The Business Case For The Internet Of Things

Offering Everything as a Service will make businesses twice as valuable.

The Internet of Things (IoT) allows applications to run across both the Cloud and connected devices, and that means that just about every piece of equipment that was previously bought now can be efficiently rented out.

Take an elevator, for instance.  Today a typical elevator for a commercial building costs about $112,500 to install, plus another $4,800 each year thereafter for the maintenance contract.  The IoT permits an entirely different business model.  Instead of selling the elevator to the building owner, the elevator manufacturer can instead keep ownership of the elevator and charge by the trip.  In this model, the elevator manufacturer would charge about $0.11 (eleven cents) for each elevator trip, on average.

Let’s make some assumptions in order to understand this 11 cents per trip a little better.

  • Yearly trips per elevator: 132,000 (the global average)
  • Elevator service life: 20 years (again, average)
  • Cost of capital: 7.95% (typical for an elevator manufacturer)

Under these assumptions, and at 11 cents per ride, the present value of the revenue is the same for the manufacturer under both models.  So if all else were equal, the manufacturer would be indifferent between selling the elevator upfront and getting the yearly maintenance contract, and charging 11 cents per trip, on average.

But all else is definitely not equal.  In the software industry, companies that sell software licenses upfront (and typically sign a maintenance contract) average a 3x multiple on their revenue.  That is to say that investors value companies like this at 3x their revenue.  But software companies that have recurring revenue average a 6x multiple on their revenue.  In other words software companies that sell their software as a service are twice as valuable as companies that sell upfront licenses.

Keep reading, and see how far the rabbit hole goes...

Keep reading, and see how far the rabbit hole goes...

And there’s very good reason to think that the same dynamic applies to capital equipment manufacturers like elevator companies as well as it does to software makers. 

A Boston Consulting Group analysis of performance from leading machinery companies in recent years shows that services have outperformed equipment sales in several dimensions:

  • Faster growth rates
  • Greater predictability
  • Greater resilience through economic cycles
  • Greater profitability

Any business that grows faster, more predictably, is less exposed to the economic cycle and has higher profitability will be more valuable than another business that does less well on these factors.  The Internet of Things allows companies to shift their business model to services entirely, without changing the present value of their revenue, potentially doubling the value of their business.  That’s a pretty strong business case.

And there’s a strong business case for the building owners as well.  Instead of having to finance the purchase of the elevator, the building owner’s costs instead scale up and down as the occupancy of the building (and rents) scales up and down.  Instead of needing to build a bigger balance sheet in order to rent space out profitably, the building owner reduces risk and reduces up-front cash outlays.  And, if the elevator is equipped to recognize passengers, the building owner could even pass the elevator costs on to the tenants in proportion to their elevator use.  A pretty interesting proposition for the building owner.

But really, we’re just getting started down this path.

So awesome.

So awesome.

The model we’ve just outlined is Infrastructure as a Service (IaaS) as applied to elevators.  This is the kind of business that Amazon has with Amazon Web Services in the Cloud, where they rent out servers and storage (capital equipment) by the hour.  This is a great business for Amazon. So much so that in 2018 Amazon Web Services has been growing more than 40% while also having profit margins greater than 20%!

But IaaS isn’t the only kind of “as a service” model that there is.  There are also Platforms as a Service (PaaS) in which all of the infrastructure you need to build great applications is combined into one platform that is, again, priced per use or per hour rather than sold for a lump sum up front.  In the case of a commercial building you could imagine the elevators, escalators, climate control, catering, lighting, security, common spaces (think conference room reservations for example), phones and bandwidth all being offered as a service through a common platform.

And finally there is Software as a Service.  At least, that’s what it’s called in the Cloud, where software sold as a subscription solves a problem for its user.  There are any number of examples of these (Salesforce.com is a Customer Relationship Management system as a service, Hubspot is Marketing Automation as a service, etc. etc.).  But in the Internet of Things, the last layer won’t really be software as a service.  On the Internet of Things, the last layer will be Experience as a Service (UXaaS).

UXaaS: like having these guys at your beck and call, but in the 21st century.

UXaaS: like having these guys at your beck and call, but in the 21st century.

Imagine that you have subscribed to an Experience as a Service offering that is integrated with your office building, and you’re on your way to work in the morning.  Because of that, your Uber driver knows exactly where to drop you off outside your building so that you have the shortest walk to the elevator. 

The security system checks you in and the elevator door opens without you having to even break stride on the way to the elevator.  On the way to your floor, your office lights turn on, the window shades open and the climate control ensures that it is maintaining the temperature that gives you maximum productivity. 

As you sit down in your office, a delivery person from the building’s café drops off your morning cup of coffee just as you like it.  After 15 minutes at your desk checking emails, you walk down the hall to your conference room where you’ll be connecting with a team based in Europe.  As you approach, you notice that the room ordered bagels for your local colleagues and the videoconference system has dialed out to your team in Europe automatically.

Now if your office were able to deliver that kind of experience, would it make you and your team more productive?  I think it would.  And would it influence the building that you chose to locate your office in?  Again, I think it would.

Now think back to the elevator maker.  Delivering an outstanding Experience as a Service is pretty different from making elevators, but it’s also a much more valuable and differentiated business. Experience as a Service isn’t so much about connecting a piece of equipment to the Internet, but rather is about building agile software that runs across the Cloud and multiple pieces of equipment or devices to deliver that great experience each time.  And while Experience as a Service may seem far removed from where we are today, bear the following in mind:

We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.
— Bill Gates

Everything as a Service, meaning IaaS, PaaS and UXaaS is the business opportunity for the Internet of Things.  At Apiotics, our tools help developers, manufacturers, integrators, and others quickly build great, secure IaaS, PaaS and UXaaS applications for the Internet of Things.  Come build something great with us.

- Mac Dougherty