IoT is at the top of the hype cycle right now – but as I dug deeper, beyond the stories featured in the popular media, I made some surprising conclusions. Last week in Palo Alto, I moderated an event called “The Second Coming of the Internet of Things” for the German American Business Association where we assembled a stellar panel, including Dinesh Sharma, VP of Marketing for Internet of Things at SAP, Marianne Wu, Managing Director at GE Ventures, and Raj Kanaya, CMO at Aeris Communications. Sven Strohband, CTO at Khosla Ventures also helped me with my research but was unable to attend the panel.
The panelists were fantastic, providing an on-the-ground perspective from the startup, corporate, and venture front. Here is what I was surprised to learn:
The Hype is Real – But It Will Take Time
The just-released hype curve from Gartner ranks Internet of Things at the absolute peak of “Inflated Expectations”:
Gartner believes the technology still has to make a 5-10 year long journey through the “Trough of Disillusionment” and climb the “Slope of Enlightenment” before reaching the “Plateau of Productivity”. The opportunity, though, is huge – according to Cisco, 10B devices are alread tied to the Internet today, and research firm IDC expects that number to shoot to 212B devices by 2020, making IoT a $9 trillion market by 2020.
These are large numbers, and they reflect the opportunity behind adding connected sensors to physical objects used daily by consumers and industry. Marianne Wu called this trend the “merging of the physical and digital world” and cited Uber as an example trend that consumers may be familiar with. With a few swipes using a software app, a physical vehicle can be made to appear in a matter of minutes!
Google’s $3.2B acquisition of Nest earlier this year may have contributed to the peak of the media hype coverage. It’s clear that Google, Apple, Samsung (and others such as Intel, Qualcomm, and ADT) are pushing hard to take over the home by providing an array of smart devices, but it will take a long time before Google will recoup its 3.2B investment - in IoT, it’s better to think in decades than in years.
While we hear a lot of of hype surrounding consumer devices, the enterprise market presents a bigger potential for IoT.
IoT is all about the Enterprise
The Nest thermostat makes a nice piece of “tech jewelry” on your wall to showcase that you are plugged in, but IoT really comes to shine in the enterprise. Think about it - connected sensors and machine intelligence can highlight and even automatically resolve problems ranging from freight logistics to healthcare, from industrial production to mining and oil and gas exploration – and the savings created by more efficient processes can add up quickly over time.
SAP, the leader in business process automation, considers IoT the “4th Industrial Revolution” – expecting a potential impact to industry that is as potent as the three prior revolutionary events – the invention of steam power, the age of electricity, and the use of electronics and IT to automate production.
General Electric calls this trend the “Industrial Internet” combining IoT, machine intelligence, big data, and analytics to eliminate more than $150B in waste across industries such as aviation, healthcare, rail, power, and oil and gas.
The Asset is Key
Will we soon have an Internet-connected drinking glass, that automatically tracks your water consumption, or how about that Internet-connected refrigerator? One way to judge the potential success of an IoT product or company is to focus on the size of the asset it impacts. For example, how can a network connection and data analysis impact the kitchen refrigerator? Perhaps it can reduce spoilage of some food, marginally increase the efficiency with which you purchase new food, but overall, the economic impact is low.
Contrast the household refrigerator with a modern jet engine worth $15M or more. If an Internet-connected sensor works to improve maintenance for this asset, preventing even a small percentage of outages, the economic impact is large.
By the same reasoning, it’s no wonder that we see an explosion of startup activities revolving around the connected vehicle. After all, this is an asset worth $30,000 or more and it largely sits in-operational in a garage or parking lot. Uber has a $18B valuation because of the economic potential represented by the potential for large efficiency gains in personal transportation.
Enterprise tends to use large, valuable assets, and thus it’s a key target for IoT. Asset intensive industries include transportation (passenger & freight), oil and gas exploration/production, mining, energy generation, as well as healthcare. These industries will lead the adoption of IoT due to the size of the assets that are involved and thus the potential savings that can be generated.
IoT Favors Large Corporates (for the most part)
While startups are perfectly suited to compete in the battle for the Internet-connected toothbrush, they may be at a disadvantage when it comes to participating in the 4th industrial revolution. The key challenges are a lack of domain knowledge for a given target industry as well as the lack of scale and sales channels. Corporates have domain knowledge, scale, and customers in droves – but often lack innovative new ideas and speed of execution.
Smart corporates have figured out that they compensate for these weaknesses by embracing Open Innovation, working on partnerships with early stage startups.
Startups have a place within the IoT ecosystem, but it is doubtful that a startup in this space will IPO as the next Google, since the market favors large asset investments – an environment characterized by large corporates.
Meet the Service Economy
When James Watt perfected the steam engine in 1788, heralding the first industrial revolution, he decided not to sell it – but rather lease it to the mine operators that needed a more powerful and reliable source of energy. After all, the industrial steam engine replaced muscle power – generated either by humans or animals. By leasing his machinery, Watt could better “share the rents” in cost savings with the mine owners as well as provide a “plug and play” replacement to the traditional methods for power replacement without requiring huge capital outlays for his customers.
GE has discovered this business model for its jet engines – instead of requiring a large up-front capital investment by the airlines to buy its engines, GE now sells “Power by the Hour”, which aligns incentives perfectly with its customers. GE gets paid only when its customers are paid – when the planes are in the air. Why now? IoT has made this possible, providing GE with vast stores of knowledge about the performance of its engines in a variety of operating environments, and thus is able to predict and prevent failures.
Once sensors and M2M (machine-to-machine) communications are ubiquitous, this service economy may even come to the consumer household appliance. After all, what we want in our home is comfort – and clean laundry. Most of us don’t care how comfort (warm air) is delivered. If a company has accumulated the knowledge to provide these services to us efficiently and without requiring our interventon, why bother with appliance ownership?
IoT: Knowledge is King
In conclusion, The Internet of Things lives up to the hype, but it will take time (decades) for a full rollout, given the asset-intensive and slow & deliberate nature of the large corporates that are due to harvest the greatest benefit from this technology. As IoT takes hold, these corporates will need to ask themselves whether they should continue to be in the business of selling assets (i.e. jet engines) or service (i.e. power for flying). As more and more data is generated and analyzed, the intellectual property for a given corporate may not just involve specific product features, but also the knowledge on how the product is deployed on a global basis. The corporates that sell connected products first in their market have the potential to create a sustained knowledge advantage over their competitors!
Thanks again to Dinesh, Marianne, Raj, and Sven for sharing their perspectives at the GABA panel and serving as the inspiration for this blog article.