Published on 08/02/2016 | Market Sizing
Hype-cycles are well known phenomena to those who pay attention to high-tech markets. Since we are probably at a peak of the early IoT hype-cycle in 2016, it’s natural to expect this latest wave of technologies to evolve just like other tech categories have in the past, with the eventual market power and market value going to a few consolidated, independent, and market leading platform companies. I think making this assumption could be a big mistake, particularly when it comes to platforms for IoT enablement (connected device platforms).
By Michael Tanner - Published on 06-13-2016
In the tech industry, industry platforms get created when markets consolidate around a small number of players who deliver standardized services (the platform) that enable application development and deployment. From the perspective of a technology business, history suggests that companies with new disruptive innovations repeat a similar process to eventually achieve market-leading platform status:
- Get major lighthouse accounts to establish the category
- Dominate self-referencing markets with differentiated and focused solutions
- Leverage and generalize those solutions to create a horizontal products platform as the market matures
- Expand the distribution and partner ecosystem to dominate the industry
- Establish the entire business as either the de facto brand and solution, or the one key differentiated alternative
You might also expect this process to result in high business valuations and industry domination by a few independent tech company winners. After all, when it comes to application enablement platforms, when markets mature, a small group of companies will usually end up dominating as their customers flock to the safe choices. Right?
Maybe not. In fact, there are good reasons why IoT technology categories may evolve very differently. Companies within previous B2B application enablement categories like app servers, BPM, databases, ERP, marketing automation, messaging, sales automation, switching, and others, grew their power (and market valuation) by consolidating services to support multiple use cases. As they consolidated, they achieved rapid revenue growth and built entrenched partner ecosystems, leveraging high switching costs, dominating market share, and controlling architectures that became widely adopted.
In essence, they helped to create and then control the complete industry value chain built around their platform.
This was the playbook that category leaders from Autodesk and Adobe to SAP and MS/Windows executed to become market dominators. Unlike with these past categories, however, the value chains for connected device applications are going to be much more difficult for technology companies to directly control.
In my opinion, IoT infrastructure providers will face significantly bigger challenges in achieving the kind of mega-Gorilla status and sustained high valuations than did their predecessors.
In the rest of this post I will refer to “the customer” as the customer of a technology company who sells IoT infrastructure. I won’t get into the details of either the IoT platform value chain or the IoT business models here, but as reference, two recent posts by Microsoft’s Mohit Agrawal nicely illustrate both: the first post, “Business Models in the Internet of Things” illustrates the IoT value chain. The second post, “Impact of Internet of Things on Business Models,” summarizes different business models that are coming into play.
IoT is about accessing, analyzing, and operating upon information retrieved from edge devices, and then using that information to create efficiencies and improvements to the performance of those edge devices (or the end customer’s experience).
The value chain doesn’t just end at the customer (the organization which a tech company sells to). It extends to the customer’s customer (or the customer’s machine) at the network edge. The insights generated from the data are a major part of the value created — what edge devices are doing, when they need maintenance, how or why consumers are using them, and what might be expected to happen next.
Companies who want to expose this value require a way to optimize machine or consumer experience through the use of increasingly sophisticated analytics. This is key, because unlike the other categories I referenced previously, the companies who embark upon a connected device strategy (the customers of technology companies) are likely to see IoT infrastructure as a strategic investment into their core businesses and into their actual products and processes.
This viewpoint will make it more likely for these companies to interact with technology providers strategically, and even in a competitive way. They may need the tech companies to initially assemble solutions and build market entry. But, just like independent software companies have done in the past, as markets mature and growth eventually slows, they will will start looking for ways to design the partner tech companies out of the game, either through independent in-house development, consolidation, or acquisition. Since the application value to be unlocked requires access to the edge-point data, and because the manufacturer owns the access to that data, the real power in the IoT market is much more likely to migrate towards manufacturers rather than only to the tech companies who support them.
When application infrastructure such as ERP, messaging, CRM, marketing automation, and others were originally adopted by major manufacturers such as GE or Bosch, it was undoubtedly clear to them that building and controlling the software platforms internally made little sense. It was a different business than the ones which they were in; the competencies required were different, and, had they invested in trying to do it themselves they’d have gotten zero credit in the public markets for the effort. Today, however, it’s not so clear. Large corporations that plan to implement connected device strategies may see platforms that control, manage, analyze, maintain, and update devices as natural investments into their core businesses. They may also see the IoT as a way of transforming aging commodity product businesses into modern “products-as-a-service” businesses with more predictable revenue streams.
In fact, both GE and Bosch appear to have reached this conclusion. GE, for example, has made heavy investments into creating its GE Digital group, and establishing its Predix IoT platform not just for use within its own divisions, but for use by other organizations and industries. It’s invested at least $ 105M into the big data and cloud PaaS company Pivotal. Bosch, recently acquired Cologne-based ProSyst Software GmbHto fuel its own IoT offerings, and says it will also make the software available to other companies. Unlike the early days of front and back office application enablement categories, manufacturers such as GE and Bosch no longer see commercial software as something far afield from their core businesses. In fact, they are investing millions into software enabled offerings of their own.
Unlike earlier technology categories, where independent, market-dominating technology providers grew as independent companies, it’s more likely for key IoT platform solutions to end-up under the eventual ownership and control of the companies who manufacture the “things” of the IoT. .
Their primary competitors may not be Gorilla-like independent software companies that deliver a complete solution, but consortia-driven, open source platforms.
Another key difference with IoT applications has to do with how value is created. Because connected device applications get much of their value from analytics sourced from edge device or end-user data, independent IoT platform providers can be blocked by their customers from creating and owning analytics-based applications due to the sensitive nature of the customer data required.
IoT platform providers can certainly provide tools that enable customers to create analytics — for example, descriptive analytics that report things about where edge devices are at, how they are performing, what they are doing, etc., but this level of analytics is always the first to commoditize.
The larger value from a connected device strategy comes from predictive analytics — machine learning and prescriptive alerts that operationalize and optimize device performance.
Creating these high-value predictive use cases requires open access to statistically significant edge device data to understand whether an application is even possible. Tech companies can get access to this sensitive customer data doing work for hire, but they are often prohibited from owning the resulting intellectual property that could enable them to build reusable and marketable business applications.
Nick Beim recently wrote a TechCrunch article The Barbell Effect of Machine Learning, pointing out how these higher forms of analytics will likely concentrate value among those who own the data. I agree. Within the IoT market, I believe that other major manufacturers, just like GE and Bosch, will come to realize that the data harvested from their edge device installed bases, and the corresponding analytics, are the golden jewels for creating business value. And, if they are making the investment into developing this infrastructure for their own divisions, why not leverage the efforts to create the same tools for other businesses to use?
So, what about the independent software vendors such as PTC, who acquired Thingworks and Axeda, or Autodesk, who acquired SeeControl? Both companies made these acquisitions very early in the IoT life-cycle, and each of these acquired businesses now has deeper resources and an existing customer base to up-sell into. Even so, I don’t believe that industry consolidation of the type we saw with ERP, sales automation and the other B2B mega categories is likely to happen. Companies such as Autodesk and PTC will still face the value chain barriers that did not exist with PLM/PDM and CAD tools. Over time, their competition will include companies such as GE, Bosch, and probably many other industrials who can differentiate through deep domain knowledge at the high end, and at the low-end, the possibility of open-source and consortia led offerings.
If I’m even a little right about this, the eventual shake-out will produce a more fragmented industry as compared with what we’ve come to expect based upon history. Connected device players who execute a platform strategy and remain independent will find it harder to achieve real market dominance. These can still be tremendous businesses, of course, but they might not achieve the huge platform valuations that previous tech Gorillas did in their heyday. At the same time, established Fortune 100 companies who choose to invest into building connected device platforms themselves may increase their bottom lines through efficiencies and their top lines through recurring services, but the financial markets will probably just value them as better versions of themselves unless or until they eventually spin out those businesses as independently valued pure-play companies. Either way, it will be interesting to see how this market evolves.