You’re probably hearing about the Internet of Things (IoT) from some of your technology suppliers. While much of it is very cool, and we’ll see much more that’s even cooler, why should you consider using IoT cloud services? What does all of this technology to connect machines, collect data from them, and learn from it actually do, in practical terms?

Timothy Chou

Timothy Chou

This article, the second in a three-part series on the IoT (see the first here), focuses on companies that build machines, whether tractors, gene sequencers, or compressors, and the IoT-related opportunities available to them.

As many in the software industry know, the movement to deliver software as a service has revolutionized the industry. And as machines become more and more complex and increasingly enabled by software, many of the lessons learned in software maintenance and service will also apply to machine service. Ultimately, that learning might reshape business models for everyone building industrial equipment.

Improved Service Quality

Hardware and software companies have traditionally provided maintenance services. In the case of software, such services are typically priced as a percentage of the initial purchase price. For their part, hardware companies many years ago connected to the devices they sold, enabling them the devices to “phone home” and report any potential problems, thereby improving the quality of service.

Today, the manufacturers of generators, blood analyzers, and forklifts can do the same. By connecting their Things to the Internet, not only is there a potential additional revenue stream, but also the ability to provide better service for the machine — better availability, performance, security, and change management

Better availability means less downtime for the customer. Better performance management might mean telling the customer how to better use the machine. Better security means not only ensuring there aren’t any viruses, but also notifying the customer when security patches are available for the software on the machine.

And because so much of modern machines are software, better change management service will mean ensuring the customer knows there are new features available merely by upgrading the software. Based on usage data, equipment suppliers can suggest more appropriate models or companion equipment. All of us have seen Amazon provide personal and relevant information regarding other products that we might be interested in, so why not do the same things on the industrial side?

Reduced Cost of Service

Traditional computer hardware service requires “rolling a truck” to bring spare parts to repair or service a machine. By connecting the machines, not only could you diagnose problems remotely, but also if you need to make a house call, you could make sure you brought the right part.

All of this factors into dramatically reducing the cost to deliver a service. Such capabilities are now available to the manufacturers of MRI scanners, locomotives, and wind turbines.

Maintenance of machines — whether high-speed inserters, 19-foot scissor lifts, or HVACs — is often left as a cost to the purchaser. As consumers who have bought cars or computers, we know how true that is. These maintenance costs can be significant. A large construction rental company spends over $1 billion per year on maintenance.

The general practice today is to implement time-based maintenance. As a driver, this means that every 12,000 miles you should put oil in your car, no matter if you drive it on a track or are just taking the kids to school.

While that’s the best we can do in a non-connected world, once we connect many Things, it becomes possible to know the difference between a forklift that’s been used in a sandy, high-humidity, high-temperature environment for the past year and one that’s been in an air-conditioned warehouse. Knowing precisely when the offshore wind turbines need service and being able to do that proactively offers significant operational and economic benefits.

New Business Models

Manufacturers have traditionally focused on producing a physical good and capturing value by transferring ownership of that good to a customer through a sales transaction. The owner is then responsible for the costs of servicing the product and other costs of use, while bearing the risks of downtime, other product failures, and defects not covered by warranties.

Smart, connected products allow the radical alteration of this long-standing business model, and leading machine manufacturers are beginning to understand that.

Luckily, we can learn from our friends in the software industry. Early in its history the industry created products and sold them on CDs; if you wanted the next version of the product, you’d have to buy the next CD. As software products became more complex, companies like Oracle moved to a business model where you bought a product license and a support and maintenance contract. That service contract was priced at a derivative of the product purchase price. Over time, this became the largest and most profitable component of many enterprise software companies.

Next these companies said, if you connect your machines we can offer you advisory services. As the manufacturer of the software product, with knowledge of how it was being used, you could tell clients they could improve security by applying this software patch, or increase the performance by making changes to the database. Of course, once you can tell customers how to manage the availability, security, performance, and change in the software, it’s a simple matter to offer to do it for them.

So the second generation of enterprise software companies (for example, WebEx, Salesforce, and Netsuite) built their software and processes so they could manage products’ security, availability, performance, and change. Service and support levels could be guaranteed because the product management was now in the hands of the manufacturer. These business models allowed for customers to purchase the services on demand and resulted in differentiated and highly valued software-as-a-service companies.

Today, manufacturers of machines — whether seed drills, chillers, or CT scanners — can leverage the path paved by the software product companies through three new business models:

  1. Service and Support — bundling machine sales with warranty or service contracts so the manufacturer keeps service in-house and capture more of the value from service efficiencies.
  2. Assisted Services — connecting to the machine and offering advice to improve its availability, security, or performance of the machine.
  3. Machine-as-a-Service — retaining ownership of the machine and taking full responsibility for its security, availability, performance, and change, in return for a recurring charge. We’ve seen this done by enterprise software-as-a-service providers with their applications.

The Internet has enabled the “as-a-service” business model for IT infrastructure and software. The Internet of Things enables “machines-as-a-service” business models for all kinds of other products, potentially letting many kinds of companies shift from selling products to selling services based on those products.

This model can transform large capital expenditures into a pay-by-usage operating expense. Examples of this trend are emerging. Internet-connected sensors built into products enable tires to be sold by the number of miles driven, compressors by the amount of air compressed per minute, and coal-mining machinery by the number of cubic meters of coal mined.

Such services will often be more profitable than the products they are based on. You may not want to be the first in your industry to do this, but you certainly don’t want to be the last.

Timothy Chou is a lecturer on cloud computing at Stanford University. He is a former president of Oracle on Demand. For more information about IoT and how it might reshape your business, check out his new book: “Precision: Principles, Practices and Solutions for the Internet of Things” and his online class Precision IoT: The Class.

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