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Profiting Month-by-Month

By Benjamin Shepherd on August 22, 2016

The Internet of Things (IoT) isn’t a new idea, but it’s one that’s still going through growing pains. Some companies are making a mint off IoT, while others are getting left by the wayside. The hardest part of making a new product is figuring out what to charge, and how often to charge it.

In the WSJ’s Keywords column this weekend, Christopher Mims points out that we’re probably interacting with IoT a lot already, but not in ways that many people would expect. There are already tons of connected devices, but the real winners in IoT are the companies that have figured out how to provide IoT-as-a-service instead of a one-off device purchase.

Mims uses as examples Uber Technologies and Comcast Corp, which recently bought a business which sets up smart homes relying on connected devices to hook consumers up with recurring services. He also points to Clorox Corp’s new smart Brita pitcher which, instead of just telling consumers they’re out of filters, can reorder filters itself and creates recurring revenue.

That’s a terrific point. The IoT landscape is already littered with smart products that eventually got dumb, basically because of a flawed business model.

Just this past February, Alphabet shut down the server that kept its Revolv automation hub running. Basically, for a one-time $299 purchase, the Revolv hub allowed consumers to control everything from lights and coffee pots through a single smartphone app. But the hub relied on a cloud-based server to allow it to talk to the smartphone and, without that server, the hub is basically an expensive brick.

Revolv initially gobbled up a lot of market share precisely because it was a one-time, if a bit high, cost for consumers. Unfortunately for the company though, maintaining servers is a recurring cost and you’re only going to get so many buyers. I hate to put it this way, but the service was almost like a Ponzi scheme, relying on enough new buyers to support the old ones.

TCP smart lightbulbs are another case in point. While they cost two or even three-times more than a run-of-the-mill bulb, their biggest selling point was that you could control them remotely. But like Revolv they relied on a server maintained by TCP, which pulled the plug as of June 1st. And just like Revolv, it sounds like there just wasn’t enough cash flow to justify maintaining the server.

I’m not pointing this out to scare you off IoT; in fact, my intention is just the opposite. Every new technology goes through growing pains and, unfortunately, there are times when consumers get burned. Just think back to the great Betamax/VHS war of the 1970s. You ended up with an expensive brick if you bought a Betamax, but you might be surprised to learn VHS players just went out of production last month, finally supplanted by digital recording.

Thanks to failures of devices like the Revolv hub and TCP smart bulb, makers of IoT devices have gotten an object lesson in how to successfully sell and market their products. That’s especially true if, as most do, they’re going to rely on cloud servers to keep them connected. And as the examples in Mim’s column shows, consumers are generally willing to pay recurring fees if the service actually makes their lives easier or creates peace of mind.

That’s also good news for IoT investors, because it shows that the technology is coming into its own. A lot of people thought buying a single PC for your home was “dumb money” back in the 1970s, but how many do you have now? With effective pricing models being worked out, we’re sure to start seeing more smart devices being introduced since developers will be better able to monetize them.

 


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