Guest Post from LiveWorx Sponsor Deloitte Consulting, BV, by Helena Lisachuk, Global IoT Lead
What makes grass green?
A simple question, with a complex answer. It turns out plant cells cannot harness sunlight and water on their own. Rather, they requires the services of a broker, chloroplasts, to bring together the raw materials and make energy.
How do you make money from IoT?
Another simple question with a complex answer, and, like plants, the answer may lie in facilitators, or platforms, to support companies in making use of the technological raw materials offered to them.
Going green: How platforms create value
There are many technological defintions of a platform, but here we are interested in the definition from economics. In economics, a platform is a space – physical or virtual – for two parties to meet in order to create value.[i] What that typically dry and pedantic definition means is that platforms create value, not by making any specific product, but rather by connecting previously disconnected supply and demand.
Platforms help demand sort through the many technologies available and choose the right IoT solution for them. Therefore the more technologies and solutions a platform hosts, the more demand-users it can attract. And the more users it can attract, the more attractive the platform becomes to solution developers, creating a flywheel effect called positive network effect. Figure 1 shows what this positive network effect might look like for an IoT platform.
Network effect is more than just a buzz-word. We can actually quantify just how beneficial this effect can be to platform owners by using Metcalfe’s Law. While selling 100 more products gives a company 100 more units of revenue, an increase of 100 participants to a platform increase its value by 10,000.[ii]
Planting the seed: First steps to take towards creating an IoT platform
The exponential value created by platforms no doubt makes them attractive to many companies, but they also represent very different business models than what most companies are used to. Those differences can create large challenges for any company considering building its own platform, but a few key considerations can help smooth the journey.
- Identify the ecosystem partners needed to create value. It is rare that any single company is able to provide all of the technology and expertise necessary to make a solution work—an ecosystem of partners is usually needed to achieve your goals with IoT.
- Understand where there are gaps in the vendor ecosystem. In any ecosystem, there will be gaps and imperfect connections between participants. When you know value is created by the flow of information, you will be better positioned to identify where there are gaps or bottlenecks in that flow.
- Fill that gap. Once a gap or slowdown in information flow is identified, a potential platform must move to fill that gap.
- Race to scale. Finally, survival for many platforms rests with rapidly harnessing the network effect to attract more customers and more developers. This process reaches far beyond mere advertising or marketing, ultimately touching the core of the business – including how much you charge and to whom.
While these factors can seem to be daunting challenges, they are merely part of the process. Just as a plant does not go from seed to tree overnight, there is no need to have every answer at the start. So, think big, but start small, and then scale fast those ideas that prove to be viable.
[i] Andrei Hagiu and Julian Wright (2011). Multi-Sided Platforms, Harvard Working Paper 12-024.
[ii] James Hendler and Jennifer Golbeck (2008). "Metcalfe's Law, Web 2.0, and the Semantic Web" (PDF).
Post originally published in TechTarget.
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