- The Past: Generating Revenue with Subscriptions
- The Present: Tighter Margins for Vendors
- The Future: A Move Toward Predictable, Transparent, Affordable Hosting
In years past, industry insiders were certain that making money with the Internet of Things (IoT) was not limited to physical product sales. Rather, new revenue like value-added services, subscriptions and apps would become possible after the initial sale.
As we know, this is far from what happened, with only a fraction of customers today paying for extra services. And yet, despite the profit gap, the majority of device vendors host their devices on the cloud and accept fluctuating costs based on use. It appears that the IoT business model has evolved while the vendor pricing model has not.
Today, this imbalance creates a costly situation for device vendors. They continue to foot the cloud bill to host data for users, the majority of whom count “freemium” accounts and generate next to no revenue. Worse, this hosting model remains the status quo. So, how did the industry get itself into this position? And what does the future look like for IoT hosting?
The Past: Generating Revenue with Subscriptions
It’s important to highlight that the industry is very different today from what it was 20 years ago. Back then, subscriptions were the industry expectation. The service would generate predictable and recurring revenue streams to lock the customer in for a period of time. The thinking was that companies could then focus their sales resources on closing new accounts instead of trying to re-sell to the current customer base every quarter or every year.
However, the industry reality starkly differs from the ideas of yesterday. The rise of cloud hosting means “freemium” is the norm. Much like music and news services, many customers don’t pay for subscriptions once they get a taste for free. As a result, vendors face much stiffer competition and smaller receipts. The idea had been that subscription revenue streams would cover the costs of cloud hosting—though they never truly came to fruition in the IoT.
The Present: Tighter Margins for Vendors
Vendors that have successfully implemented a subscription service model remain few and far between. One outlier success is tracking services, where external costs to cellular services are required and impossible without a subscription model. Unfortunately, this example is the exception to the rule.
With revenue tough to come by, many vendors focus on cutting costs. For example, some are creating an IoT platform technology with pricing that can be costed into the product. Video surveillance cameras are a great example, as they normally come without a subscription fee and require the vendor to foot the bill for connection services between the camera and apps. This is achieved by using specific cost-saving technologies, like peer-to-peer connections, that show live feeds from the camera to keep the running costs per camera fairly low. Thus, the final price reflects the total operating costs.
On the whole, though, cloud hosting continues to burn a hole in vendors’ pockets. This is because current pricing models force vendors to pay for the number of servers that they consume, thereby delivering changing costs over time. This is an issue when revenue generation has not evolved in kind and vendors are forced to cover cloud costs.
The Future: A Move Toward Predictable, Transparent, Affordable Hosting
The good news is that IoT pricing is beginning to move with the times. At long last, pricing models are starting to include one-time, fixed fees. In contrast to usage-based cloud models like Amazon Web Services (AWS) and Azure, this evolution allows vendors to anticipate the full cost of hosting from day one, meaning that they can essentially add it to the bill of materials and account for the expense upfront.
This is a relief for vendors. With thinner margins than ever before, they require a predictable, transparent and affordable method to continue hosting device data. Moreover, IoT hosting is instrumental to delivering company goals of convenience and speed—and it’s growing. In the past five years, the IoT hosting market grew $800 million more than originally predicted, and this maturing market is still expanding.
The industry is now seeing the development of novel connectivity models following years of subscription dominance. While subscription connectivity works for some projects, it doesn’t work for all projects. And as more devices enter our homes and workplaces, and as costs become increasingly important for consumers and device makers, we should expect to see more innovation in the way our devices connect. Watch this space.
Carsten Rhod Gregersen is the CEO and founder of Nabto, a P2P IoT connectivity provider that enables remote control of devices with secure end-to-end encryption.
Exhibitors at RFID Journal LIVE! 2022 will offer solutions for Internet of Things applications. To learn more, visit the event’s website.