Monetising The Internet of Things: It’s About Services, Not Products

In late 2013 the diagnostics team at Tesla noticed a small but potentially significant problem. Some of its Model S electrical charging adapters (or the devices that plug into electrical outlets to charge the vehicles) were overheating, usually as a result of bad outlet wiring.

So that December they issued an OTA (Over The Air) software update that let all of its cars automatically reduce their charging current by 25 percent if they detected any unusual external power fluctuations. And for those who wanted them, they issued new adapters. Problem solved.

When was the last time your car diagnosed and solved a maintenance issue on its own?

We are still in the very early deployment of connected devices, or what I like to call the efficiency stage. Security, platform and bandwidth issues remain big challenges. But over the next couple of years we’re going to be hearing a lot more stories like this one.

The first stage in IoT will be about web-connected products using diagnostics to solve problems with firmware updates. Products will make themselves better.

The next step in the Internet of Things, however, will be about creating possibilities, or the discovery stage. Products are going to become conduits for a whole new ecosystem of cloud-based capabilities.

The winners in this industry will be the companies that keep their customers consistently and happily surprised with new subscription-based services. Tesla’s own Model S firmware changelog is a pretty remarkable document – take a look. Over the past few years Tesla drivers have woken up to discover that their cars can suddenly respond to voice commands, account for real-time traffic conditions and automatically adjust their suspensions.

Tesla undoubtedly makes a great product, but as a company it distinguishes itself by the services it wraps around that product. A Tesla is essentially a giant smartphone on wheels. Owning a Tesla isn’t a product experience, it’s a subscription experience. Once you’ve experienced a self-updating Tesla, you will expect all your cars to do the same, just like you do your phone or laptop.

Tesla is ahead of the curve, but manufacturers like GM are adding a 4G connection to every car coming off their assembly line in the next 48 months. To auto manufacturers, the data plans that they sell with their cars may ultimately be more valuable than the cars themselves.

If manufacturers are looking at the huge commercial opportunities of IoT (a $7.3 trillion market by 2017 according to IDG) as a way to re-market their existing product catalogue so that everything works with an app, they’re completely missing the point. The broader message of IoT is that stand-alone products don’t cut it anymore. Consumers, particularly younger ones, increasingly view owning something as simply managing the decline of a physical asset. They value access over ownership.

Other than picking a colour or slapping a monogram on it, a stand-alone product can’t be personalized. A product can’t learn your behaviour and preferences. A product can’t be constantly upgraded, so that it gets better and better — instead, it simply gets obsolete, another victim of the old landfill economy.

The point isn’t to ask “What can an Internet-enabled device do?” but rather “What does my customer really want, and how can I deliver that as an intuitive service?” That’s the secret to effectively monetising the IoT.

If I was launching a new connected device, I would concentrate all of my resources into making that product as passively intelligent as possible. I would make that product an excellent listener. I wouldn’t even think about enhancing its functionality until I had at least six months’ worth of behaviour and usage data to look at.

Then I’d make it my business to happily surprise my customers with valuable new services on a consistent basis. Services that they didn’t even realise that they needed. Just like Tesla does.

Tien Tzuo is CEO of Zuora

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