I’m always looking for sharp expository writing about IoT, and McKinsey’s latest study, Unlocking the Potential of the Internet of Things does an excellent job of mapping this massive commercial potential (somewhere between $3.9 and $11.1 trillion per year by 2025) across nine discrete “settings”. I encourage you to read the entire study, but here, in my opinion, is the biggest insight of the report (and I’m quoting in full):
“The Internet of Things will change the bases of competition and drive new business models for user and supplier companies. The Internet of Things will enable – and in some cases force – new business models. For example, with the ability to monitor machines that are in use at customer sites, makers of industrial equipment can shift from selling capital goods to selling their products as services. Sensor data will tell the manufacturer how much the machinery is used, enabling the manufacturer to charge by usage. Service and maintenance could be bundled into the hourly rate, or all services could be provided under an annual contract. The service might also include periodic upgrades (software downloads, for example). Performance from the machinery can inform the design of new models and help the manufacturer cross-sell additional products and services. This “as-a-service” approach can give the supplier a more intimate tie with customers that competitors would find difficult to disrupt.”
In other words, the explosion in smart connected devices is forcing organizations to change and consider new business models. In some cases, companies are giving away their physical product as part of a complete subscription-based offering. When packaged and connected, that offering (consisting of a product, software, training, consumables, support, etc.) represents a very different business model. Having the ability to support subscriptions with allocations for usage or outcomes is increasingly becoming an imperative .
If you are wondering how real this is, look no further than Apple’s recent announcement that it’s now essentially offering monthly subscriptions for a new iPhone every year. While some people are undoubtedly doing the math on the lifetime cost of their phones, many more of us are saying “finally.” No more negotiation of a bi-annual contract with my carrier for a subsidized plan, most of which I don’t understand.
What is really at stake here is the relationship, and Apple seeking to improve the digital experience of all of its customers. The company and its stockholders are well aware that 40% of all iPhones still in use are more than three years old. This represents a customer satisfaction problem and an opportunity to reach out with an improved experience. The question all product companies should be asking is: can this model work for us? Can a similar model help develop a better customer relationship? Cupertino seems to think so.
Add to this the developing need to manage more data, and have it operate effectively between IoT systems (as outlined in the McKinsey study) and the idea of using data from different product systems in combination to create a unique customer solution is yet another complex business model worthy of consideration. The study suggests that this “interoperability” could drive upwards of 40% of the value of the end solution, and upwards of 60% in some situations. The clear indication here is that data is part of the solution, and in many cases should be an integral element of the subscription experience. Is this something else worth thinking about?
Personally I think the opportunity for a complete business transformation is a far more exciting and challenging concept than slapping some cell phone sensors on your product and calling it “smart.” It’s inevitable that all products in the future will be smart and connected. That’s a given. What’s not is whether businesses will adjust their models based on subscriptions and the primacy of the digital experience. After all, connected devices and subscriptions are the ideal foundation for creating those “sticky” relationships that drive enterprise value for shareholders.
IoT turns products into services, and in order to fully capitalize on that fact, companies are going to have to make some fundamental, systemic changes in the way they conduct their businesses. We’re all in the Subscription Economy now. Things (connected or otherwise) are about to get a lot more interesting.