HBS

LTV

Consumer IoT
Business Models

Aziz Albahar, Vipul Chhajer, Evan McPhee

March 2016

HBS
LTV

Agenda

Executive summary
Market context
Business model analysis
Implications for future businesses
Open questions

Consumer IoT
Business Models

Executive summary

HBS
LTV

Consumer IoT
Business Models

Funding to startups has doubled in the five years to over $2B in 2015, and
26-30B devices are expected to be connected by 2020

However, the earliest consumer IoT companies (Fitbit, GoPro) to IPO have struggled
Consumer IoT is extraordinarily fragmented, competition in sub-categories is
extremely high- lower barriers to entry have resulted in an explosion of HW
companies
Though a plethora of business models are being experimented upon, true productmarket fit for consumer IoT limited to date

Six primary categories of business models are available to consumer IoT

business models, with widely varying customer LTV potential: 1) product
sales, 2) high-variable cost premium services, 3) low-variable cost premium
services, 4) hardware-as-a-service, 5) consumables, and 6) data licensing
Understanding key trends and drivers of the consumer IoT space is crucial
to the success of IoT startups- the team has developed five key
suggestions for consumer IoT businesses

HBS
LTV

Agenda

Executive summary
Market context
Business model analysis
Implications for future businesses
Open questions

Consumer IoT
Business Models

HBS
LTV

Consumer IoT
Business Models

Both funding and connected devices have exploded over the

past five years, and are anticipated to continue growth to 2020
Funding to IoT Startups has more than doubled in
five years
IoT Global Yearly Financing History
2010 - Q3 2015

$2,500

250

and connected devices worldwide are projected

to explode to ~26-30B by 2020
35

200

$1,500

150

$1,000

100

15

50

10

$0

2011

2012

2013

Investment ($M)

2014

Deals

2015

26-30B

30

$2,000

$500

Connected devices worldwide (B)

25
20

7-10B

5
0

2013

Source: http://www.mckinsey.com/industries/high-tech/our-insights/the-internet-of-things-sizing-up-the-opportunity; CB Insights IoT Landscape Q3 2015

2020E

HBS
LTV

Fitbit has grown extremely rapidly, but its share price has struggled
since its IPO in 2015- opinions on future outlook mixed
Fitbit Summary
Fitbit helps people lead healthier,
more active lives by empowering them
with data, inspiration, and guidance to
reach their goals.

Fitbit Mission Statement

Key Financials

Market Cap: $3B

Revenue: $1.85B

Net Income: $175M

Fitbit Stock Price 07/2015 to 03/2016 ($)

25

Consumer IoT
Business Models

Growth Trajectory

20
15
10
5
0

Source: Fitbit 10-K for year ended 12/31/2015

2012 2013 2014 2015

Devices Sold (millions)
Active Users (millions)

18
16
14
12
10
8
6
4
2
0

HBS
LTV

Consumer IoT
Business Models

Analysis of GoPro indicates growth is slowing down after fast

start out of the gate- can it recover in the long-term?
Fitbit Summary
Enabling immersive and engaging
content is at the core of our business.
We develop product solutions to
enable consumers to capture, manage,
share and enjoy some of the most
important moments in their lives.

Key Financials
Market Cap: $1.75B
Revenue: $1.6B

Net Income: $36M

Growth Trajectory
GoPro Revenue ($M)

$1,800

300%

$1,600

250%

$1,400
$1,200

GoPro Mission Statement

200%

$1,000

GoPro Stock Price ($)

150%

$800
$600

100%

$400

50%

$200
$0

Source: GoPro 10-K for year ended 12/31/2015; http://www.businessinsider.com/gopro-revenue-growth-hit-the-wall-2016-1

2010

2011

2012

Revenue ($M)

2013

2014

Revenue Growth

2015

0%

HBS
LTV

Consumer IoT
Business Models

IoT is an extremely broad, fragmented space with significant

competition in every meaningful sub-category
Notes

Business models widely varied- a hodgepodge

of attempts for revenue, network effects, and
user acquisition have resulted in significant
variation and competition even within largely
similar categories (e.g., smart locks models,
wearables, etc.)

Experimentation abounds in search for viable

business models and consumer traction- many
IoT startups with high press awareness have yet
to achieve true product-market fit, much less
cash-flow positive models
Source: Matt Tursk, MD FirstMark Capital- http://techcrunch.com/2013/05/25/making-sense-of-the-internet-of-things/

HBS
LTV

Consumer IoT
Business Models

Many current IoT businesses can most accurately be described as

smartphone components assembled in Shenzhen wrapped in slick marketing
Smartphone Components Driving IoT

[Todays surge in IoT products] is basically the

peace dividend of the smartphone wars, which is to
say that the components in a smartphone the
sensors, the GPS, the camera, the ARM core
processors, the wireless, the memory, the battery
all that stuff, which is being driven by the incredible
economies of scale and innovation machines at
Apple, Google, and others, is available for a few
dollars. They were essentially unobtainium 10
years ago. This is stuff that used to be military
industrial technology; you can buy it at RadioShack
now
Chris Anderson, former editor, Wired

Access to Shenzhen Democratized

Easier than ever to access Shenzhen

manufacturing resources- costs and capabilities
no longer require significant resources (or
provide a meaningful moat)

Marketing Efforts Heating Up

Millions being poured in to marketing IoT

products in an effort to build a brand to
defend undifferentiated products

IoT startups that rely only on these three factors almost certainly doomed- meaningful differentiated and
sustainable competitive advantages (network effects, economies of scale, etc.) will be necessary for success

Source: http://foreignpolicy.com/2013/04/29/epiphanies-from-chris-anderson/; Wikipedia.org; http://ben-evans.com/benedictevans/2015/1/11/home-and-the-mobile-supply-chain

HBS
LTV

Consumer IoT
Business Models

Business model experimentation has resulted in wide variety of

products and user experiences- viability of many still unclear
Company

Product Description

Petnet

Automatic pet feeder

Sutro

Automatic pool condition

monitor and cleaner

Tank
Utility

Monitors propane levels

in tank

Sense

Home energy monitor for

all utilities

OneDrop

Interactive diabetes
monitor

Business Model

Buy product, buy add-ons through

product such as food
Buy product, buy add-ons through
product such as chemicals, pool
technicians
Buy product, buy add-ons through
product such as propane

Monitors electricity usage of entire

home grid, helps user understand
products that use most energy or are
faulty
Monitor diabetes symptoms and
record food consumption

HBS
LTV

IoT has seen a proliferation of consumer products focused at

extremely narrow niches in recent years- viability of these unclear

Consumer IoT
Business Models

Consumer IoT in many ways has become an

extremely niche-focused market segmentproducts increasingly focused on extremely
specific use cases and limited customer bases

Many markets small and overcrowded with products

with extremely slightly different functions that all are
close substitutes for one another
Internet-enabled basketballs, walkie-talkie hardware
attachments for phones, smart refillable pet feeders all
examples of this phenomenon- products that fulfill
customer promise, but with only small initial target
markets that dont solve critical problems for large
groups of people

Early significant winners in this space have

demonstrated broad appeal across large groups
of consumers (e.g., power-saving with Nest,
fitness with Fitbit)- niche businesses will need
to be able to achieve extremely high CLTV to
remain viable in medium-long term
Source: http://www.wilson.com/en-us/anthem-media/images/basketball/wx/graphic-ball-lighter.png; http://www.petnet.io; https://store.orionlabs.io/products/onyx-2-pack-choose-colors

HBS
LTV

Agenda

Executive summary
Market context
Business model analysis
Implications for future businesses
Open questions

Consumer IoT
Business Models

HBS
LTV

Consumer IoT
Business Models

Six predominant business models have emerged in consumer

IoT as candidates to fuel profitable growth for businesses
1

Description

Product sale
Sell IoT hardware to
consumers as
primary profit
engine

High cost (HW-/

Services-like)
premium services

Sell premium
services to
consumers that
require significant
variable cost to
provide

Low-cost (SW-like)
premium services
Sell premium
services to
consumers or
business that
require no/ little
variable cost

Example

Ringly sells
connected womens
jewelry only,
without recurring
revenue streams

Nest Cam (Dropcam)

sells HD video
storage,
transmission, and
access for a monthly
fee.

Apple App Store,

Jibo talents and
others cost nothing
for device
companies to
distribute.

Model Customer
LTV (directional)

Low

Moderate

High

Hardware-as-aservice
Charge consumers a
monthly fee for
access to hardware,
with repair/
replacement often
bundled in to fee

Consumables
Sell higher-margin
consumables as
primary profit
engine to
complement lowermargin HW

Data licensing
Gather and
monetize consumer
data through firstparty use or
licensing to third
parties

Tile sells the ability

to locate tagged
objects for ~$1/
month.

Keurig reaps
significant gross
margins (~35%+) on
consumable coffee
pods, Amazon Dash
a similar model.

Google widely
believed to
monetize/ reap noncash benefits from
gathering and
analyzing Nest
thermostat data

Moderate

High

Variable depending
on data actionability

Source: Keurig- http://www.statista.com/statistics/326520/keurig-green-mountain-gross-margin-of-portion-packs-worldwide/; Tile- http://readwrite.com/2015/10/13/hardware-subscription-business-model/;

Product
sale

High cost
premium
services

Low-cost
premium
services

HWaaS

Consumables

Data
licensing

HBS
LTV

Pure HW product sales are difficult business models to build

successful stand-alone businesses around
100%
90%
80%
70%
60%

Typical Breakout of HW Product $ Sold in Retail

(Illustrative/ Directional only, $200 device)
$30.00
$10.00

$60.00
$ for returns, other costs
$ to distributor

50%

$ to retailer

40%
30%
20%

$ to HW company
$100.00

10%
0%

Retail Margin Shares

Hardware product sales are

difficult, as HW companies
typically only receive ~50%
of device average selling
price (ASP) due to cuts to
retailer, distributors, other
players in channel
COGS, freight, R&D, and all
other unit costs and opex
must be covered with this
50% of ASP- extremely
difficult to carve out
meaningful margins

Consumer IoT
Business Models

Customer LTV Implications

HW companies lucky to get

$40 on a $200 ASP devicemargins often much lower
Customer lifetime value
typically only this one-time
device margin, unless a
compelling repurchase value
proposition exists
In product sale-only business
model, cash flow extremely
tight, especially given HW
development costs and need
to carry inventory

Product
sale

High cost
premium
services

Low-cost
premium
services

HWaaS

Consumables

Data
licensing

HBS
LTV

High-variable cost and low-variable cost premium services

result in fundamentally different CLTV
Low Variable Cost Premium Services- Illustrative
Unit Cost Chart

20

20

18
14

Cost/ Unit (Total)

Cost/ Unit (Total)

16

12
10

8
6
4
2

Key implications

18

16

High Variable Cost Premium Services- Illustrative

Unit Cost Chart

14
12
10

8
6
4
2

Units

n
9

10

High fixed cost, very low variable cost businesses result in very
low unit costs as quantities increase
Key examples include app stores and other software sales, or
additional key generation for Kevo locks
CLTV much higher than high variable cost premium services,
but may be difficult to demonstrate clear value to customers in
some cases (i.e., Kevo additional keys may result in customers
feeling cheated)

Units

n9

Consumer IoT
Business Models

10

High fixed cost, high low variable cost businesses result in

comparatively high unit costs as quantities increase
Key examples include Nest Cam (Dropcam) video storage and
streaming services, streaming content licensing for Amazon
TV
CLTV much lower than low variable cost premium services,
but often much easier to demonstrate clear value to customers

Seemingly similar premium

services for consumer IoT
products have very different
ramifications for CLTV of
businesses
While high-margin businesses
extremely valuable from
CLTV, cash-flow perspectives,
these margins and
businesses may be difficult
to defend over time against
competitive products/
solutions

Product
sale

High cost
premium
services

Low-cost
premium
services

HWaaS

Consumables

Data
licensing

HBS
LTV

Consumer IoT
Business Models

HWaaS models largely still speculated about in consumer IoT,

but potential of business model very high
Benefits

Hardware-as-a-Service much more common in B2B

space (e.g., Amazon EC2 and other infrastructureas-a-service), but early examples like Tile* making
waves in consumer IoT

Ability to more closely tie

revenue to customer value
provided
Potential to reap higher
overall margins/ CLTV at right
price and servicing cost
Potential to disintermediate
retail, distribution channel
partners
Ability to manage upgrade
cycle directly for customers
implies lower platform
fragmentation

*: Tile sells $12 product with no recharging capability that lasts ~1 year- in practice, Tile essentially sells tracking for $1/ month
Source: http://readwrite.com/2015/10/13/hardware-subscription-business-model/

Disadvantages

Channel partners less well

developed, succeeding at
HWaaS may require more
first-party services and
distribution investment, lead
to higher-risk businesses
Customer expectations may
be higher in model where
paying a monthly fee
Services costs (repair,
maintenance, upgrade cycle
management) may be high
Managing churn and
customer satisfaction
essential to success, likely to
be difficult

Product
sale

High cost
premium
services

Low-cost
premium
services

HWaaS

Consumables

Data
licensing

HBS
LTV

Consumables represent an intriguing business model for IoT,

but will not work for every business
Benefits

Keurig not technically IoT model, but represents

clear business model template for consumer IoT;
Amazon Dash Button a more clear example of
consumer IoT being an entry point to a higher CLTV
business model

Opportunity for high-margin

recurring revenue
(depending on nature and
margin of consumable)
represent high-CLTV
business model
Purchase of hardware may
make customers more
sticky, lengthen customer
lifetime/ reducing churn

Consumer IoT
Business Models

Disadvantages

Managing customer
satisfaction and behavior
crucial to success- Keurig
customers often dissatisfied
with higher-priced pods go to
off-brand pods with no
revenue cut to Keurig,
defeating model. Though
Keurig has fought back to
attempts to prevent this
through DRM-like
measures, many customers
upset

Source: https://www.amazon.com/dashbutton ; https://blog.bolt.io/keurig-accidentally-created-the-perfect-business-model-for-hardware-startups-18e9c3b4e796#.ypgdkhh2n

Product
sale

High cost
premium
services

Low-cost
premium
services

HWaaS

Consumables

Data
licensing

HBS
LTV

Consumer IoT
Business Models

Data licensing has significant potential in consumer IoT, but ensuring

appropriate data value and privacy considerations crucial
Benefits

Early days in consumer IoT data licensing, but

insurance companies like Liberty Mutual testing
value of insurance data with IoT products like Nest
Protect through partnerships and consumer
discounts for data access

Source: http://welcome.libertymutual.com/nest/

Gathering and selling data

costs consumers little, can
provide large benefits to
companies/ services
consuming data- potential for
high margin recurring
revenue (depending on value
of data set) and high CLTV
Potential for device
businesses to be paid
twice by consumers for HW
and by corporate partners for
data licensing

Disadvantages

Privacy of consumers crucial

to manage, balance can be
tricky, and legal implications
can be difficult to manage
(especially when approaching
multiple countries)
Not all data sets created
equal- demonstrating and
proving commercial value of
anonymized data sets to
partners can be extremely
difficult

HBS
LTV

Agenda

Executive summary
Market context
Business model analysis
Implications for future businesses
Open questions

Consumer IoT
Business Models

HBS
LTV

Consumer IoT
Business Models

Consumer IoT companies should be aware of five key insights

as they build their products and business models
1

Similarities to PC,
Mobile

IoT to follow many

similar trends to
previous
generations of
technologyunderstanding
crucial to success

HW Is Not Enough

Selling products
alone is not
enough - IoT
companies must
build recurring
revenue streams

Platforms and
operating
systems for IoT
are attractive, but
only a very few
will succeed

Incumbents will
have key
advantages in
several significant
areas of IoT

Platforms Are Hard

Incumbent
Advantages

Chase High
Interaction/
Transactions

IoT startups should

chase areas of
significant
consumer
interaction or
transaction
volume to
maximize potential
of their businesses

Similarities
to PC,
Mobile

HW Is Not
Enough

Platforms
Are Hard

Incumbent
Advantages

Chase High
Interaction/
Transactions

HBS
LTV

Consumer IoT
Business Models

Consumer IoT will follow a similar trajectory to PC and Mobile

technology generations in three key ways
Growth in computing devices

Many key trends from PC and Mobile will

carry over to IoT, similar drivers at play

1.
2.
3.

Source Morgan Stanley Research

Moores Law: Expected to continue

lowering processing cost though
rate of improvement may have
slowed

Progressively easier development

as more software and tools get built
out
Shorter time to market for new
products as supply chain gets more
robust and experienced

Similarities
to PC,
Mobile

HW Is Not
Enough

Platforms
Are Hard

Incumbent
Advantages

Chase High
Interaction/
Transactions

HBS
LTV

Consumer IoT
Business Models

Building recurring revenue crucial to success of consumer IoTthree key models are leading the way
Embrace consumables

Wide variety of products can

be sold via IoT- coffee, pet
food, wine, etc. currently
being pursued but significant
other opportunities

Data plays provide

defensibility

Builds network effects,

strong data sets that are
monetizable are very difficult
to replicate

Ex. - Nest working with utility

cos. to provide Nest Energy
Services

Build value-added services

Fitbit premium services

provide in-depth fitness data
for $50/yr - success of
company likely hinges on
success in premium services
Fitbit Premium Services Dashboard

Similarities
to PC,
Mobile

HW Is Not
Enough

Platforms
Are Hard

Incumbent
Advantages

Chase High
Interaction/
Transactions

HBS
LTV

Consumer IoT
Business Models

Early consumer IoT IPO darlings have suffered from an inability

to build strong recurring revenue, though not for lack of trying
Fitbit suffers from engagement problem

2015 revenue from subscription-based services

was less than 1% of total revenue

Units (in millions)

Half of Fitbit device owners dont even use their device

GoPros frantic efforts at platformization

Several attempts to create a platform without

clear results
Licensing videos to brands
Hardware accessories platform
Drone image capture and analysis platform,
Kolor
Awards program to reward content creators
with cash

Fitbit and GoPro market cap are 28% and 13% respectively from peak

Source: Fitbit S-1, Rock Health

Similarities
to PC,
Mobile

HW Is Not
Enough

Platforms
Are Hard

Incumbent
Advantages

Chase High
Interaction/
Transactions

HBS
LTV

Consumer IoT
Business Models

Startups that can build data-centric businesses around existing

IoT businesses have a good shot at getting acquired
Target

Target Description

Acquirer

Transaction Value

MyFitnessPal

Nutrition-tracking

Under Armour

$475M

MapMyFitness

Run tracking

Under Armour

$150M

Fitstar

Personalized video workouts

Fitbit

$17.8M

Nutrition tracking

Jawbone

$2.7M

Nutrition tracking

Jawbone

Undisclosed

Massive
Health

Nutrivise

Similarities
to PC,
Mobile

HW Is Not
Enough

Platforms
Are Hard

Incumbent
Advantages

Chase High
Interaction/
Transactions

HBS
LTV

Consumer IoT
Business Models

Proliferation of devices and competition at both the low- and highend will increase importance of sustainable competitive advantages
Dividends of smartphone + IoT

Component prices to
continue to decline for
several years

IoT device prices to come

down, increasing adoption in
a virtuous cycle

HW startups to continue to
proliferate for a few years,
most successful to eventually
consolidate (similar to mobile
evolution)

Focus on branding & design

Price competition in
consumer IoT inevitable,
especially in product
categories dominated by
commodity smartphone
components assembled by
outsourced third-parties
Brand-building to continue to
increase in importance,
implying increased spending
on advertising and branding
by IoT
Even greater need for
building recurring revenue
streams to fund brandbuilding efforts

Use data to build

differentiation

Networks effects and other

sustainable competitive
advantages crucial to develop
for long-term success
Consumer IoT companies that
gather (and monetize) strong
data sets to fuel machine
learning improvement to be
fueled by network effects
Businesses in consumer IoT
that enable/ support multisided platforms, tie in to
other strong businesses to be
more defensible

Similarities
to PC,
Mobile

HW Is Not
Enough

Platforms
Are Hard

Incumbent
Advantages

Chase High
Interaction/
Transactions

HBS
LTV

Consumer IoT
Business Models

Common software OS will tie IoT similar to what happened in

mobile OS 2005 to 2010
Symbian S60
Symbian UIQ
Symbian MOAP
Linux
PalmOS
Maemo

2005

Evolution of mobile OS

Windows Mobile
iOS
RIM
Bada
Palm webOS
MeeGo

Android
iOS
Windows Mobile
RIM

2015

Similarities
to PC,
Mobile

HW Is Not
Enough

Platforms
Are Hard

Incumbent
Advantages

Chase High
Interaction/
Transactions

HBS
LTV

Consumer IoT
Business Models

Many platforms competing to be the OS for the Smart Homeexpect extremely few winners to emerge
Contenders for the Smart Home

Google / Nest

Flex

Samsung

Apple

Amazon/Alexa

Microsoft

Comcast, Time
Warner, and others

Similarities
to PC,
Mobile

HW Is Not
Enough

Platforms
Are Hard

Incumbent
Advantages

Chase High
Interaction/
Transactions

HBS
LTV

Expect voice to emerge as a strong interaction and control

mechanism for IoT, similar to touchscreens in mobile
Connected things have extreme cost constraints
and space limitations, implying that traditional
methods of interaction (physical buttons/ keys,
touchscreens, remotes) unlikely to be popular
Voice likely to be the interaction mechanism of
choice on IoT, is a natural way to interact
o In 2014, number of Smart TV customers using their
voice to find content increased by 230%

o Gartner expects one-third of PC users will use speech or

gestures to issue commands by 2019
Source: Nuance Communications

Consumer IoT
Business Models

Similarities
to PC,
Mobile

HW Is Not
Enough

Platforms
Are Hard

Incumbent
Advantages

Chase High
Interaction/
Transactions

HBS
LTV

Consumer IoT
Business Models

Traction in voice-based IoT systems (HW and SW) being made

by both large and small companies
Large companies want IoT data

Goal is to get hooks into data

generated by IoT devices
Amazon, Facebook and
Nuance building voice
platforms that IoT device
makers can incorporate in
their devices
wit.ai

Mix
Echo / Alexa
Source: Frost & Sullivan, Report on Voice Recognition Technology

Startups not far either

Smaller startups building -

o Devices with internally

developed voice analysis
capabilities OR
o Software platform for voice
and intent analysis that
other device makers can use
Vernax

Typical Technology Stack

Similarities
to PC,
Mobile

HW Is Not
Enough

Platforms
Are Hard

Incumbent
Advantages

Chase High
Interaction/
Transactions

HBS
LTV

Consumer IoT
Business Models

Large incumbents will leverage strengths to position own tools/

platforms as killer app and capture OS of choice positioning
Google and Facebook will leverage AI strengths
utilizing massive data sets and user bases to train
algorithms/ AI
Beauty of IoT is in rich data from sentient objects- AI
unlocks value from these streams in ways that legacy
tools can not.
Availability of OS will make hardware development
easier for device makers- but not owning SW or
platforms will erode defensibility for device makers,
implying these advantages a double edged sword

Similarities
to PC,
Mobile

HW Is Not
Enough

Platforms
Are Hard

Incumbent
Advantages

Chase High
Interaction/
Transactions

HBS
LTV

Consumer IoT
Business Models

Some of the strongest businesses in consumer IoT will be those that win
in home/ work areas with frequent interactions or high value transactions
High value transactions

Connected Refrigerator Example

Frequent interactions

Smart Desk Example

Valuable businesses to be built where economic value transacted or where humans

deeply invested

Source : Samsung Electronics; www.designboom.com

HBS
LTV

Agenda

Executive summary
Market context
Business model analysis
Implications for future businesses
Open questions

Consumer IoT
Business Models

HBS
LTV

Consumer IoT
Business Models

Several key open questions remain in consumer IoT- the answers to

these will be crucial to many companies success (or failure)
Will there be a new stand-alone
IoT Giant or will incumbents
own IoT?
Previous key generational
computing shifts have birthed
some of largest/ most
successful businesses of all
time (Microsoft/ Google/
Facebook, etc.)- will IoT spur
development a new giant, or
will incumbents gobble up best
startups and reap largest IoT
rewards?

How and when will consumer IoT

cross the chasm?

Consumer IoT customers

largely affluent, predominately
male tech enthusiasts- when
and how will consumer IoT hit
the mass market?

How will industry develop

coherent privacy standards?

IoT devices will be everywhere,

and most importantly all over
consumers homes- how will
the industry develop coherent
privacy standards that protect
consumers, and who will lead
the charge?