Building a disruptive business model on the Internet of Things

In short, for companies – and entire industries – looking to become the disruptors rather than the victims of disruption, the IoT is a valuable tool. But for those looking to transform their business model to meet the realities of changing markets, IoT won’t be enough on its own.

“I'm sorry to break the news, but IoT alone is not transforming business models,” says Dagfinn Wage, head of innovation at Lyse. “But it's a very important component, the way we see it.”

Wage is speaking at the Smart Summit in London, where the Internet of Things is a hot topic of discussion. But while many of his colleagues are looking at the trends and technologies surrounding IoT, he is focusing on business models shaping the adoption of the technology.

With such strong hype having overinflated IoT investment in the last few years, there has been a tendency to blindly embrace the technology, assuming that it alone will cure all ills. Which is perhaps why Wage feels the need to remind his audience of what a true business model really is.

“My favourite definition here is by Alexander Osterwalder, and he says that the business model describes how you create value, how you deliver it and how you capture value,” he says. “So when someone talks about a business model that's a subscription fee, that's not a business model, it's just a payment mechanism. If you don't have all these three covered, it's not actually a business model.”

Wage’s team at Lyse has been particularly focused on the subject of business models, and how they have been transformed as industries have been disrupted.

“One of the first questions that we asked ourselves when we started out here with this work was actually to see what happens when new business models overtake the old ones,” he explains. “And what we have seen so far is that when the flow in the business model changes, [or] when components in the model are removed, changed or added, something dramatic happens.”

This, he argues, can be seen in some of the world’s biggest disruptive companies, and IoT is already playing a key role.

“Tesla, it's a car, but for us it's an Internet of Things object because its stuffed with hardware and it's always connected, and there's a two-way flow of data coming from it. This change will change the car industry, and is about to do it now,” says Wage.

“Netflix, as you know, they have also done something, they have removed something. They have removed the cost of distribution, because whereas the traditional blockbuster had a high cost for distribution, they have a really, really marginal cost compared to it because they use the internet to distribute.”

Similarly, he argues, Google’s AdWords platform has transformed advertising in, as he puts it, “an example of a new component changing things”, while new technologies have led to a sustained period of disruption in the music industry that has led to the loss of over 70% of total sales revenues.

All of these industries, Wage argues, have one thing in common: a shift to a bi-directional flow of data.

“There is a disruption pattern here – and it goes for the banking industry, the commercial industry, the postal service – and all of them are characterised [by the fact] that when you have a bi-directional flow of data reaching a customer, then change happens.”

A significant part of this is the creation of ecosystems around these technologies, which allow this two-way flow of data.

“We profiled the big five, like Apple, Google, Samsung, these companies, and we found that what's changed here is that having control over the devices and the interfaces, and what we call local device operating systems are really, really important,” he says, “Because this is why telcos struggle, this is why British Telecom struggles, because they don't have any of these things actually connecting to the customer.

“So this is really important to see, and also they exploit all of what we call ecosystem partners, they have a lot of partners, and the other side of the business model: that's what makes it two-sided.”

The IoT is set to create, and in some cases augment, such ecosystems, which makes incorporating this two-way flow essential to the creation of IoT-focused business models.

“We always say that open innovation is an inherent part of these new business models; if you don't have open innovation, you will die. Nest has done this. And it looks different, but in principle it's the same,” he says, referring to the smart thermostat company that has made waves as an early example of a successful IoT company.

“Data is the new compulsory flow in these ecosystems. Just looking at Facebook, you will see that there is no money involved in the downstream side, but the two bi-directions in the data, you will find both on the downstream customer side and on the ecosystem side together with their partners.”

The energy industry is a field in which Wage has particular expertise, and right now he believes there is a “perfect storm” situation unfurling that makes now the ideal time for companies to transition to IoT-focused, bi-directional business models.

“You see the changes on the customer side: you have customer-centric trends, customer-friendly regulation – if you look at the winter package that the EU has launched, it's very customer friendly – and we have the digital technologies and the new platforms or business models that exploit them,” he explains.

Wage believes this will drive the transition to a new approach to energy, which he sees as beginning to play out with the acquisition of SolarCity by Tesla.

“I've been waiting for that acquisition, and it came, and they say that they have installed in-home controllers and broadband connections to all their residential solar sites, so they've been thinking about this for a long time.”

The wider picture for the energy market, he argues, will see energy supply increasingly become part of a larger package of offerings as other services become possible using the same infrastructure.

“We think that energy will be multi, it will be other actors selling other stuff, and then they put energy on top of it, which is the easy part actually,” he says.

However, it’s not just energy that needs to take action urgently. When it comes to disruption, the stakes are incredibly high.

“Nokia's phone was crushed by the iPhone, and yes you can crush a competitor, but if you are dealing with disruptive business models, they crush whole industries, so it's quite different when it comes to the impact,” Wage explains.

“These new business models, they're able to absorb what we call digital growth and digital exponential growth mechanisms. You will recognise Moore's Law, [but] this one is another law, it's called Nielsen's Law, it's the law of bandwidth, how it actually almost doubles every 18 months, so it has exponential growth.

“The higher number of digital exponential growth aspects the business model can absorb, the more disruptive it will become, and it happens both in the delivery part, the creation part and the value capture part.”

But for many industries, and particularly companies based in Europe, there is much to be done.

“The situation now, it's not good. If you look at how many we have of these platform-based companies in Europe, it's really thin,” he says. “And I think that's one of the serious challenges for Europe overall, because we focus a lot on technology, but we tend to forget these new business models enter the market.”

Nevertheless, it is important for businesses to remember how much of the infrastructure required is ready and waiting for them to exploit.

“You don't have to build a second infrastructure: it's already here,” he says. “It's called the internet. And this is the way your competitors will enter it, so there's no time for doing it. Either you exploit it or you're out of business.”