Searching for the Right Business Model

By Neil Strother, Navigant Research

As Internet of Things (IoT) technologies, such as connected home products like smart thermostats or advanced sensors in commercial buildings, gather momentum, a number of companies and utilities are challenged to develop a business model that works for them. They might see significant revenue and growth opportunities in the IoT, but are unsure how best to take advantage of or develop a smart strategy.

For established device or component manufacturers, the question about a business model can be rather straightforward. Build the latest smart thermostat, smart meter or sophisticated sensor, for instance, and sell through existing or new channels as quickly as possible to capture as much IoT market share as possible.

Deeper Thinking

If your company or utility is not involved in making hardware, however, an IoT strategy demands deeper thinking. There are essentially three models: provide a software based solution or platform, deliver an IoT service to clients or create a hybrid of these two models.

The software solutions come in a couple of flavors. One is the software platform that enables connected things to share data and operate within systems in buildings and homes, or across campuses and cities. These software vendors operate business-to-business (B2B), supplying some of the essential tools companies need to compete in the IoT market. Companies such as Amazon (Amazon Web Services), Microsoft Azure, Cisco, Arrayent and Ayla Networks fit this model. Their value proposition is to help businesses automate and simplify their IoT offerings much more quickly than having to do it on their own. The model is often software as a service (SaaS), and based on cloud computing technology.

The other IoT software solution model focuses on applications coupled with analytics that leverage data from devices and other sources. Vendors like Oracle, Tendril and C3 IoT specialize in data gathering from devices and then provide useful applications to utilities or other corporate customers for operational efficiency gains, or end-customer use cases. For instance, Tendril sells its Orchestrated Energy software which enables utilities to offer personalized energy optimization plans for consumers.

IoT Services

Providing IoT-related services to clients is another viable business model worth considering. This well-known model combines hardware with services that generate a recurring fee. Cable companies and security system providers have done this for decades. Comcast’s Xfinity service is one example, bundling traditional broadband, TV and telecom with door locks, smart thermostats and smart plugs. Similarly, Vivint offers energy management, home security, home automation, local cloud storage and broadband Internet solutions to residential customers in North America.

Hybrid IoT Solutions

The hybrid IoT business model combines the various hardware, software or services previously described. This model can be challenging because of the many moving parts, but can work well if the execution is well coordinated. Some companies providing a hybrid IoT solution or packages include Itron, Alphabet-Google-Nest, Silver Spring Networks, Honeywell and Landis+Gyr, to name just a few. Their solutions can span from hardware to software to services. This model, though challenging, does provide companies some flexibility to pivot to areas where they see more traction as the IoT market matures. Variations of the hybrid model are also likely to emerge; for instance, a combination of hardware as a service (HaaS) tied to SaaS could work for some customers unwilling or pay for devices, since devices can become obsolete quickly.

Utilities and IoT

Some utilities are already players in the IoT, often adopting a hybrid model, and acting as the go-between for hardware and services. For instance, Chicago-based Commonwealth Edison (ComEd) launched an ecommerce site called Marketplace with the help of Simple Energy. Simple Energy provides the software platform that customers use to learn about and purchase connected products for energy savings online.

In Vermont, Green Mountain Power is promoting its eHome program, which is aimed at bringing together hardware and services that help customers save energy and reduce their bills. The eHome program is noted for its flexible approach to IoT technologies, enabling customers to integrate things like smart thermostats, plugs, solar, EV charging stations and Tesla Powerwall based on their needs and budget.

Similarly, utilities have partnered with IoT hardware manufacturers like Nest and ecobee to help customers choose smart thermostats that can be used in energy efficiency programs such as demand response. Besides, ComEd, other utilities partnering with Nest or ecobee include Southern California Edison, Georgia Power, Kansas City Power & Light, CPS Energy and Austin Energy.

When considering IoT business models, industry stakeholders must have an open mind about ways to leverage the opportunity of connected, intelligent devices. Utilities in particular should test out the latest hardware and potential services with an eye toward helping customers leverage the technology to be more energy efficient, or solve problems within the organization. Don’t over-think the model with extended pilots, however; the market is ready for solutions and will adapt as the IoT applications and use cases mature. In addition, take a similar approach with regulators. Embrace IoT technologies and their benefits, then promote rules that can enable the market to flourish in a safe manner.

Neil Strother is a principal research analyst contributing to Navigant Research’s Utility Transformations program, with a focus on smart metering technologies, home energy management (HEM) solutions and the Internet of Things (IoT) trend among consumers. Strother has an extensive background in market intelligence (more than 15 years) focused on emerging technologies, mainly in the wireless industry. Strother holds a Master of Science degree from Northwestern University and a Bachelor of Arts degree from Whitman College.

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