At the Stream IoT conference in April, the author spent some time discussing the impact that IoT might have on existing industries and business processes. During that session I hypothesised that IoT has the potential to substantially disrupt the capitalist system as we know it. In much of the research on the Internet of Things, the focus has been on the incremental value provided by connecting various devices and business processes. There is, however, another perspective: looking at the major vertical industry sectors and the extent to which IoT might disrupt existing business models. The benefits of IoT extend into most vertical sectors, so there is high potential for widespread disruption. In this article I want to expand upon that subject.
There are many different motivations behind the application of connectivity to particular devices and processes and the consequent inclusion into the Internet of Things. These include meeting regulatory mandates, adding new features to products to improve the user experience, creating new products, building closer relationships with customers, increasing efficiency and reducing costs in business processes, and reducing energy consumption.
The above are just a few of the many motivations. However, it should be noted, that for the most part these types of motivations are unlikely to have a fundamental impact on the companies adopting them. They tend to be incremental additions to existing products, or occasionally products in their own rights. Where the application of connectivity, and thus the IoT, becomes really interesting is where it facilitates completely new business models. Typically this means an evolution from selling products, to selling services based on those products, as seen with printer or photocopier manufacturers that have gradually evolved to sell ‘document solutions’. This opens opportunities for many business sectors to find new models of working. In particular this is interesting because of the potential to create a paradigm shift in how existing services are delivered. Implicit in this is a disruption to existing companies within those verticals.
There are a vast array of analogies in the technology world where start ups (or more nimble existing companies) have completely undermined the business models of existing companies based on technology evolutions. Kodak was destroyed by the growth of digital cameras, for instance. This is even more pronounced in the internet world, where Silicon Valley start-ups spend much of their time trying to undermine existing legacy business models, converting localised 40% margin industries into global 10% margin industries. Taxi companies are cursing Uber, hoteliers hate Air BnB, book stores are undermined by Amazon, and encyclopaedia salesmen don’t even exist any more courtesy of Wikipedia (and the wider internet, of course). Even the tech sector is not immune to disrupting itself, with the likes of Whatsapp undermining operator SMS revenue.
None of this disruption is new. New technology has always disrupted existing business models. The big question is: if the IoT is the next major technological trend, which industries are in the firing line this time? IoT is particularly interesting because it spans almost all industries. Machina Research spends a lot of time analyzing the impact of IoT on various vertical sectors. There isn’t space here to examine every possible permutation of vertical. However, we can look at just a few where the impact might be significant.
In connected car, the first IoT applications were simple value-add features such as connected navigation. However connecting cars opens up the possibility for something more disruptive, with users switching from a usage model based on temporary rather than permanent possession of the vehicle. Car sharing schemes, such as Zipcar, are currently relatively small in comparison to the auto sector, but the trend is definitely in the direction of more such schemes. This has tremendous implications for car manufacturers. Firstly, what features will be required of vehicles that will be used in this way. This is no longer a B2C sale, it is a B2B sale, so perhaps the built-in redundancy of many vehicles will have to go. Similarly the potential scale declines. If cars are no longer sitting idle for >90% of the time, the number of vehicles required will decline substantially. What are the implications for how OEMs operate? Another question for OEMs is: do they try to disrupt the existing business model themselves, or wait for others to do it? Many OEMs are already pursuing their own car sharing schemes.
Turning to a completely different market altogether, the utilities market, particularly electricity, could be fundamentally changed by IoT. At first glance, the existing model for electricity generation and distribution (and the equivalents for gas and water) are untroubled by smart metering and smart grid. These use cases typically help to eliminate technical and non-technical (i.e. fraud) losses, as well as providing some capability for demand-response from devices in the users home. There is typically some government pressure for reduction in overall usage, but the industry structure is generally unaffected. However, further down the line the application of connectivity, combined with the growth of distributed generation (e.g. domestic photo-voltaic cells), means that the old top-down model of generate-distribute-consume will be replaced by an internetworked group of produce/consumers able to trade power through Virtual Power Plants (a topic on which Machina Research has written for M2M Now earlier this year).
These are just two examples, covered very briefly, of how IoT can and will deeply change the existing business models in well-established sectors. Everyone needs to be ready for the change.