing hardware, there is a huge likelihood that many devices are not as secure on all networks. In addition, IoT includes devices on Wi-Fi networks or even fixed-line networks may not be as secure. Security is a critical element and vendors and service providers that help secure networks will generate revenues and find new growth opportunities from the Internet of Things. However, just like with data analytics, security must come to the forefront and not be an afterthought in IoT deployments.
There are various opportunities to generate revenues and margins at every level of the IoT ecosystem. With great products and services (and a list of competent ecosystem partners), an organization can unearth growth opportunities and generate revenues. With the financial impact of IoT estimated at over $1 trillion over the next 5 years, the Internet of Things will aid the global economy to grow and sustain the over 7 billion inhabitants of this planet.
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