LTV Final Project- Consumer IoT Business Models

8/19/2019 LTV Final Project- Consumer IoT Business Models

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HBS

LTV

Consumer IoT

Business Models

Aziz Albahar, Vipul Chhajer, Evan McPheeMarch 2016


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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


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Agenda

• Executive summary

• Market context

• Business model analysis

• Implications for future businesses• Open questions


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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


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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 ($)


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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 ($)


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“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/


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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


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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


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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


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Agenda


• Market context




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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


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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

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$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


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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


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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

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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


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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

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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


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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

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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


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Agenda


• Market context




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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


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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


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HBSimilarities Chase High

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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

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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


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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


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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


1 2 3 4 5


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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


Transactions

HBSimilarities


/

1 2 3 4 5


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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


Transactions

HBSimilarities

t PCHW Is Not Platforms Incumbent

Chase High

I t ti /

1 2 3 4 5


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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


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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,


Interaction/

Transactions

HB

Similarities

to PCHW Is Not Platforms Incumbent

Chase High

Interaction/

1 2 3 4 5


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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,


Interaction/

Transactions

High value transactions Frequent interactions

Valuable businesses to be built where economic value transacted or where hudeeply invested

HB


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Agenda


• Market context


•

Implications for future businesses• Open questions

HB

LTV


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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?

Documents

LTV Final Project- Consumer IoT Business Models