The Internet of Things value chain – who will win?

One of the main topics at the Mobile World Congress (MWC15) in Barcelona last week was the ‘Internet of Things’ (IOT). By no means a new concept but certainly one that is evolving in its form as well as the business models that support it. According to Gartner, there will be 26bn devices on IOT by 2020 which is expected to contribute between $600bn to $1.3 trillion to the US economy by 2025. It’s big. Simply described, the value chain of the Internet of Things has four basic components:

1. Objects (nodes, devices, controllers)

2. Networks (connection between devices, connection to a network of devices, connection to cloud)

3. Cloud (data storage, analytics, security, privacy)

4. Services and APIs (cloud interfaces for software development using the data, service provision etc.)

Whilst the players are settling in and business models are still forming in each of these components it was clear from the presentations from a number of representatives in each component at the MWC that some are likely to do better than others. Here are 5 insights from MWC which speak to how the value chain is evolving and who may win in the longer term.

1. Object makers are turning commoditised products into value service interfaces

IOT has helped makers of commoditised items bring new product value. Take for example the humble lightbulb which you can buy for $2. Philips is making connected light bulbs (Bluetooth, wifi and sensor enabled) which can now be sold for $60. These bulbs can be controlled from your smartphone and act as a direct service interface opening up Philips to provide security, fire protection or beacon-like marketing services. Another example is Nest, which follows the Internet of ‘Unsexy’ Things turning thermostats, drop cams, smoke alarms and CO monitors into desirable, connected devices. In January last year Google acquired Nest for $3.2bn which is an attempt to strengthen Google’s household presence through web-connected appliances thus opening up other parts of the IOT value chain.

There is certainly an advantage to being the the maker of the nodes, and players like ThinFilm, who are creating low cost smart labels to attach to consumable items, are likely to create very profitable businesses from being the gateway into IOT from value-added product features and where possible obtaining some margin from service provision.

2. The network providers that can connect the most devices, securely and without downgrading device performance will win network value but are also best positioned for downstream value

One of the hurdles for IOT is connecting many devices (from different makers, systems etc.) freely and easily. This requires a simple, secure and scalable solution which can combine wifi forms, bluetooth and other connections and allow devices to talk to one another. Threadgroup is helping to do this by offering a mesh network that can connect devices with different connectivity characteristics to a single network which then connects to cloud and other mobile devices. Consumer take up of IOT inparticular is predicated partly on the ease of connecting multiple devices.

For enterprise and industrial IOT companies seem to be taking an industry specific approach to network. Take Cisco who have solutions for ‘connected’: transportation, healthcare, mining etc. they like others see industry bespoke solutions as a means to providing network but also specific cloud and service solutions thus converting values in the downstream parts of the value chain.

3. One controller to control them all – maybe

The smart home control experience like the network is about the ability to add then control multiple devices regardless of make, model and manufacturer. Thiru and Bala from Peel are looking to provide that control point in their product Peel – which eliminates the need to have multiple remote controls. They are doing very well so far with over 100M users worldwide, 7Bn remote commands and deals with many TV manufacturers. What is special about a single control point is that it is that it can also become an ecommerce and service channel for the connected home where you could order new lights, smoke alarms or a pest inspection.

Although Peel looks well placed, it’s clear the mobile manufacturers are not going to let the control point go. Take Xaiomi who’s smart phone controls a network of proprietary smart home devices. There is a significant amount to be gained by being the focal point of the smart home, but will there be only one?

4. No one provider has an end to end IOT solution yet – partner or perish

Providing an end to end IOT solution does not yet seem to be the model but there are companies well placed to do so – e.g. Apple. Partnerships will be important as object makers partner with network or cloud providers and visa versa to ensure they are not left out of the IOT ecosystem.

5. Incumbent CSPs and mobile network providers become further commoditised

The importance of partnering is most clear for incumbent CSPs who have relationships with clients but are not the makers of objects, do not provide mesh networks for connecting multiple devices and who don’t have robust cloud offerings. In this state a CSP provides just the pipe connection to the cloud. IOT will drive greater data usage but stands to be commoditised as a ‘non-value’ add component of the value chain.

Some parts of the IOT value chain will attract more of the trillions of dollars that are predicted to be made through the Internet of Things than others. My take is that at the outset object makers will generate significant value from conversion of non-connected to connected objects but longer term those who provide services related to those objects – security, fire, well being etc. may attract larger recurring value. The control point stands to be at the centre of the smart home and opens up a new channel for products and services. Network providers won’t be able to do it alone but greatest value will be placed on ease of use/connectivity, security and privacy. Cloud will have minimal value with out API revenue which is likely to be split between and service provider/software developers who use the data to save enterprises/consumers money, time or resources.

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