8/19/2019 LTV Final Project- Consumer IoT Business Models
1/33
HBS
LTV
Consumer IoT
Business Models
Aziz Albahar, Vipul Chhajer, Evan McPheeMarch 2016
8/19/2019 LTV Final Project- Consumer IoT Business Models
2/33
8/19/2019 LTV Final Project- Consumer IoT Business Models
3/33
HB
LTV
Executive summary
• Funding to startups has doubled in the five years to over $2B in 2015,26-30B devices are expected to be connected by 2020
• However, the earliest consumer IoT companies (Fitbit, GoPro) to IPO have strug• Consumer IoT is extraordinarily fragmented, competition in sub-categories is
extremely high- lower barriers to entry have resulted in an explosion of HWcompanies
• Though a plethora of business models are being experimented upon, true prodmarket fit for consumer IoT limited to date
• Six primary categories of business models are available to consumer business models, with widely varying customer LTV potential: 1) prodsales, 2) high-variable cost premium services, 3) low-variable cost premservices, 4) hardware-as-a-service, 5) consumables, and 6) data licensi
• Understanding key trends and drivers of the consumer IoT space is cruto the success of IoT startups- the team has developed five key
suggestions for consumer IoT businesses
8/19/2019 LTV Final Project- Consumer IoT Business Models
4/33
HB
LTV
Agenda
• Executive summary
• Market context
• Business model analysis
• Implications for future businesses• Open questions
8/19/2019 LTV Final Project- Consumer IoT Business Models
5/33
HB
LTV
Both funding and connected devices have exploded over thpast five years, and are anticipated to continue growth to 2
Source: http://www.mckinsey.com/industries/high-tech/our-insights/the-internet-of-things-sizing-up-the-opportunity; CB Insights IoT Landscape Q3 2015
0
50
100
150
200
250
$0
$500
$1,000
$1,500
$2,000
$2,500
2011 2012 2013 2014 2015
IoT Global Yearly Financing History
2010 - Q3 2015
Investment ($M) Deals
Funding to IoT Startups has more than doubled in
five years…
0
5
10
15
20
25
30
35
2013 2020E
Connected devices worldwide (B)
7-10B
26-30B
…and connected devices worldwide are pr
to explode to ~26-30B by 2020
8/19/2019 LTV Final Project- Consumer IoT Business Models
6/33
HB
LTV
Fitbit has grown extremely rapidly, but its share price has strugglesince its IPO in 2015- opinions on future outlook mixed
Fitbit Summary Key Financials Growth Trajec
“Fitbit helps people lead healthier,more active lives by empowering themwith data, inspiration, and guidance toreach their goals.”
Fitbit Mission Statement
• Market Cap: $3B
• Revenue: $1.85B
• Net Income: $175M
0
5
10
15
20
25
2012 2013 201
Devices Sold (
Active Users (Source: Fitbit 10-K for year ended 12/31/2015
Fitbit Stock Price – 07/2015 to 03/2016 ($)
8/19/2019 LTV Final Project- Consumer IoT Business Models
7/33
HB
LTV
Analysis of GoPro indicates growth is slowing down after fastart out of the gate- can it recover in the long-term?
Fitbit Summary Key Financials Growth Trajec
“Enabling immersive and engagingcontent is at the core of our business.We develop product solutions toenable consumers to capture, manage,share and enjoy some of the mostimportant moments in their lives.”
GoPro Mission Statement
• Market Cap: $1.75B
• Revenue: $1.6B
• Net Income: $36M
Source: GoPro 10-K for year ended 12/31/2015; http://www.businessinsider.com/gopro-revenue-growth-hit-the-wall-2016-1
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
2010 2011 2012 2013
GoPro Revenue
Revenue ($M) Re
GoPro Stock Price ($)
8/19/2019 LTV Final Project- Consumer IoT Business Models
8/33
HB
LTV
“IoT” is an extremely broad, fragmented space with significcompetition in every meaningful sub-category
Notes
• Business models widely varied- a hodof attempts for revenue, network effuser acquisition have resulted in signvariation and competition even withinsimilar categories (e.g., smart locks m“wearables”, etc.)
• Experimentation abounds in search fbusiness models and consumer tractioIoT startups with high press awarenesto achieve true product-market fit, mcash-flow positive models
Source: Matt Tursk, MD FirstMark Capital- http://techcrunch.com/2013/05/25/making-sense-of-the-internet-of-things/
8/19/2019 LTV Final Project- Consumer IoT Business Models
9/33
HB
LTV
Many current IoT businesses can most accurately be described assmartphone components assembled in Shenzhen wrapped in slick m
Smartphone Components Driving IoT
“[Today’s surge in IoT products] is basically the
peace dividend of the smartphone wars , which is to
say that the components in a smartphone — the
sensors, the GPS, the camera, the ARM core
processors, the wireless, the memory, the battery —
all that stuff, which is being driven by the incredible
economies of scale and innovation machines at
Apple, Google, and others, is available for a fewdollars. They were essentially ‘unobtainium’ 10
years ago. This is stuff that used to be military
industrial technology; you can buy it at RadioShack
now”
Chris Anderson, former editor, Wired
Access to Shenzhen Democratized Marketing Efforts H
Source: http://foreignpolicy.com/2013/04/29/epiphanies-from-chris-anderson/; Wikipedia.org; http://ben-evans.com/benedictevans/2015/1/11/home-and-the-mobile-
• Easier than ever to access Shenzhen
manufacturing resources- costs and capabilities
no longer require significant resources (or
provide a meaningful “moat”)
IoT startups that rely only on these three factors almost certainly doomed- meaningful differentiated
sustainable competitive advantages (network effects, economies of scale, etc.) will be necessary for su
• Millions being poured in to
products in an effort to “bu
defend undifferentiated pro
8/19/2019 LTV Final Project- Consumer IoT Business Models
10/33
HB
LTV
Business model experimentation has resulted in wide varieproducts and user experiences- viability of many still unclea
Company Product Description Business Model
Petnet Automatic pet feederBuy product, buy add-ons through
product such as food
SutroAutomatic pool condition
monitor and cleaner
Buy product, buy add-ons through
product such as chemicals, pool
technicians
Tank
Utility
Monitors propane levels
in tank
Buy product, buy add-ons through
product such as propane
SenseHome energy monitor for
all utilities
Monitors electricity usage of entire
home grid, helps user understand
products that use most energy or are
faulty
OneDrop
Interactive diabetes
monitor
Monitor diabetes symptoms and
record food consumption
8/19/2019 LTV Final Project- Consumer IoT Business Models
11/33
HB
LTV
IoT has seen a proliferation of consumer products focused atextremely narrow niches in recent years- viability of these unclea
• Consumer IoT in many ways has becextremely niche-focused market seproducts increasingly focused on exspecific use cases and limited custo
• Many markets small and overcrowded wwith extremely slightly different functioclose substitutes for one another
• Internet-enabled basketballs, walkie-taattachments for phones, smart refillable
examples of this phenomenon- productcustomer promise, but with only small markets that don’t solve critical problegroups of people
• Early significant winners in this spacdemonstrated broad appeal across of consumers (e.g., power-saving wfitness with Fitbit)- niche businesseto be able to achieve extremely hig
remain viable in medium-long term
Source: http://www.wilson.com/en-us/anthem-media/images/basketball/wx/graphic-ball-lighter.png; http://www.petnet.io; https://store.orionlabs.io/products/onyx-2-pack-choose-colors
8/19/2019 LTV Final Project- Consumer IoT Business Models
12/33
HB
LTV
Agenda
• Executive summary
• Market context
• Business model analysis
• Implications for future businesses• Open questions
8/19/2019 LTV Final Project- Consumer IoT Business Models
13/33
HB
LTV
Six predominant business models have emerged in consumIoT as candidates to fuel profitable growth for businesses
Product sale
High cost (HW-/
Services-like)
premium services
Low-cost (SW-like)
premium services
Hardware-as-a-
serviceConsumables
Description
Sell IoT hardware to
consumers as
primary profit
engine
Sell premium
services to
consumers that
require significant
variable cost to
provide
Sell premium
services to
consumers or
business that
require no/ little
variable cost
Charge consumers a
monthly fee for
access to hardware,
with repair/
replacement often
bundled in to fee
Sell higher-margin
consumables as
primary profit
engine to
complement lower-
margin HW
m
Example
Ringly sells
connected women’s
jewelry only,
without recurring
revenue streams
Nest Cam (Dropcam)
sells HD video
storage,
transmission, and
access for a monthly
fee.
Apple App Store,
Jibo “talents” and
others cost nothing
for device
companies to
distribute.
Tile sells the ability
to locate tagged
objects for ~$1/
month.
Keurig reaps
significant gross
margins (~35%+) on
consumable coffee
pods, Amazon Dash
a similar model.
m
Model Customer
LTV (directional) Low Moderate High Moderate High
V
o
Source: Keurig- http://www.statista.com/statistics/326520/keurig-green-mountain-gross-margin-of-portion-packs-worldwide/; Tile- http://readwrite.com/2015/10/13/hardware-subscr
1 2 3 4 5 6
8/19/2019 LTV Final Project- Consumer IoT Business Models
14/33
HB
LTV
Pure HW product sales are difficult business models to builsuccessful stand-alone businesses around
Product
sale
High cost
premium
services
Low-cost
premium
services
HWaaSConsum-
ables
Data
licensing
1 2 3 4 5 6
$100.00
$60.00
$10.00
$30.00
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1
Typical Breakout of HW Product $ Sold in Retail
(Illustrative/ Directional only, $200 device)
$ for returns, other costs
$ to distributor
$ to retailer
$ to HW company
Retail Margin Shares Customer LTV I
• Hardware product sales are
difficult, as HW companies
typically only receive ~50%
of device average selling
price (ASP) due to cuts to
retailer, distributors, otherplayers in channel
• COGS, freight, R&D, and all
other unit costs and opex
must be covered with this
50% of ASP- extremely
difficult to carve out
meaningful margins
• HW companies
$40 on a $200 A
margins often
• Customer lifetim
typically only th
device margin, compelling rep
proposition exi
• In product sale
model, cash flo
tight, especially
development c
to carry invento
8/19/2019 LTV Final Project- Consumer IoT Business Models
15/33
HB
LTV
High-variable cost and low-variable cost premium servicesresult in fundamentally different CLTV
0
2
46
8
10
12
14
16
18
20
1 2 3 4 5 6 7 8 9 10
C o s t / U n i t ( T o t a l )
Units
Low Variable Cost Premium Services- Illustrative
Unit Cost Chart
0
2
46
8
10
12
14
16
18
20
1 2 3 4 5 6 7 8 9 10
C o s t / U n i t ( T o t a l )
Units
High Variable Cost Premium Services- Illustrative
Unit Cost Chart
• High fixed cost, very low variable cost businesses result in very
low unit costs as quantities increase
• Key examples include app stores and other software sales, or
additional key generation for Kevo locks
• CLTV much higher than high variable cost premium services,
but may be difficult to demonstrate clear value to customers in
some cases (i.e., Kevo additional keys may result in customersfeeling “cheated”)
Product
sale
High cost
premium
services
Low-cost
premium
services
HWaaSConsum-
ables
Data
licensing
1 2 3 4 5 6
…n …n
Key implic
• Seemingly simil
services for con
products have v
ramifications fo
businesses• While high-mar
extremely valua
CLTV, cash-flow
these margins a
businesses may
to defend over
competitive pro
solutions
• High fixed cost, high low variable cost businesses result in
comparatively high unit costs as quantities increase
• Key examples include Nest Cam (Dropcam) video storage and
streaming services, streaming content licensing for Amazon
TV
• CLTV much lower than low variable cost premium services,
but often much easier to demonstrate clear value to customers
8/19/2019 LTV Final Project- Consumer IoT Business Models
16/33
HB
LTV
HWaaS models largely still speculated about in consumer Iobut potential of business model very high
Product
sale
High cost
premium
services
Low-cost
premium
services
HWaaSConsum-
ables
Data
licensing
1 2 3 4 5 6
Benefits Disadvan
• Ability to more closely tie
revenue to customer value
provided
• Potential to reap higher
overall margins/ CLTV at right
price and servicing cost• Potential to disintermediate
retail, distribution channel
partners
• Ability to manage upgrade
cycle directly for customers
implies lower platform
fragmentation
• Channel partne
developed, suc
HWaaS may req
first-party servi
distribution inv
to higher-risk b• Customer expe
be higher in mo
paying a month
• Services costs (
maintenance, u
management) m
• Managing chur
customer satisfessential to suc
be difficult*: Tile sells $12 product with no recharging capability that lasts ~1 year- in practice, Tile essentially sells tracking for $1/ month
Source: http://readwrite.com/2015/10/13/hardware-subscription-business-model/
Hardware-as-a-Service much more common in B2B
space (e.g., Amazon EC2 and other infrastructure-
as-a-service), but early examples like Tile* making
waves in consumer IoT
8/19/2019 LTV Final Project- Consumer IoT Business Models
17/33
HB
LTV
Consumables represent an intriguing business model for IoTbut will not work for every business
Product
sale
High cost
premium
services
Low-cost
premium
services
HWaaSConsum-
ables
Data
licensing
1 2 3 4 5 6
Benefits Disadvan
• Opportunity for high-margin
recurring revenue
(depending on nature and
margin of consumable)
represent high-CLTV
business model• Purchase of hardware may
make customers more
“sticky”, lengthen customer
lifetime/ reducing churn
• Managing cust
satisfaction and
crucial to succe
customers ofte
with higher-pri
off-brand podsrevenue cut to
defeating mode
Keurig has foug
attempts to pre
through “DRM-
measures, man
upset
Source: https://www.amazon.com/dashbutton; https://blog.bolt.io/keurig-accidentally-created-the-perfect-business-model-for-hardware-startups-18e9c3b4e796#.ypgd
Keurig not technically IoT model, but represents
clear business model template for consumer IoT;
Amazon Dash Button a more clear example of
consumer IoT being an entry point to a higher CLTVbusiness model
8/19/2019 LTV Final Project- Consumer IoT Business Models
18/33
HB
LTV
Data licensing has significant potential in consumer IoT, but ensurappropriate data value and privacy considerations crucial
Product
sale
High cost
premium
services
Low-cost
premium
services
HWaaSConsum-
ables
Data
licensing
1 2 3 4 5 6
Benefits Disadvan
• Gathering and selling data
costs consumers little, can
provide large benefits to
companies/ services
consuming data- potential for
high margin recurringrevenue (depending on value
of data set) and high CLTV
• Potential for device
businesses to be “paid
twice” by consumers for HW
and by corporate partners for
data licensing
• Privacy of cons
to manage, bal
tricky, and lega
can be difficult
(especially whe
multiple count• Not all data set
equal- demons
proving comme
anonymized da
partners can be
difficult
Source: http://welcome.libertymutual.com/nest/
Early days in consumer IoT data licensing, but
insurance companies like Liberty Mutual testing
value of insurance data with IoT products like Nest
Protect through partnerships and consumer
discounts for data access
8/19/2019 LTV Final Project- Consumer IoT Business Models
19/33
HB
LTV
Agenda
• Executive summary
• Market context
• Business model analysis
• Implications for future businesses• Open questions
8/19/2019 LTV Final Project- Consumer IoT Business Models
20/33
HB
LTV
Consumer IoT companies should be aware of five key insighas they build their products and business models
Similarities to PC,
MobileHW Is Not Enough Platforms Are Hard
Incumbent
Advantages
Ch
Int
Tra
1 2 3 4 5
• IoT to follow many
similar trends to
previousgenerations of
technology-
understanding
crucial to success
•Selling products
alone is not
enough - IoTcompanies must
build recurring
revenue streams
•Platforms and
“operating
systems” for IoTare attractive, but
only a very few
will succeed
• Incumbents will
have key
advantages inseveral significant
areas of IoT
• IoT st
chase
signifconsu
intera
trans
volum
maxim
of the
Si il iti Ch Hi h1 2 3 4 5
8/19/2019 LTV Final Project- Consumer IoT Business Models
21/33
HB
LTV
Consumer IoT will follow a similar trajectory to PC and Mobtechnology generations in three key ways
1. Moore’s Law: Expectedlowering processing cosrate of improvement mslowed
2. Progressively easier deas more software and tout
3. Shorter time to marketproducts as supply chairobust and experienced
Source – Morgan Stanley Research
Growth in computing devices
Similarities
to PC,
Mobile
HW Is Not
Enough
Platforms
Are Hard
Incumbent
Advantages
Chase High
Interaction/
Transactions
Many key trends from PC an
carry over to IoT, similar dr
8/19/2019 LTV Final Project- Consumer IoT Business Models
22/33
HBSimilarities Chase High
1 2 3 4 5
8/19/2019 LTV Final Project- Consumer IoT Business Models
23/33
HB
LTV
Early consumer IoT IPO darlings have suffered from an inabto build strong recurring revenue, though not for lack of try
Fitbit suffers from engagement problem
• 2015 revenue from subscription-based serviceswas less than 1% of total revenue
GoPro’s frantic efforts at platformiza
• Several attempts to create a platformclear results
• Licensing videos to brands
• Hardware accessories platform
• Drone image capture and analysis plaKolor
• Awards program to reward content cwith cash
Fitbit and GoPro market cap are 28% and 13% respectively from p
Half of Fitbit device owners don’t even use their device
Source: Fitbit S-1, Rock Health
U n i t s ( i n m i l l i o n s )
Similarities
to PC,
Mobile
HW Is Not
Enough
Platforms
Are Hard
Incumbent
Advantages
Chase High
Interaction/
Transactions
HBSimilarities
l f bChase High
1 2 3 4 5
8/19/2019 LTV Final Project- Consumer IoT Business Models
24/33
HB
LTV
Startups that can build data-centric businesses around existIoT businesses have a good shot at getting acquired
Target Target Description Acquirer Transacti
MyFitnessPal Nutrition-tracking Under Armour $47
MapMyFitness Run tracking Under Armour $15
Fitstar Personalized video workouts Fitbit $17.
Massive
HealthNutrition tracking Jawbone $2.7
Nutrivise Nutrition tracking Jawbone Undisc
Similarities
to PC,
Mobile
HW Is Not
Enough
Platforms
Are Hard
Incumbent
Advantages
Chase High
Interaction/
Transactions
HBSimilarities
HW I N t Pl tf I b tChase High
1 2 3 4 5
8/19/2019 LTV Final Project- Consumer IoT Business Models
25/33
HB
LTV
Proliferation of devices and competition at both the low- and highend will increase importance of sustainable competitive advantag
Dividends of smartphone + IoT
• Component prices tocontinue to decline forseveral years
• IoT device prices to comedown, increasing adoption ina “virtuous cycle”
• HW startups to continue toproliferate for a few years,most successful to eventuallyconsolidate (similar to mobileevolution)
Focus on branding & design
• Price competition inconsumer IoT inevitable,especially in productcategories dominated bycommodity smartphonecomponents assembled byoutsourced third-parties
• Brand-building to continue toincrease in importance,implying increased spendingon advertising and brandingby IoT
• Even greater need forbuilding recurring revenuestreams to fund brand-building efforts
to PC,
Mobile
HW Is Not
Enough
Platforms
Are Hard
Incumbent
Advantages
g
Interaction/
Transactions
Use data to bdifferentiati
• Networks effects asustainable compeadvantages crucialfor long-term succe
• Consumer IoT com
gather (and monetdata sets to fuel mlearning improvemfueled by network
• Businesses in consuthat enable/ supposided platforms, tieother strong busine
more defensible
HBSimilarities
HW Is Not Platforms IncumbentChase High
1 2 3 4 5
8/19/2019 LTV Final Project- Consumer IoT Business Models
26/33
HB
LTV
Common software OS will tie IoT similar to what happenedmobile OS 2005 to 2010
Symbian S60 Windows Mobile
Symbian UIQ iOS
Symbian MOAP RIM
Linux BadaPalmOS Palm webOS
Maemo MeeGo
Android
iOS
Windows Mo
RIM
2005 20
Evolution of mobile OS
to PC,
Mobile
HW Is Not
Enough
Platforms
Are Hard
Incumbent
AdvantagesInteraction/
Transactions
HBSimilarities
HW Is Not Platforms IncumbentChase High
1 2 3 4 5
8/19/2019 LTV Final Project- Consumer IoT Business Models
27/33
HB
LTV
Many platforms competing to be the “OS for the Smart Homexpect extremely few winners to emerge
Contenders for the Smart Home
Flex
Samsung Apple
Google / Nest Microso
Comcast, Ti
Warner, and oAmazon/Alexa
to PC,
Mobile
HW Is Not
Enough
Platforms
Are Hard
Incumbent
AdvantagesInteraction/
Transactions
HBSimilarities
HW Is Not Platforms IncumbentChase High
/
1 2 3 4 5
8/19/2019 LTV Final Project- Consumer IoT Business Models
28/33
HB
LTV
Expect voice to emerge as a strong interaction and controlmechanism for IoT, similar to touchscreens in mobile
• Connected ‘things’ have extreme cost constraintsand space limitations, implying that traditionalmethods of interaction (physical buttons/ keys,touchscreens, remotes) unlikely to be popular
• Voice likely to be the interaction mechanism of
choice on IoT, is a natural way to interact
o In 2014, number of Smart TV customers using theirvoice to find content increased by 230%
o Gartner expects one-third of PC users will use speech orgestures to issue commands by 2019
Source: Nuance Communications
to PC,
Mobile
HW Is Not
Enough
Platforms
Are Hard
Incumbent
AdvantagesInteraction/
Transactions
HBSimilarities
t PCHW Is Not Platforms Incumbent
Chase High
I t ti /
1 2 3 4 5
8/19/2019 LTV Final Project- Consumer IoT Business Models
29/33
LTV
Traction in voice-based IoT systems (HW and SW) being maby both large and small companies
Large companies want IoT data
• Goal is to get hooks into datagenerated by IoT devices
• Amazon, Facebook andNuance building voiceplatforms that IoT devicemakers can incorporate intheir devices
Startups not far either
• Smaller startups building -
o Devices with internallydeveloped voice analysiscapabilities OR
o Software platform for voice
and intent analysis thatother device makers can use
Typical Technolog
to PC,
MobileEnough Are Hard Advantages
Interaction/
Transactions
Echo / Alexa
wit.ai
Mix
Vernax
Source: Frost & Sullivan, Report on Voice Recognition Technology
HBSimilarities
to PCHW Is Not Platforms Incumbent
Chase High
Interaction/
1 2 3 4 5
8/19/2019 LTV Final Project- Consumer IoT Business Models
30/33
LTV
Large incumbents will leverage strengths to position own toplatforms as ‘killer app’ and capture “OS of choice” position
• Google and Facebook will leverage AI strengthsutilizing massive data sets and user bases to trainalgorithms/ AI
• Beauty of IoT is in rich data from sentient objects- AIunlocks value from these streams in ways that legacytools can not.
• Availability of OS will make hardware developmenteasier for device makers- but not owning SW orplatforms will erode defensibility for device makers,implying these advantages a double edged sword
to PC,
MobileEnough Are Hard Advantages
Interaction/
Transactions
HB
Similarities
to PCHW Is Not Platforms Incumbent
Chase High
Interaction/
1 2 3 4 5
8/19/2019 LTV Final Project- Consumer IoT Business Models
31/33
LTV
Some of the strongest businesses in consumer IoT will be those tin home/ work areas with frequent interactions or high value tran
Source : Samsung Electronics; www.designboom.com
onnected Refrigerator Example Smart Desk Example
to PC,
MobileEnough Are Hard Advantages
Interaction/
Transactions
High value transactions Frequent interactions
Valuable businesses to be built where economic value transacted or where hudeeply invested
HB
8/19/2019 LTV Final Project- Consumer IoT Business Models
32/33
LTV
Agenda
• Executive summary
• Market context
• Business model analysis
•
Implications for future businesses• Open questions
HB
LTV
8/19/2019 LTV Final Project- Consumer IoT Business Models
33/33
LTV
Several key open questions remain in consumer IoT- the answers these will be crucial to many companies’ success (or failure)
Will there be a new stand-alone“IoT Giant” or will incumbents
own IoT?
How and when will consumer IoT
“cross the chasm”?
How will industry
coherent privacy s
• Previous key generational
computing shifts have birthed
some of largest/ most
successful businesses of all
time (Microsoft/ Google/Facebook, etc.)- will IoT spur
development a new giant, or
will incumbents gobble up best
startups and reap largest IoT
rewards?
• Consumer IoT customers
largely affluent, predominately
male tech enthusiasts- when
and how will consumer IoT hit
the mass market?
• IoT devices will be
and most importan
consumers’ homes
the industry devel
privacy standards consumers, and w
the charge?
Top Related