The global network of the ‘Internet of Things’ (IoT) is advancing at a revolutionary rate, with the potential to transform companies (both old and new) beyond our most forward-thinking expectations. Businesses are increasingly using the wave of connected devices as a means of tapping into a whole new world of data to enhance their offerings, and most importantly, their profit margins. With global IoT turnover expected to range between $3.04 trillion (£2.04 trillion) by 2020 according to IDC to $11.1 trillion (£7.43 trillion) by 2025 by McKinsey, it’s important that businesses acknowledge the potential of IoT in order to stay relevant and lucrative.
The question that remains then is, whereis the value potential of IoT?
McKinsey’s latest study, “Unlocking the Potential of the Internet of Things” does an excellent job of exploring this massive commercial potential across nine discrete “settings”. The biggest insight of the report is as follows:
“The Internet of Things will change the bases of competition and drive new business models for user and supplier companies.The Internet of Things will enable—and in some cases force—new business models. For example, with the ability to monitor machines that are in use at customer sites, makers of industrial equipment can shift from selling capital goods to selling their products as services. Sensor data will tell the manufacturer how much the machinery is used, enabling the manufacturer to charge by usage. Service and maintenance could be bundled into the hourly rate, or all services could be provided under an annual contract. The service might also include periodic upgrades (software downloads, for example). Performance from the machinery can inform the design of new models and help the manufacturer cross-sell additional products and services. This “as-a-service” approach can give the supplier a more intimate tie with customers that competitors would find difficult to disrupt.”
In other words, the study has confirmed that the explosion in smart connected devices is directing companies towards new business models. In some cases, companies are giving away their physical product as part of a complete subscription-based offering. When packaged and connected, that offering (consisting of a product, software, training, consumables, support, etc.) represents avery differentbusiness model. Having the ability to support subscriptions with allocations for usage or outcomes is increasingly becoming an imperative.
If you are wondering how real this is, look no further than Apple’s recent announcement that it’s now essentially offering monthly subscriptions for a new iPhone every year. While some people are undoubtedly doing the math on the lifetime cost of their phones, many more of us are saying “finally.” No more negotiation of a bi-annual contract with my carrier for a subsidised plan, most of which I don’t understand.
What is really at stake here, and most important, is the relationship: Apple is seeking to improve the digital experience of all of its customers. The company is well aware that 40% of all iPhones still in use are more than three years old. This represents a customer satisfaction problem and an opportunity to reach out with an improved experience. The question all product companies should be asking is: can this model work for us? Can a similar model help develop a better customer relationship? We’ve also seen similar, experience-oriented initiatives in the UK’s public sector. For example, large-scale, connected city project Bristol is Open is introducing subscriptions as the medium to access different services across the city – to both businesses and the citizens. The ability to develop those relationships and facilitate a community experience at such a scale, while maintaining a solid means of ongoing revenue, is a posterchild for monetising IoT effectively.
Add to this the developing need to manage more data, and have it operate effectively between IoT systems (as outlined in the McKinsey study), and the idea of using data fromdifferent product systems in combinationto create a unique customer solution is yet another complex business model worthy of consideration. The study suggests that this “interoperability” could drive upwards of 40 percent of the value of the end solution, and upwards of 60% in some situations.
The clear indication here is that data is part of the solution, and in many cases should be an integral element of the subscription experience. Is this something else worth thinking about?
The opportunity for a complete business transformation is a far more exciting and challenging concept than slapping some mobile phone sensors on a product and calling it “smart.” It’s inevitable that all products in the future will be smart and connected. That’s a given. What’s not is whether businesses will adjust their models based on subscriptions, and the primacy of the digital experience. After all, connected devices and subscriptions are the ideal foundation for creating those ongoing relationships that drive enterprise value for shareholders.
IoT turns products into services, and in order to fully capitalise on that fact, companies are going to have to make some fundamental, systemic changes in the way they conduct their businesses. We’reallin the Subscription Economy now. Things (connected or otherwise) are about to get a lot more interesting.
About the author
John Phillips runs the EMEA field operations for Zuora. He is a senior software sales leader with over 22 years of experience selling and delivering enterprise, open source and cloud-based software solutions to a wide range of industries including Telecommunications & Media, Manufacturing and Financial Services.
Prior to Zuora, John ran the European operations of Cordys up to its eventual acquisition by OpenText. This subsequently led to John running OpenText’s Business Process Management division for EMEA.