Recurring revenue model key to Internet of Things success

While the Internet of Things is a hot commodity, monetizing it, except in industrial sectors where similar work has been done for years, has been problematic. One expert says that the key to monetization is implementing it with a successful recurring revenue model.


Brendan O’Brien, chief evangelist and co-founder at Aria Systems

Like Y2K, the Internet of (IOT) Things is a huge manufactured hype machine. Unlike Y2K, the Internet of Things is very real. Monetizing it has been a problem for many players in the space to date, however. Brendan O’Brien, co-founder at San Francisco-based cloud billing provider Aria Systems, said that participation in the IoT is an absolute necessity, and that embracing a recurring revenue model around it is a key to monetization.

O’Brien said that while there is enormous hype around the IoT, the ability to monetize it so far has varied significantly.

“The inflated hype cycle argument is very real to a point,” he said. “Overall, if you compare the adoption of the IoT to the hype, it is lagging. But there are areas where is isn’t lagging that much. The slow progress has been more common in a lot of the consumer-related areas, like consumer wearables and home security, where monetization has been slow. That’s a problem because that has really been the focus of much of the media. That’s what gets the attention at CES.”

On the other hand, there are areas where monetization hasn’t been lagging that much.

“In the industrial area, the IoT has been moving at a great space,” he said. “Companies like Generac make generators for the industrial space where the generators have sensors sending out a warning when fuel is low, calling for technical support.”

Industrial players have an advantage here, in that many have been doing work that would now be called the IoT before the term even came into use.

“IoT is not a new technology,” O’Brien said. “It is Moore’s Law on several existing technologies like RFID and wireless connectivity and software embedding in chips.”

O’Brien said one of the ways the IoT extends this is that it is fundamentally based on a consumption-based recurring revenue – in both the industrial and commercial spaces.

“Usage will be the key driver,” he said. “It was only 7-8 years ago that subscription was a daring model, but that ‘one size fits all’ model has begun to wane in favor of a consumption based model. There’s a lot of value in consumption data because the reality is the need to truly understand customers. Usage data, even if you don’t bill for it directly – and that has become more common in the last two years – has massive value in understanding your customer base. Let’s day I discover 40 per cent of people on a free trial churn out, that’s not by itself actionable information. I don’t know why they left. But if I have usage data, to compare what they are doing compared to the others who stayed, I can find out things about why they are leaving, and what they aren’t doing. It might be that they aren’t using the service enough, in which case I can extend the trial period or give premiums for more frequent use.”

O’Brien said that 47 per cent of businesses in the U.S. have adopted or are considering adopting a recurring revenue model to be able to respond rapidly to customer demands and the number is growing. The IoT opportunity needs new approaches to billing and monetization because without agile billing engines behind recurring revenue models, IoT offerings won’t be as effective.

“Legacy systems can’t do usage based billing well,” he said. “You need to be able to translate everything into a line item on a bill. You need to measure it to charge for it.”

O’Brien said that segments where this has been slow to translate into revenues reflect the unique dynamics of particular segments, and don’t detract from the general principle.

“On smart appliances, interest has been lagging at the consumer level from where we expected it to be a year ago, but that’s because of a slow adoption rate since most sales are replacements for existing machines. We expect smart appliances will be the only ones available in the near future, and so in due course this will be a strong revenue opportunity.”

One longer term issue with consumer products is privacy issues, but even those O’Brien said will inevitably become minor.

“There is still some trepidation around security and privacy, but they really represent a societal shift,” he said. “With IoT data, there is information about you that you didn’t hit a button to push. Personal wearables do transfer information like your heart rate. But that’s of more concern to my generation. Younger people don’t care about these issues as much, so for the coming generation of buyers, it’s much less of an issue.”

O’Brien said that solution providers must get involved in both the IoT and Big Data, which are inextricably related.

“The IoT and Big Data are definitely connected because of the use data, which means that VARs have to embrace a Big Data strategy,” he said. “They have to pressure vendors to provide access to the data, because if one VAR doesn’t ingest that data, someone else will. They have to acknowledge what customers are going to demand, and those who resist it are dinosaurs-in-waiting.

“Even though there is a lot of hype, you still need to move,” he stressed.