Show Me The Money: Who Really Makes Money In IoT?

Dilip Sarangan, Industry Principal, Internet of Things (IoT), at Frost & Sullivan takes a comprehensive look at the main profit centers in IoT, and who is currently benefiting from them.

Internet of Things

A couple of days ago, a senior executive at a large telco asked me, “Who really makes money in Internet of Things (IoT)?”. The simple answer is that everyone makes money, but not everyone profits. The comprehensive answer is much more complicated, and requires a good look at the entire IoT ecosystem.

Chip, Modules, Semiconductors and Embedded Devices

While every endpoint has one or many sensors and semiconductors, not all IoT applications are flying off the proverbial shelf, and only a small portion of the cost of an IoT solution is attributed to them. Take a vehicle, for example: vehicles have dozens of sensors and there are over 900 million of them traversing our streets, meaning there are close to (if not more) than a billion sensors sold each year. The problem is the economies of scale; the margin on sensors is minimal and constantly shrinking, so unless any sensor company sells billions of sensors a year, they are not likely to be making much money and need to pay off  R&D investments first. In reality, these companies are facing intense pricing pressures, and the same is true for connectivity modules and chipsets. While revenues may be up from previous years, margins are either stagnant or declining.

Hardware Devices

The story for hardware devices is similar. Hardware costs account for a significant portion of the cost of an IoT solution (between 20-30 percent). Over the past several years, hardware device prices are declining, competitive products are always emerging, and R&D costs continue to increase. However, competitive pressures force suppliers to constantly provide rebates on list prices in order to win bids. Take, for instance, Apple vs. Samsung. Globally, Samsung sells more smartphones than Apple, but the iPhone retails at cost (unless a service 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.

Source: Frost & Sullivan Internet of Things Program
Source: Frost & Sullivan Internet of Things Program

Connectivity

From all the marketing on IoT (and machine-to-machine before that) from the carriers, it would seem that the carriers profit with IoT, but the truth is that connectivity is not much of a revenue generator. Applications such as smart meters (AMIs) or home security apps 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, but there are very few connected digital signage devices today. Connectivity margins are diminishing as customers want to reduce monthly connectivity costs but increase 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. To provide value, communication service providers 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, with both emerging and established vendors typically calling themselves platform providers. From application development and connectivity management, to user interfaces and middleware for integration, platforms enable IoT solution development and integration. Platforms for certain applications can be very lucrative, but 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, which was recently acquired by Cisco for $1.4 billion. By all estimates, Jasper had revenues in the range of between $70-80 million, meaning it was acquired for 20x revenues (and close to 50-70x margins). Jasper is the platform that powers AT&T’s Control Center and helps manage tens of millions of IoT connections for the telco (25 million cellular connections and tens 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.

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Data Storage

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 will result in millions of petabytes of data transmitted and stored in five 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 also be a significant increase in cloud storage solutions adopted. Data storage companies are one of the key ecosystem companies that will benefit from the addition of billions of devices to the network.

Backbone Cloud Computing

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 ten 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 cloud-based platforms and the APIs necessary for application development to create a massive ecosystem. The money for these companies is not in the platform, but 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. The platform is part of a larger goal to generate revenues either from storage or from the enterprise management software services market.

Data Analytics

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 pre-planned 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 and network security is one of the most critical layers in successful IoT deployments. Companies such as Cisco, AT&T, and Verizon have made great strides in network protection, but 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 that may not be as secure. Security is critical, so vendors and service providers that help secure networks will generate revenues and find new growth opportunities from IoT. However, just like with data analytics, security must come to the forefront and not be an afterthought in IoT deployments.

Final Thoughts

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 five 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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