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The subscription economy: Innovative IoT providers move to Opex revenue

Hardware goods fall victim to the slim margins of commoditization. Fortunately for IoT providers, value-added software enhancements can significantly extend the use of devices and increase monetization options. The rise of the subscription economy means that revenue streams shift from customers’ capital expenses (Capex) to their operating expenses (Opex). In the next few years, IoT product monetization will change fundamentally and provide producers and their customers with more flexibility. Producers will profit from increased recurring revenue, while customers will benefit from paying only for what they need and want.

Capex dominates, while Opex offers greater long-term opportunity

Innovative IoT providers are experimenting with subscription or value-and-outcome-based monetization models. But traditional Capex monetization models — revenue based on one-time sales of devices or software — still prevail in industrial IoT applications, such as medical and manufacturing devices. Before considering subscriptions and Opex monetization streams, providers prioritize achieving operational efficiencies, such as reducing physical product lines, changing software capacity and capability from an IoT gateway, and providing new value through updates. However, the greatest revenue opportunity lies in flexible monetization models, like subscription or pay-per-use, that offer more flexibility as well as upsell and cross-sell opportunities with feature sets that are tailored to customers’ needs.

Early adopters are achieving a competitive advantage by moving to subscription and service-based models that trigger recurring revenue. Software-driven connectivity and security features are driving Opex monetization models for companies developing IoT devices for networking, industrial automation, medical devices, and smart home and building technologies. Subscription- and usage-based revenue streams require business systems that can securely track and manage the install base, while delivering a stellar customer experience that drives renewals rates. Software IoT components enforce the terms of the subscription — including enabling/disabling features — and log usage events often with corresponding data points.

What does feature monetization look like?

Offering features on demand and connecting them to tangible business value generates significant upselling and cross-selling opportunities during the lifecycle of the IoT devices and software applications. Consider the many features that a home gateway — such as the wildly popular Amazon Echo and Google Home — can offer. Software subscriptions can control connected devices such as window shutters, alarms, entertainment and other services. Complementary mobile applications can extend even more service and flexibility to customers. Cloud-based monetization offerings can govern entitlements and usage rights for IoT software services and mobile apps.

Feature management enables producers to offer unprecedented product agility and significant operational efficiencies through producing fewer physical parts and rebalancing features between devices. Instead of manufacturing dozens of different models of a product — a significant manufacturing cost — an IoT company can use secure digital monetization capabilities to reduce the number of physical product lines and use software to create different versions.

Data collection reveals new value streams

Massive amounts of data are now available thanks to increased connectivity, coupled with low-cost powerful computing and storage capabilities. This data opens monetization opportunities for:

  • Usage-based revenue models, like pay-per-use or pay-for-overage
  • Product usage analytics that can help producers optimize product packing, future direction and business models
  • Instrumentation data that can support more complex contracts or sharing of devices
  • Performance data that can drive services, like predictive and preventive maintenance

Data services will be a critical element to selling technologies. Medical device makers, for example, can use big data to provide better diagnostics based on segmenting national, socio-economic or ethnic characteristics of an overall population pool. Auto manufacturers can equip their cars with every feature and upgrade available — and simply turn the feature on or off via software and licensing, based on what the customer has purchased. In addition, industrial automation companies can monitor systems for preventive and proactive maintenance. In these scenarios, device makers can make strategic decisions about offering complimentary features as a competitive advantage or delivering features via a subscription or usage-based operating expense.

The future is in Opex revenue models

In last-generation IoT devices, providers were fairly limited in terms of monetization options. Their primary revenues derived from the sale of hardware devices and, perhaps, maintenance revenue associated with the purchase. The next big IoT revenue opportunity shifts this capital expenditure to an operating expense by using IoT software to deliver coveted and customizable features as a subscription or pay-per-use revenue model. Examples like Amazon Echo and Google Home only scratch the surface of the new possibilities for adding customer value.

But this trend doesn’t stop with consumer IoT. Manufacturers of industrial IoT devices are quickly adopting new business models that are based on subscription models for devices and data-driven services that create added value, like product-usage insight or new opportunities to bill customers based on their actual consumption. Moreover, data collection and analytics capabilities pave the way for radically new and important services for scientific advancement and preventive maintenance. Strategic IoT companies are building these options into their devices with cloud-based feature management applications, in order to create sustainable new Opex revenue streams.

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