Shahin Farshchi

Where’s the Money in the Internet of Things?

Last month, Motorola Solutions announced the sale of its Enterprise unit to Zebra for $3.45B. The business was doing over $2.5B in annual sales, selling rugged mobile devices, tags and scanners that giants such as FedEx and UPS depend on. Zebra, which generates roughly $1B in annual sales primarily from RFID tags, borrowed heavily to finance the acquisition in hopes of becoming a leader in IoT. This divestiture comes seven years after Motorola acquired RFID leader Symbol for $3.9B with similar aspirations – now being sold as part of its package to Zebra.

This begs the question: Where is the money in IoT? Linear cofounder and CTO Bob Dobkin’s statement on their 2012 acquisition of IoT trailblazer Dust Networks sums it up well: “We got a very good functioning company. The technology works well… the only thing they lacked was sales.”

Designing, building, marketing, and supporting new hardware products have become as easy and accessible as designing smartphone apps. No need for hours at the soldering station, pricey CAD software, advanced engineering degrees, and a budget in the millions to design beautiful, connected products. Electric Imp, Spark, and several others offer development kits that a high school student can use, as well as back-end services to provide consumers with a rich, connected experience. The back-end service also creates an opportunity for future revenue streams. When you add widespread 3D-printing and contract manufacturing services, what results is the democratization of engineering, prototyping and mass producing gadgets. Unfortunately, in their rush to create a pitch deck around a beautiful widget, entrepreneurs forget to ask: “Why is this an interesting business?”

Having done part of my own graduate work on wireless and embedded systems, I am seeing a large number of IoT startups, which typically fall into three categories:

1) Gadgets: $10-$200 devices that sense or take action. Unfortunately their functionality is limited to off the shelf sensors, radios, and actuators. Aesthetics and experience, though enhanced by clever design, are limited to existing manufacturing techniques and materials. Disruption is almost always advertised, but common sense calls this wishful thinking. Today, many hardware VCs are funding what used to be research, development, and product trials by the likes of Sony/Samsung/LG. The consumer certainly benefits, as do the behemoths, who step back and watch the progress of crowdfunding campaigns before quickly preparing their own copycat products (i.e., Fuel Band and Morpheus). Although OculusVR has been an exceptional outcome for its investors, it is quite literally the exception. Before pursuing the gadget strategy, it is worthwhile to consider what will make the product truly unique. Just the right blend of good design and features? Know that you are going up against the formidable competition in the race to the bottom.

2) Gadgets as a channel for a captive market: Steve Jobs’ iPod/iTunes service is a classic example. Sell the elegant widget, get exclusive access to content on your service, and voilà: a monopoly. Google Play has since caught on, but iTunes was an absolute windfall for Apple, while facilitating the iPod’s early success. Though Nest didn’t charge a subscription, its gadgets offer a unique a channel into consumer behavior and activity in their homes – far richer than what cable boxes and alarm systems have long aspired to offer – hence Nest’s multi-billion-dollar acquisition by Google. Lux portfolio company Planet Labs also falls into this same category; with its unique earth-observing satellites, it can offer valuable images and signals to customers ranging from mapping to agriculture to finance. You can be disruptive in this category – but it’s not just about the aesthetics or functionality of your gadget. It’s about unique access to information or content for which you can command a high price.

3) Service running on an installed base of connected gadgets: WhatsApp and Instagram are classic success stories offering a value-add service on top of devices customers originally purchased to make phone calls. Retail analytics startups Prism Skylabs and Euclid are using security cameras and WiFi signals, respectively, to track customer activity in retail stores. The outcome of analytics on those images is a powerful tool for retail to track consumer purchasing patterns, behavior, and response to signage, just to name a few. Streams of data are coming from our cars, but going nowhere – how about using them to dynamically set insurance? The opportunity for building an attractive business is huge, without even needing to build or sell a physical product.

My advice?

If you’re in Category #1, make sure that there is an element of art and design that really makes you stand out. It’s not about features, it’s about being much more than the sum of your parts. Think about paintings vs. masterpieces, buildings vs. landmarks, meals vs. culinary experiences, cars vs. exotics. You get the idea.

Category #2? It’s not as much about the product, but the lock-in effect you have with your customer. Can your gadget position your business as the exclusive provider of a unique experience or service? Such companies can be extremely valuable by virtue of having a recurring revenue stream from a known population with predictable churn and growth rate. Software as a service comes to mind.

Category #3 is as hard as, if not harder than, Category #1. There is typically almost no barrier to entry, unless you can secure some proprietary access to the data flow from the gadgets, which is rare. Why would the owner of that data simply give it up to someone else to monetize? WhatsApp and Instagram succeeded on network effects. Analytics companies such as Prism and Euclid have to provide recommendations, or calls to action. Entrepreneurs typically underestimate the customer’s expectation to get instant gratification, or instant, tangible value-add upon purchasing a service.

Today’s aspiring entrepreneurs are in a position to capitalize on providing their customers with a rich, connected experience. They need to be realistic about how they are positioned relative to their fierce competition from other startups and behemoth incumbents. Before spending a dime on development, they should look through the lens of the discerning American consumer, rather than the Silicon Valley engineer who wants to try the coolest new gadget. Although developing many forms of hardware today has become as accessible as developing software not long ago, the challenges associated with creating attractive hardware-related businesses are far larger.

 

Image Courtesy of Steve Wainwright, Freescale Semiconductor, Inc.
2 Comments » for Where’s the Money in the Internet of Things?
  1. Dane Witbeck says:

    Very well put. I would just add that entrepreneurs also need to honest with themselves about the amount of capital required to properly execute the various strategies. Strategy #1 or #2 is capital intense due to overhead of quality control and inventory management (even though the design/test phase has gotten easier).

  2. Atindra says:

    One of the key problem’s with IOT is the effort required to derive the value. Few products, as you said ,provide instant gratification – you start it and you start reaping the benefits immediately. Very less effort is required to derive the value from such products. Nest is an example of such a product. Effort required to derive the value out of a product depreciates the perceived value exponentially. Whatever IOT offering you launch, you should address these two questions:
    1. Will connecting this device to the internet provide substantial value?
    2. How much effort will be required to derive the value?
    In my last 10 years of experience in M2M (IOT) field, I have observed that most IOT projects have failed due to lack of value proposition or high level of effort required to derive value.

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