The golden ratio of IoT technology investment

Turns out the actual business performance of an IoT investment follows neither a hypey, rocketing J-curve nor a catastrophic plunge into the red. Read on if you want to understand how businesses’ worthwhile investments in IoT play out.

What do most businesses want from IoT? Even today? Exactly—new revenue.

To get there, they often hope that besuited, bespectacled, bewildering tech consultants will navigate their manufacturing company across the rainbow to the putative pot of top-line gold. Unfortunately, that's not how things play out. There’s a reality about IoT investment you can embrace, if you’re willing.

The golden ratio

If you’re investing in an IoT project, here’s the golden ratio of IoT investing that you need to accept and understand:

SPEND	GAIN	SAVE	EARN
$1	$6.00	$0.60	$0.06

For every $1 you invest in IoT, you should expect to:

1. Gain $6.00 in added value
2. Save $0.60 in direct cost reductions
3. Earn $0.06 in new revenue

• Gain equates to those difficult-to-calculate, non P&L-impacting benefits you'll see from implementing your IoT technology. These primarily come from new capabilities, avoided pains, increased barriers of protection, new markets opened, productivity gains, increases in purchasing power, and time economy.
• Save explicitly means the money that you, as an IoT buyer, should expect to save over a given period of time*.
• Earn means the money you can expect to earn from the sale of your connected thing for its connected value above and beyond its otherwise non-connected value.

*What period of time? Incidentally, no research we’ve ever seen answers this directly, but in our experience, it's about 4 years.

What holds IoT savings and earnings down?

Around 2018, we observed a shift in how businesses view technology. Past digital replaced paper systems, becoming the “back office”. Present-day digital is about delivering core offering value in line with modern expectations.

That means leaders must deliver some or all of their business’s and products’ offerings digitally. That shift presents five challenges:

1. Digital is a strategic function businesses must control.
2. Any technological convenience a business creates has to outweigh any interference or added work imposed by their technology.
3. Multiple technologies must work together to create value, especially with connected products.
4. Smart product, service, and process expertise doesn’t live in one place, and few orgs have it.
5. If digital technology becomes part of a product or internal process, it needs to be maintained over a long-ish period of time (5–10 years, probably).

To decide to do IoT is to invite new challenges into a (generally underprepared) business while signing onto several potentially long-running costs. Two costs in particular choke real financial return on IoT:

1. Maintenance cost. No IoT system is a buy-once, cry-once purchase. They have Ferrari-levels of upkeep. This gets worse as system components degrade or become obsolete.
2. Offering creation and maintenance. When you’re selling a product’s connected features as their own separate financial transaction, you’ll need a new set of everything that goes into selling a product: marketing, salespeople, product managers, feature enhancements over time, support documents, trained customer service staff, even potentially new accounting rules!

If it sounds like a boatload of hassle, it is.

So why do people invest in IoT at all?

If they’re looking for a 10x silver bullet, they don’t. However, if there’s an intangible or incalculable gain—a benefit that’s worth having and maintaining over time—connecting your offerings or operations can be worth enduring the build process and the long cost tail. Some genericized example outcomes we’ve seen and created:

• Total overhaul (and simplification) of the customer experience
• Complete pivot in distribution and customer relationships
• Brand new market established
• First-time, real-time visibility into supply chain and provenance
• Endurance beyond the business’s first product
• Dramatically more accurate scientific data

All of these amount to step-change improvements in a company’s offering or operations. Some of them are even zero-to-one. That potential step-change is what you need to look for.

How do you evaluate a potential investment in IoT?

Identify gained value, direct savings, then revenue by asking these questions in order of magnitude:

1. Do I get a new thing that I want, eliminate an old pain, or erect a tall barrier? Is that worth having?
2. Do I save any money by implementing this tech? If so, how much by when?
3. Do I get any uplift from the connected version of my product(s)? If so, how much? Oh, and what are the costs of providing that service?
4. How much am I spending for the above, and do I feel that’s worth it?

If you feel good about your answers to the above, then you’re strategically, mentally, and financially grounded enough to create and maintain a reasonable IoT success.

Back in the day (erm, 2016), IoT was supposed to have become a $6 trillion dollar industry by now, propped up by fantastical numbers:

• 75B connected devices (archived IHS article)
• $470 billion in IoT vendor revenue (Bain)
• 21.11% compound annual growth rate (archived IDC article)
• The vast majority of projected IoT gains come from productivity gains (€430B), increases in purchasing power (€300B), and time economy (€210B) (Forbes’ synthesis)

The most pessimistic predictions from 10 years ago were a whole standard deviation too optimistic for reality. Do notice that those overestimations prompted silent retractions like those cited, and revisions by those willing to face error.

Our golden ratio comes from analysts’ synthesized estimates. Three (those bolded) matter most:

• 2024 IoT devices installed base: ~18B
• 2024 IoT spending: $260B technology worldwide.) on IoT products and services
• 2024 global value: ~$1.6T (to a $100T global economy)
• 2020 value redistribution: $3.5T (worldwide revenue shifts with no growth impact)
• 2020* value to end customers: $177B (IoT’s reduction in costs realized by end customers), but we’ll call it $200B
• 2024 end users’ new revenue attributable to IoT: $7B

That’s right. Almost all research sources are silent on the amount of revenue companies can generate from connectivity. The last estimate we saw came from the 2018 period from a now unfindable (even on archive.org) IDC article that projected only $7B in worldwide incremental revenue gained by non-tech companies offering the connected version of their thing. While this data would be challenging to obtain, this also indicates that no analyst foresees value emerging from OEMs’ dreams of connected services offerings. Let’s be generous and call it $15B.

But what does it mean?

IoT impacts the global economy much like other automation technology, as a Schumpeterian creative/destructive wave that transfers trillions in earnings (a.k.a. “jobs”), generating far more efficiency (also a.k.a. “jobs”) than real growth. For clients, here’s what it means (approximately):

SPEND	GAIN	SAVE	EARN
$260B	$1600B	$177B	$15

SPEND	GAIN	SAVE	EARN
$1	$6.15	$0.68	$0.057

Or, for simplicity’s sake, the ratio you saw earlier:

SPEND	GAIN	SAVE	EARN
$1	$6.00	$0.60	$0.06

With a decent likelihood that failure to connect gets your revenue transferred elsewhere.

What else do analysts say?

Generally, IoT industry analysts focus on the size of the market for IoT technology providers—those selling picks and shovels to the metaphorical miners using them. Here are some general themes you’ll find in almost every analyst summary:

• Implementation difficulty is IoT’s greatest challenge
• Consumer IoT providers regularly stack adjacent services atop their recently-digitized products.
• IoT product and services buyers are wary and scared of charlatans
• The tech industry not actually 100% sure what the B2B and B2C IoT wants—consequently, IoT providers tend to "sell the last tech”
• Some connected products were already failing by 2016, but reporting on this dropped off
• In 2015—no competitor really has serious market share or making huge dollars on IoT, today big platform providers have share, but their profits are hard to work out
• Security’s still a huge problem, and security spend is at 10% of global market size and growing
• IoT still a bit ahead of its time
• Cellular IoT doesn’t make up a more than 10% of total devices
• Vertical solutions were long viewed as the likely winners in IoT, but that view softened recently with fewer analysts making claims
• Top solution areas: predictive maintenance, self-optimizing production, automated inventory management, remote patient monitoring, smart meters, track and trace, connected cars, distributed generation and storage, fleet management, and demand response, surveillance

We look forward to seeing what else industry tastemakers say about IoT in the future.

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Too often, technology expenditure creates performative work that indulges the buyer in commercial fantasy. If you want to leverage technology to affect your reality, Next Mile can help.