When it comes to industrial IoT, the incumbents are winning

Industrial IoT is killing the traditional narrative of startups disrupting older players out of the market. Instead, leaders in industrial equipment are parlaying both their expertise and their customers’ hesitation over new products into new business models — and in the process, facilitating a gradual transformation of their business and their customers’ operations.

Along the way, they are buying startups or investing in them as a way to keep their fingers on the pulse. But the conservative nature of manufacturing and sectors such as oil extraction have too much at stake to build their future business on an unknown platform. All of this, plus new business models, are clearly laid out in a new report from Boston Consulting Group.

The report kicks off by covering how enterprise and industrial companies are adopting IoT. Readers of this newsletter are already familiar with many of the findings. For example, incumbents are generally at an advantage because they have access to lots of high-quality data generated by their machines and operations, while their customers are less tech savvy and reluctant to do the hard work of integrating several products together to deliver an IoT “solution.”

Incumbents have another advantage if they provide critical equipment in a manufacturing operation that can offer data that is useful across different problem sets. They have an added advantage if they can offer more than monitoring, and can instead take action on the insights delivered by their data. The challenge for incumbents seeking to take advantage of their data and relationships with customers is to build out internal teams that can make these IoT solutions work for customers.

This gets us to the most interesting part of the report: a discussion about how companies are monetizing their digital transformation efforts. First, the report tries to distinguish between platform providers and ecosystems. Then it lays out various business models that companies are trying. For example, the concept of selling hardware as a service gets some love, although the report notes that this is a challenging model.

It also talks about companies that have created and then licensed digital twins of their hardware. This is a novel model for me, but a shipping company has already sold a digital twin of a warship to the U.S. Navy along with the ship itself. This model won’t work everywhere, especially in consumer-facing industries where companies worry about their IP getting stolen, and in industries where a third-party parts market thrives.

Massimo Russo, managing director and senior partner at BCG and one of the authors of the report, replied to my emailed questions about controlling digital rights to gear by saying, “The digital twin can be bundled with a maintenance contract, or the degree of data shared with customer can be limited, with more available to the OEM providing the maintenance services.”

As for spare parts, the digital twin can be used to generate a 3D-printed part, but a licensing fee ensures the OEM still makes money. “Companies need to think about both physical and virtual part monetization,” Russo noted. This strategy could also help companies keep their distribution networks happy, by providing them with an opportunity to continue making money on parts and service even as catastrophic breakdowns become less common thanks to predictive maintenance.

The final revenue model takes a page from the App Store. BCG sees companies that can act as “orchestrators” between the customer and a variety of service providers. Orchestrators have the potential to address huge markets. The report points to Honeywell’s Connected Plant model and Schneider Electric’s Exchange platform as examples of this option. In each case, the orchestrator has built a platform for other companies to join and through which they can link their data to the orchestrator’s data. The buyer goes through the orchestrator and can add on elements they need from other participants in the platform. The orchestrator takes a cut, but the smaller companies that join the platform get seen by a wider number of customers.

Different companies will adopt different models, but BCG has done a good job proving that incumbents have the data, the credibility with the customer, and the ability to build out the needed technical chops to make sure they stay relevant as technology drives deeper into factories.