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Bosch Internet of Things & Services Lab

A Cooperation of HSG and Bosch

Business Models and


the Internet of Things
Elgar Fleisch (ETH Zurich / University of St. Gallen)
Markus Weinberger (Bosch Software Innovations GmbH)
Felix Wortmann (University of St. Gallen)

Bosch IoT Lab White Paper

August 2014

Elgar Fleisch
Professor of Information and Technology Management
ETH Zurich / University of St. Gallen
efleisch@ethz.ch

Markus Weinberger
Director Bosch IoT Lab
markus.weinberger@bosch-si.com

Felix Wortmann
Scientific Director Bosch IoT Lab
felix.wortmann@unisg.ch

BOSCH und die Bildmarke sind registrierte Marken der Robert Bosch GmbH, Stuttgart

www.iot-lab.ch
Business Models and the
Internet of Things

Abstract

Thisarticleprovidestheoreticallyandpracticallygroundedassistancetocompaniesthataretoday
engagedprimarilyinnondigitalindustriesinthedevelopmentandimplementationofbusinessmodels
thatusetheInternetofThings.Tothatend,weinvestigatetheroleoftheInternetinbusinessmodelsin
generalinthefirstsection.WeconcludethatthesignificanceoftheInternetinbusinessmodelinnovation
hasincreasedsteadilysincethe1990s,thateachnewInternetwavehasgivenrisetonewdigitalbusiness
modelpatterns,andthatthebiggestbreakthroughstodatehavebeenmadeindigitalindustries.Inthe
secondsection,weshowthatdigitalbusinessmodelpatternshavenowbecomerelevantinphysical
industriesaswell.Theseparationbetweenphysicalanddigitalindustriesisnowconsignedtothepast.
ThekeytothistransformationistheInternetofThingswhichmakespossiblehybridsolutionsthatmerge
physicalproductsanddigitalservices.Fromthis,wederiveverygeneralbusinessmodellogicforthe
InternetofThingsandsomespecificcomponentsandpatternsforbusinessmodels.Finallywesketchout
thecentralchallengesfacedinimplementingsuchhybridbusinessmodelsandpointtopossible
solutions.1

The Influence of the Internet on Business Models to Date

OurstartingpointforapproachingtheseissuesisthequestionofhowandwheretheInternethas
impactedthedevelopmentofbusinessmodelstodate.Byansweringthisquestion,weattainaclearer
pictureoftheroleofinformationtechnology(IT)ininnovatingbusinessmodelsontheonehand,andon
theotherweestablishaninformedperspectiveonpossiblefuturebusinessmodelinnovationsbasedon
emerginginformationtechnologies,inthiscasetheInternetofThings.

WeselectedtheresultsofGassmannetal.(2013)asthefoundationforthisfirstsection.Intheirwork,
theyhaveanalyzedmorethan300casestudiesofcompaniesthatbrokewiththeestablishedlogicintheir
industriesandintheprocesspermanentlychangedit.Gillette,IKEA,NespressoandPixararewellknown
examplesofsuchcompanies.Throughyearsofpainstakingwork,Gassmannetal.haveexaminedthese
casestudiestofindtheircommonalities,identifyingasetof55businessmodelpatterns.Theydefinea
businessmodelpatternasadefiniteconfigurationoffourcoreelements(whoarethecustomers?Whatis
beingsold?Howisitproduced?Howisrevenueearned?)thathaveprovensuccessfulindifferent

1
TheBoschInternetofThingsandServicesLabprovidedmajorfundingtoHSGforthisproject.Wethank
Prof.OliverGassmann,Ass.Prof.KarolinFrankenberger,KristinaFlchterandStefanieTurberfor
invaluablediscussionsandfortheirsupport.

Fleisch/Weinberger/Wortmann2014 1|P a g e
companiesandindustries."2Thelistofbusinessmodelpatternsdeterminedusingthisempiricalapproach
runsfromAddon,basedprimarilyoncasestudiesofRyanair,SAP,andSega,toWhiteLabel,derivedfrom
casestudiesofFoxconn,RichlieuFoodsandPrintingInABox.

IT plays a central role in many industrychanging case studies and business model patterns
WehavenowinvestigatedtheinfluenceofITonthese55businessmodelpatterns.Indoingso,we
distinguishthreedifferentrolesthatITcanassumeinbusinessmodelpatterns:

First,itcanplayaconstitutiverole,i.e.withoutit,thebusinessmodelpatternwouldbeimpossible.
ExamplesofthisincludeECommerce,LongTailandCrowdsourcing.WithoutITtheywouldbe
unthinkablesoweidentifythemasdigitalbusinessmodelpatterns.
Second,ITcanincreasevalue.PatternssuchasSelfServiceorCustomerLoyaltyexistedlongbeforethe
Internetandastheyweredeployedtransformedindustries.ButwithIT,andtheInternetinparticular,
theirsignificancehasincreaseddramaticallyinthesenseoftheirdisseminationand/ormarketshare.
Third,ITcanbeirrelevantforabusinessmodelpatternsuchasforFranchisingandIngredient
Branding.

InFig.1theindustrytransformingcasestudiesfromGassmannetal.(2013)areplottedasdotsona
surfacespanningatimeaxisandtheinfluenceofIT.Thebusinessmodelspatternsarelistedaccordingto
theroleITplaysinthem.

Fig.1:DistributionofindustrytransformingcasestudiesbasedontheroleofIT,
businessmodelpatternandtime(ourchart)

2
Gassmann,etal.(2013)
Fleisch/Weinberger/Wortmann2014 2|P a g e
Itisstrikingthatsincethe1990s,IThasbeenextremelysignificantinmanycasestudies,eventhough
therecontinuetobebusinessmodelpatternsthatmanagetotransformanindustrywithoutIT.Onthe
onehand,thisisnotsurprisingsinceITfirstbecamewidelyusedthroughoutthebusinessworldinthe
1990s.Ontheotherhand,theconcentrationofITdrivencasesisimpressive.Alargeshareofthenewer
casestudiesreliesinparticularondigitalbusinessmodelpatterns.

Each new Internet wave has led to new digital business model patterns
WhenthenewbusinessmodelpatternsenabledbyITand/orindustrytransformingcasestudies
associatedwiththenewbusinessmodelpatternsareplottedacrossthetimeaxis,thefollowingpicture
emerges(seeFig.2):AfirstsetofnewbusinessmodelpatternsenabledbyITappearbetween1995and
2000.ThesebusinessmodelpatternsareallbasedonwhatisknownasWeb1.0,whentheInternet
begantobeseenandusedforthefirsttimeaspartofbusinessinfrastructure.Usingthenomenclatureof
Gassmannetal.,thesenewbusinessmodelpatternsenabledbyITincludedECommerce,Freemium,
LeverageCustomerData,OpenSource(inrelationtosoftware)andDigitalization.

Around2005anothersetofITenabledbusinessmodelpatternsappeared.TheywereallbasedonWeb
2.0,theInternetthatmadeitpossibleevenforordinaryuserstocontributecontent.TheseincludedUser
Designed,Crowdsourcing,Crowdfunding,LongTail,andOpenSource(inthesenseofcontent).

Fig.2:Internetwavesandthedigitalbusinessmodelpatternstheygaveriseto
(ourchart)

Many Internetdriven business model patterns follow three overarching trends


WhethertheInternetofThingswillalsogeneratenewbusinessmodelpatternsand,ifso,whichones,is
thequestiondrivingthisessay.Inordertoanswerit,twomoreinsightsfromtheaboveanalysisare
helpful:

First,manyoftheITinfluencedbusinessmodelpatternsregardlessofthetechnologywavefromwhich
theyemergedfollowthreeoverarchingtrends:

Integrationofusersandcustomers.ITenablescompaniestoincreasinglyintegratetheircustomersin
theirvaluecreationchain.Inotherwords,ITallowscompaniestodelegatesometaskstotheir

Fleisch/Weinberger/Wortmann2014 3|P a g e
customers.ExamplescanbefoundintheUserDesigned,ECommerce,OpenSource(content)and
MassCustomizationbusinessmodelpatterns.
Serviceorientation.Runtimeservicesand/oraftersalesdigitalcontactwithcustomersareontherise.
UsingITbasedservices,ITallowscompaniestomaintainandmakeuseofcustomerrelationshipseven
afterthesale.ExemplarybusinessmodelpatternsforthisincludeRentinsteadofBuy,Subscription,
Freemium,RazorandBladeandAddon.
Corecompetenceanalytics.Precisecollectionandanalysisoftransactionandusedataareincreasingly
valuableandrepresentakeyskillforproductdesign,pricing,andsalesstructuring.Examplescanbe
foundintheSubscription,FlatRate,Freemium,PayperUseandPerformancebasedContracting
businessmodelpatterns.

Andsecond:

The big breakthroughs in digital business model patterns have been made in digital industries
ClearlyestablishingtheroleofITinvariousbusinessmodelpatternshasproventobeachallenge.In
somebusinessmodelpatterns,ITcanplaydifferingrolesdependingonthecasestudy.Itwasonlyby
assigningcasestudiestoeitherdigitalornondigitalindustriesthatthenecessaryclaritywasestablished.
Acompanyisclassifiedaspartofadigitalindustrywhenitisbyitsverynaturedigital.Thebusinessmodel
ofHiddenRevenueprovidesanexampleofthis.JCDecauxhadalreadytransformedtheadvertisingmarket
withoutITbackin1964withitsstreetfurniture,suchasbusstops.Insuchnondigitalindustries,ITis
usedtodaytoupgradevalueinthebusinessmodelpattern.WhentheHiddenRevenuepatternisapplied
bycompanieslikeGoogleorFacebook,however,whicharepartofdigitalindustries,ITisbydefinition
constitutive.ITnotonlyrevivesoldbusinessmodelpatternsandgeneratesnewbusinessmodelpatterns;
ithasalsofacilitatedtheemergenceofanentirelynewdigitalindustryandredefinedoldbusinessmodel
patternsinthatindustry.

Manydigitalbusinessmodelpatterns,suchasFreemium,havebeenappliedexclusivelyinthedigital
worlduntilnow.Inmanufacturingindustries,theInternethasmainlybeenusedtosimplifyprocesses
andthusreducecostswhileincreasingqualityandthevarietyoffered.TheInternethasbeenresponsible
forbigbreakthroughsindigitalindustries,asGoogle,Facebook,PayPal,eBay,YouTube,andothersprove.

The Economic Power of the Internet of Things

ThissectionoutlinestheformativepoweroftheInternetofThingswithintheeconomy.Abroaderand
morewellgroundedanalysisoftheeconomicperspectiveontheInternetofThingscanbefoundin
Fleischetal.(2005)andFleisch(2010).

Digitalization leads to high resolution management control circuits


Thedigitalworldandthatincludesitsvariousindustriesdiffersinmultipledimensionsfromthe
physicalworldanditsindustries,forinstanceintheareasofmarginalcostsinproduction,transport,and
storage,intransportandproductionspeeds,andintheabilitytoabstractandsimulate.

Fleisch/Weinberger/Wortmann2014 4|P a g e
Forexample,asaprominentrepresentativeofthedigitalworld,Googlehasputthesecharacteristicsto
gooduseandintheprocessrevolutionizedtheadvertisingmarket.Googleanalyzesquestionsputinits
searchengineandclicksonwebpagestomeasureitsusersbehavior.Basedonthismoreprecise
becauseitishighresolutionperformancedata,thecompanypresentseachuserwithanindividual,
profitoptimizingadvertisingmessage.Then,withtheaidofuserreactions,Googlemeasuresinrealtime
theeffectivenessofitsbannerads,optimizestheirallocationmodel,andusesthesamedatatoinvoiceits
advertisingcustomers.

TheresolutionofthecontrolcircuitthatGoogleusestomanageitsdigitaladvertisingismanytimes
higherthaninthephysicalworld,whereaunidirectionalmediumliketelevisionorabillboardsendsa
staticmessagetoanunknownmassofpotentialcustomers.Finelygrainedcontroloffershugeadvantages
thathaveallowedthedigitaladvertisingmarkettobecomemuchmoredynamicthanthephysicalone.
Foryearsnow,advertisingbudgetshavebeenflowingfromthephysicaltothedigitalworld.

Digitalizationleadstohighresolutionmanagementbecausethemarginalcostsofmeasuring(inthe
controlprocess)andtheactuatingelements(inthecontroller)arealmostzero,whileinterventionscanbe
madewithalmostthespeedoflight.

Internet of Things now makes high resolution management possible in the physical world too
TheInternetofThingsisnowapplyingthislogicstepbysteptothephysicalworld.Itrepresentsthevision
thateveryobjectandlocationinthephysicalworldcanbecomepartoftheInternet.Objectsand
locationsaregenerallyequippedwithminicomputerssotheybecomesmartobjectsthatcantakein
informationabouttheirenvironmentandcommunicatewiththeInternetandothersmartobjects.These
minicomputersareusuallybarelyvisibleorcompletelyinvisible,sothephysicaldimensionoftheobject
remainspeoplesmostimportantinterface.

Fig3:HighResolutionManagementinthePhysicalWorld(Fleisch2009)

Smartthingsarehybrids,composedofelementsfromboththephysicalanddigitalworlds.Thatmeans
that,whenused,theyunitetheprinciplesofbothworldsandindoingso,introducehighresolution
managementintothephysicalworldtoo.3Thefollowingexampleshouldillustratewhatwemean.
Becauseinventorycostsinphysicalwarehousesarehigh,manualcountsaredoneasinfrequentlyas
possible;acompleteinventoryistakenonlyonceayear.Therelevantmanagementcontrolsystem
exhibitsalowfrequency,aswouldbeexpected.WhenInternetofThingstechnologiesareusedtoequip
formerlyagnosticstoragecontainersandshelveswithsmartsensorsandcommunicationcapabilities,

3
SeeFleisch(2009)

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thesesmartcontainersandshelvescannowtransmittheirspecificfilllevelatanytimeatzeromarginal
costs.Sinceacompanycanonlymanagewhatitcanmeasure,thesenewmeasuringcapabilitiesresultin
newmanagementcapabilities.Inthecasestudyofaproducerofscrews,thisgaverisetoanewtypeof
refillservice.TheInternetofThingsishavinganimpactonbusinessmanagementsimilartotheimpactof
ultrasounddevicesonmedicineorscanningelectronmicroscopes(SEM)onphysics.Thingscanbe
measuredandidentifiedusingInternetofThingstechnologiesthatpreviouslycouldnotbe(economically)
identified(seediagram3).UltrasoundandSEMspurredontheirentiredisciplines.

Digital business model patterns are becoming relevant to physical industries for the first time
Shouldthefasteningequipmentmanufacturerprovidethisinformationtohiscustomersfreeofchargeor
usethefreemiummodel?Orserviceforpayintegratedwithphysicaldeliveryrightfromthestart?And
whoownsthedata?Thecustomerwhosewarehouseisthesourceofthedata,orthesupplier;afterall,
heownsthesmartcontainersthatgeneratethedata.Canandshouldthedataanonymized,acrossthe
entirecustomerbaserevealvaluable,realtimedevelopmentsintheindustryandbecapitalizedaspart
oftheLeverageCustomerDatabusinessmodelpattern?Whicheverischosen,theFreemiumand
LeverageCustomerDatamodelsarebothexamplesofhowbusinessmodelpatternsthathavebeen
confinedtodigitalindustriescansuddenlybecomerelevantforclassicphysicalindustries.

The digital and physical valuecreation layers in an Internet of Things application


Evenmorethanthat,intheInternetofThings,digitalbusinessmodelpatternsnecessarilyintermingle
withthosefromthenondigitalworldtocreateahybridconstruct,whichbecomesparticularlyclearin
thevaluecreationlayersinvolvedinanabstractInternetofThingsapplication.Thevaluecreationlayers
(seeFig.4)aretheresultofananalysisofnumerousapplicationsthattodayareclassifiedastheInternet
ofThingsinacademiaandinpractice.Thefollowingsectionexplainswhatwemean,usingtheexampleof
asmartLEDlightbulb.

Layer1Physicalthing:Thephysicalelement,whichinthissolutionistheLEDlightbulb,formsthefirst
layerofthevaluecreationmodel.Itsuppliesthefirstdirect,physicalbenefittotheuserintheformof
comfortsuppliedbythelight.Becausethelightbulbisaphysicalentity,itisalwaystetheredtoalocation
andcansupplybenefitsatthislayeronlyinitsimmediateenvironment,forexampleinaroom.The
businessmodelpatternforthesaleorleaseofLEDlightbulbsiswellknowntoLEDlightbulb
manufacturers.

Layer2Sensor/actuator.Inlayer2,thephysicalthingisequippedwithaminicomputerwithsensor
technologyandactuatingelements.Thesensortechnologymeasureslocaldata,whiletheactuating
elementsdeliverlocalservicesandthusgeneratelocalbenefits.IntheexampleoftheLEDlightbulb,the
microwavesensorcontinuouslymeasureswhetherpeoplearepresentinthespacereliablyandatalow
cost.Theactuatorturnsthelightonautomaticallywhenhumanpresenceisdetectedandoffagainwhen
not,therebysupplyinglocalbenefitsincludingbecausethesmartLEDlightbulbfunctionswithout
separate,wiredmotiondetectortodiscernpresence.

Layer3Connectivity:Inlayer3,thepreviouslayer,inparticularthesensortechnologyandactuator
elements,isconnectedtotheInternetsotheybecomegloballyaccessible.Inourexample,thelightbulb
canbeaddressedthroughanembeddedradiomoduleandtransmititsstatustoauthorizedsubscribers
anywhereintheworldatnegligiblemarginalcosts.

Fleisch/Weinberger/Wortmann2014 6|P a g e
Layer4Analytics:Connectivitypersedoesnotdeliveranyaddedvalue.Inlayer4,sensordatais
collected,stored,checkedforplausibility,andclassified.ThenthefindingsofotherWebservicesare
integratedwiththemtoarriveatconsequencesfortheactuatorelementstypicallyinaCloudbased
backendsystem.InourLEDexample,inlayer4theonandofftimesinahouseholdarecollected,motion
patternsarediscerned,andtheoperatinghoursofindividuallightbulbsarerecordedaswell.

Fig.4:ValuecreationLayersinanInternetofThingsApplication(ourchart)

Layer5Digitalservice.Atthis,thefinallayer,theoptionsprovidedbythepreviouslayersarestructured
indigitalservices,packagedinasuitableformforinstance,asaWebserviceormobileapplicationand
madeavailableglobally.Thecharacteristicsofdigitalbusinessmodelpatternsapplytothesedigital
services,whichareinseparablefromthesmartthingsthatgeneratethedata.

Withthislayer,theLEDlightwithpresencesensorbecomesasafetylampthatattheusersinitiative
and/orattheclickonanapp,soundsanalarmtotheowner,aneighbor,orthepoliceintheeventofan
unwelcomeintruder,orinfightbackmodeitattemptstodrivetheburglaroutwithaflashingredlight
andallofthatatnegligiblemarginalcosts.

Oneimportantinsightisthefactthatlayers1through5cannotbecreatedindependentlyofeachother.
Thatiswhythearrowsconnectingthemarebidirectional.AnIoTsolutionwithvalueisusuallynotthe
mereadditionoflayersbutratheraprocessofintegrationextendingintothephysicallevel.Howthe
hardwareisbuilt,forinstance,isincreasinglyinfluencedbythesubsequentdigitallevels.Viewingthe
levelsorstepsinisolationwillmakemanyattractivedigitalservicesimpossible.Itseemsmoreandmore
essentialthathardwarebedevelopedincloseinterconnectionwithInternetsolutions.

Fleisch/Weinberger/Wortmann2014 7|P a g e

Fig.5:TheInternetofThingsProductsServicesLogic(ourtable)

Physical products and digital services merge in hybrid solutions.


Ataveryabstractlevel,thelogicofInternetofThingsbusinessmodelscanbereducedtoasimple
formula(seeFig.5).ItsaysthatthevalueofanIoTsolutiononthemanufacturingsideisfoundinthe
combinationofaclassicproductthatinthepastwasnotlinkedtotheInternet,butisnowupgradedwith
IT,ormorepreciselywithlayers2through4intheabovemodel.Onthecustomerside,atlayer5,this
valueisexperiencedasbenefitsfromthephysicalproductandthedigitalservicesassociatedwithit.That
processresultsinawholethatismorethanthesumofitsparts,buildingontheoriginalproductin
particularduetothesimpleabilityatrelativelylowcosttocombineitwithproprietaryandexternal
digitalservices.

AwatchfromLimmex(www.limmex.com)isstillawatch,evenifitincludesaGSMmodule,a
microphone,aloudspeakeranditsownhomepage.Itsphysicalandlocalusefulnessisstillalongwith

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tellingtimetosignaltoothersaroundthecoffeetabletheownerstastethroughitschic,timeless
design.Beyondthat,itcannowalsoalertfamilymembers,friendsortheRedCrossinanemergency,
howevertheownerhasconfigureditontheInternet.ThesmartinanIntellion(www.intellion.com)
warehousebinreferstoalongrangeRFIDchipembeddedinit,butitsstillastoragebinforscrewsand
washers.Italsomakespossibleanewrefillserviceprovidedbythescrewsupplier,differentiatingitfrom
thecompetition.Thelistofsuchproduct/servicehybridsofferedbystartupsandestablishedcompanies
alikeandideasspawnedbyresearchgrowsdaily.Onestartup,qipp(www.qipp.com),hastakenthislogic
toanextreme,supplyinganinfrastructurethatassistsanycompanytoverysimplyandeconomically
chargeitsphysicalproductwithstandardized,globallyaccessibledigitalservicesofalltypes.

Business Model Patterns in the Internet of Things

Theapplicationdrivengoalofthisarticleistoderivewellgroundedassistance,boththeoreticaland
practical,fordevelopingInternetofThingsbusinessmodels.Thesemodelsshouldbeinspiringand
providedonalevelofabstractionthatwillfacilitatetheirapplicationacrossindustries,whileremaining
concreteenoughtobeactionableforinnovatorsinbusinessandsocietyatlarge.

Toaccomplishthis,weanalyzed55businessmodelpatternsfromGassmannandmanyInternetofThings
applicationswithregardtotheirvaluecreatingstepsandhighresolutionmanagement.Itisthelatterthat
embodyboththeopportunitiesandlimitationsoftheInternetofThingstechnicalcapacities.Theresults
ofthisanalysiscanberepresentedassixcomponentsforbusinessmodelpatternsandtwoindependent
businessmodelpatternsfortheInternetofThings.Basedontheirpowerandtheirkinshipallofthem
facilitatedigitalservicesforphysicalproductswemergethemalltogetherinanewbusinessmodel
patternspecifictotheInternetofThings,DigitallyChargedProducts.Ontheotherhand,theconceptof
SensorasaServiceissonovelandsopowerfulthatwesuggestthatitisitselfanewbusinessmodel
pattern(seeTable1).

Businessmodelpatterns Components
DigitallyChargedProducts 1. PhysicalFreemium
2. DigitalAddon
3. DigitalLockin
4. ProductasPointofSales
5. ObjectSelfService
6. RemoteUsageandConditionMonitoring
SensorasaService

Table1:ComponentsandBusinessModelPatternsintheInternetofThings

Inthefollowing,individualcomponentsandbusinessmodelpatternsarebrieflydescribed:

Physical Freemium
Thiscomponentdescribesaphysicalassetthatissoldtogetherwithafreedigitalservice,suchasdigital
installation,operatingandmaintenanceinstructions,whichis"attached"totheproductatnoadditional
charge.Overtime,somepercentageofcustomerswillselectpremiumservicesthatgobeyondthesefree

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onesandaretheninvoiced,suchaselectronicmonitoringorbenchmarkingacrosstheentirecustomer
base.

Canary,aNewYorkstartup(www.canary.is),offersasmarthomealarmsystemthatincludesavarietyof
sensors,fromtemperatureormovementsensors,uptoacamera.Thebasicfunctionofmonitoringa
spaceduringtheresidentsabsenceandsendingamessagetoasmartphoneappintheeventof
anomalies,isincludedfreeofchargeinthepriceofthesystem.Otherservicesforanadditionalcostwere
announcedduringacrowdfundingcampaignonKickstarter,suchasadditionalmemorytostorerecorded
eventsoruseofacallcenter.AcomparablepackageofservicesisofferedbyDropcam
(www.dropcam.com),averysuccessfulcompanythatwassoldinJune2014forUSD555millionto
GooglesNest.

Digital Addon
DigitalAddonisthetermforabusinessmodelcomponentinwhichaphysicalassetissoldvery
inexpensively,thatis,atasmallmargin.Overtime,thecustomercanpurchaseoractivateanynumberof
digitalserviceswithahighermargin.Whenanautomobilesperformancecanbeconfiguredusing
softwareandthevehicleisanodeontheInternet,thenthecustomercanpurchaseanadditional50HP
fortheupcomingweekend,forexample.Andwhenaddonservicesareofferedbythirdpartiestoo,the
customercaneasilypurchasetherightadditionalminiinsurancepolicyforanoutingtoItaly,forinstance.
Thesalescommissionmaybepassedontotheautomobilemanufacturerortoathirdparty.

Digital Lockin
ThesuccessfulapplicationoftheRazorandBladeandLockinbusinessmodelpatternsrequirethatonly
originalcomponentsarecompatiblewiththesystem.Forinstance,onlyoriginalGilletterazorbladescan
beusedwithGilletterazors.Inmanycases,patentspreventcompetitorsfromsupplyingcompatible
componentsforsuchasystem.

Digitallockininphysicalproductsreferstoasensorbased,digitalhandshakethatisdeployedtolimit
compatibility,preventcounterfeits,andensurewarranties.

Product as Point of Sales


Physicalproductsbecomesitesofdigitalsalesandmarketingservicesthatthecustomerconsumes
directlyattheproductorindirectlyviaasmartphoneandidentificationtechnology.Apackageofgum
becomesaneshop,anyobjectcancarrydigitaladvertising,andtheproductitselfcollectsandtransmits
loyaltypointsandrecordstheworldarounditdigitallyviaasmartphone.

Theexpansionofthingsintopointsofsalehasalreadyhappenedinsomecases.Bypointingasmart
phoneataproduct,anInternetwebsiteopenswherethatsameproductincludingreplacementparts,
accessories,andconsumablescanbepurchased.TheAmazonappalreadyoffersthisfunctionfor
productswithabarcodethatarecarriedbyAmazon.

Object SelfService
ThiscomponentreferstotheabilityofthingstoindependentlyplaceordersontheInternet.Forinstance,
aheatingsystemcouldorderoilrefillsassoonasacertainlevelofliquidwasnotedintheoiltank.The
ideaofselfservicenolongerrefersonlytothecustomer;nowthingscanservethemselvestoo.

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Inthismodel,intermediariesaredispensedwith,likeintheDirectSellingbusinessmodelpattern.
SolutionProviderbusinessmodelsaresimplifiedbyorderingofrefillsofconsumablesautomatically.

Remote Usage and Condition Monitoring


"Smart"thingscantransmitdataabouttheirownstatusortheirenvironmentinrealtime.Thismakesit
possibletodetecterrorspreventativelyandtomonitorusageandtheremaininginventoryof
consumables.Untilnowthetechnologythisrequiredwascomplicatedandrelativelyexpensivebutasthe
InternetofThingscontinuestoexpand,thecostsandexpendituresrequiredwilldiminish,makingthe
applicationofthistechnologycosteffectivewithlessvaluableproductsaswell.

Brother,thecomputeraccessoriesmanufacturer,offersleasesforlaserprinters,forexample,withoutany
baseleasingrateonlythepagesthatareactuallyprintedareinvoiced.Inthisinstance,thePayperUse
businessmodelpatternisappliedtoproductsvaluedatjustafewhundreddollars.Transmissionofthe
relevantdatatothesupplierviatheInternetprovidesthetechnicalbasisforefficientimplementationof
thisbusinessmodel.

Digitally Charged Products


ThecomponentsdescribedhereareallvariationsoftheideathattheInternetofThingsinitsapplications
linksdigitalservicestophysicalproductstocreateahybridbundlethatisasinglewhole.Theservices
maybesimplerormorecomplex;theymaybeofferedbythemanufacturerorathirdparty;theymaybe
inthevicinityoftheproduct,orbylinkagetoafourthpartyacquireacompletelydifferentsignificance.

Thetermdigitallychargedproductsformsthebracketsaroundtheserelatedcomponents.Becauseofthe
poweroftheideasbehindtheterm,weproceedfromtheunderstandingthatDigitallyChargedProducts
isnowestablishedasanewbusinessmodelpattern:classicphysicalproductsarechargedwithabundle
ofnewsensorbaseddigitalservicesandpositionedwithnewvaluepropositions.Examplesincludethe
safetysolutionforanLEDlightdescribedabove,anelectronickanbansolutiononabin,orthedistress
callonawristwatch.Wellknownserviceorientedbusinessmodelpatternsacquirenewrelevancein
physicalindustries.

Sensor as a Service
Anotherpowerfulideaiscollecting,processingandsellingforafeethesensordatafromonesubsection
toothersubsections.ThatswhywesuggestthetermSensorasaServicetodescribeitasanInternetof
Thingsbusinessmodelpattern.Themeasurementdatafromthephysicalworldarenolongervertically
integrated,collected,storedandprocessedforjustoneapplicationbutinsteadforabroadarrayof
potentialapplicationsforanecosystemwhoseemergenceontheInternetofThingswillcertainly
presentoneofthenextbigchallenges.4

IncontrasttoDigitallyChargedProducts,thedatageneratingproductsortheresultingservicesareno
longerthecentralfocusinthispatternbutratherthedataitself.Theyaretheprimarycurrencytobe
earned.Streetline(www.streetline.com)isagoodexampleofthisphenomenon.Thiscompanyinstalls
sensorsonmunicipalandprivatepropertythatdetectvacantparkingplacesinordertosellthedata
collectedtointerestedthirdparties.Acardriveraccessestheinformationfreeofchargethroughanapp.

4
SeeSchuermans&Vakulenko(2014)
Fleisch/Weinberger/Wortmann2014 11|P a g e
Forcitygovernments,thedataprocessedsomewhatdifferentlyhastremendousvalue:theirphysical
expendituretoidentifyparkingoffendersisdramaticallyreduced;utilizationofparkingplacesincreases;
andthequalityofinformationavailabletomakethebestuseofthemrises.SensorasaServicerepresents
abusinessmodelpatternthatrevolvesaroundamultisidedmarketforsensordata.

The Internet of Things boosts many other "classic" business model patterns.
Uptothispoint,wehavedescribedcomponentsandpatternsthatarenewlypossiblewiththeInternetof
Things.Thesecomponentsalsoeffectivelyfacilitate20ofthe55patternsidentifiedbyGassmannetal.
(2013).Table2providesanoverview.

Businessmodelpatterns FacilitatingcomponentsandpatternsoftheInternetofThings
accordingtoGassmannet
al.
Addon DigitalAddonRemotesaleandinstallationofadditionaloptionsforproducts
duringthepostsale/usageperiod.
Affiliation ProductasPointofSales" SalescommissionsforInternettransactionsare
connectedtotherealworld,e.g.thelocationoftheuseroranobject.
Crowdsourcing "SensorasaService"A"crowd"ofsensorsgeneratesdata.
CustomerLoyalty "ProductasPointofSales" Customerloyaltycanberewardednotonlyforthe
purchaseofacertainproductbutcanbemeasuredaccordingtouseofthe
product,orpresenceatacertainlocation,forinstance.
DirectSelling "ObjectSelfService"Objectsmakepurchasesautonomously,directly,without
anintermediary.
Flatrate "RemoteUsageandConditionMonitoring"Useandconsumptionofphysical
goodsaremeasuredinordertoreducetherisksassociatedwithaflatrate
businessmodel.
FractionalizedOwnership "RemoteUsageandConditionmonitoring"Useandconsumptionofgoodsof
lowervaluecanbemeasuredtoo,makingthisbusinessmodelapplicabletothose
goodsaswell.
Freemium "DigitalAddon"Thisbusinessmodelcanbeappliedinthephysicalworldaswell
bycombiningfreedigitalserviceswithaphysicalproductforsale.Premium
servicesareavailableforafee.
FromPushtoPull "ObjectSelfService" KanbansystemswithInternetofThingsTechnology
GuaranteedAvailability "RemoteUsageandConditionMonitoring"Monitoringthestatusofproduction
plantsorequipmentviatheInternetsimplifiestheapplicationofthebusiness
modelpattern.
HiddenRevenue "ProductasPointofSales"Forexample,flexiblelocationspecificadvertising
becomespossibleusingtheInternetofThingstechnology.
LeverageCustomerData "SensorasaService" Objectssuchascarsorrazorstransmitdatatothe
manufacturerovertheirlifetime.Themanufacturercanthenusethedatato
improvetheproduct.
Lockin "DigitalLockin" Compatibilitywithcompetitorssystemsispreventedbyuseof
adigitalhandshakeandauthenticationmechanism.
PayperUse "RemoteUsageandConditionMonitoring"Useandconsumptionoflowervalue
productscanbemeasuredtoo.Thebusinessmodelpatternisapplicabletothese
goodsaswell.
Performancebased "RemoteUsageandConditionMonitoring"Useandconsumptionoflowervalue
Contracting goodscanbemeasuredtoo.Technologyformonitoringthestatusofproduction
plantsandequipmentfurtherpromotestheapplicationofthisbusinessmodel
pattern.
RazorandBlade "DigitalLockin""Razorblades"canbeauthenticatedonlineusingdigital
mechanisms.Eliminateselaboratesafeguardingofthebusinessmodel,suchas
throughpatents,forinstance.

Fleisch/Weinberger/Wortmann2014 12|P a g e
Businessmodelpatterns Facilitatingcomponents andpatternsofthe InternetofThings
accordingtoGassmannet
al.
SelfService "ObjectSelfService" Objectsorderconsumablesorservicesautonomously.
SolutionProvider "ObjectSelfService"and"RemoteUsageandConditionMonitoring"These
componentsincreasetheattractivenessofthebusinessmodelpattern.
Subscription "DigitalAddon" Theusabilityofaproductorsubfunctionscanberestrictedto
thetimespanofasubscription.
TwoSidedMarket "SensorasaService" Platformscombinedatasupplierswithdatausers.

Table2:BusinessModelPatternsaccordingtoGassmannthatarefacilitatedbytheInternetofThings
(ourtable)

Entrepreneurial Challenges in Implementing Internet of Things Business


Models
Thelogicdescribedabove,thecomponentsandpatternsforbusinessmodelsthatutilizetheunique
characteristicsoftheInternetofThingsshouldinspireinnovatorsinbusinessandsocietyatlargeto
developtheirownspecificbusinessmodels.Thosecharacteristicscanbeintegratedastechnology
specificexpansionsintoanymethodofbusinessmodeldevelopment.

Workingwithmanycompaniesfromlargecorporationstostartupsitbecameapparentthat,as
experiencedmanagersknow,inestablishinganewbusinessmodelintheInternetofThings,generating
newideasisnotthebiggesthurdle.Whilethatisthefocusofthisessay,herewealsobrieflydiscussthe
keychallengesinimplementationthatariseinparticularforcompanieswithahistoryofsuccessinclassic
businesseswithphysicalproducts,namelymanufacturingindustries.

Product versus service business


Abroaddiscussionhasdevelopedinthelasttenyearsinbusinessandacademiccirclesregardingthe
optimalmixofproductandservicebusiness.Themergingofthephysicalanddigitalworldsisreigniting
thatdiscussion,sincethedigitalpartofahybridsolutionisalwaysaservice.Thecentralquestionsthat
areaddressedintheliteratureandbycompaniesare:howmuchandwhichservicebusinessis
appropriate?Aretheredevelopmentalstepsalongthepathfromaproductdominanttoaservice
dominantorganization?Whatisthebestorganizationforthedevelopment,sale,andprovisionofservices
ontheregionalandinternationallevels?Whatarethevariouscategoriesofservices?HowcanI
convincecustomerstopayforservicestheypreviouslyreceivedfreeofcharge?Howispricing
determined?HowdoIorganizeandincentivizemysalesorganization?5

Servicesdifferfundamentallyfromproducts.Servicescantbestored,forinstance,andasaruletheyare
providedatthecustomerssitewhilecollaborating,andtheyaregenerallypaidforinmanysmaller
amounts,spreadoutovertime.Theheartofthematterisacomparativeweighingofthestrategicand
operationalcharacteristicsofproductsandservicesagainsteachotherandachievingasustainedoptimal
balance.

5
SeeFischer,etal.(2012)

Fleisch/Weinberger/Wortmann2014 13|P a g e

Fig.6:InterplayofDigitalizationandServiceOrientationinManufacturing
(ourchart)

OnefeatureoftheInternetofThingsisthefactthattheserviceportionofthebusinessmodelsoutlined
hereisalwaysdigitalinnature.Thishastwoconsequences:First,thetheoryandpracticeofservice
orientationmustbecriticallyexaminedandexpandedasneededagainstthebackdropofthe
characteristicsofdigitalservices.Second,digitalizationthatextendsintotheproductitself(incontrastto
digitalsupportinthevaluecreationprocess)mustofnecessityleadtoanadditionalserviceorientation.
Fig.6illustratesqualitativelyhowwithincreasingdigitalizationofpossibleproductsofferedbyproducing
industrythesolutionspaceopensuptowardsthedirectionofservicedominance.

A clash of hardware and Internet cultures


Thedifferingcharacteristicsofphysicalanddigitalproductsareparticularlynoticeableinproduct
development.Whenthemarginalcostofaproductmodificationislow,developmentiswellorganized
whenthemanagementcontrolcircuitisappropriatelyshortandhighfrequency.Consequentlyinthe
digitalworld,inparticulartheInternet,agiledevelopmentprocessesarethenormtoday.Almostevery
successfulInternetsoftwarecompanyorprojectusestheSCRUMmethodtodayandteststhenewvisible
resultseveryeveningsoitcanbedeliveredtothecustomerforuse.Inaworldwhereabugcanbe
repairedwithanupdateatalmostnocost,eveninaninstalledbaserunninginthemillions,andwhere
rightfromthestarthighgrowthisrequiredduetonetworkeffects,speed,earlycustomercontact,and
aestheticsareofutmostimportanceindevelopment.ThekeyconcepthereisMinimumViableProduct6
aproductversionthat,withminimalexpenditure,deliversmaximumknowledgeaboutthecustomer
andPerpetualBeta7neglectingcompletereleasestopromotecontinuousenhancementofthe
product.

Inthehardwarebusiness,however,andintheworldofembeddedcomputingaswell,othertermsapply.
Here,forexample,anerrorinaproductthathasalreadybeensoldusuallyresultsinanextremelycostly,

6
SeeRies(2009)
7
SeeOReilly(2005)

Fleisch/Weinberger/Wortmann2014 14|P a g e
imagedamagingrecallaction.Thesedifferencesconditionedbytechnologyandeconomicshavemeant
thatdivergentculturesaroseinhardwarecomparedtothosegoverningInternetsoftwaredepartments
andhaveshapedputativelyincompatibleorganizationalunits.

Thetechnicaldeltacannotsimplybedefinedaway.However,knowledgeoftheothersidehardwareor
softwarecanbebuiltuptothepointthatthetwoareascanbejoined.Thisgiveskeyemployeesthe
necessaryopennessforprofitableexchangesandawillingnesstoadoptbestpracticesfromtheothers
discipline.

Everyatomthatcanprofitablybereplacedbyabitwillbereplaced8forthereasonssetforthabove.
Digitalizationofhardwarefunctionsisadvancing.Thisgivesaddedsignificanceandexplosivenesstothe
questionofwhoholdsthecontrolsinthedevelopmentofhybridsolutions,thehardwareorthesoftware
side.ThecorrectanswerrelatestothesolutionspositioninFig.6.Withoutquantitativeempirical
research,onlyonestatementcanbemade,whichreliesonfragmentaryanecdotalknowledge:moreand
moreoften,itisthesoftwaresidethatwinshere.

ManyoftheIoTsolutionsweexaminedexhibitcharacteristicsofdisruptiveinnovation.9Theyusea
completelynewvaluepropositiontopositionthemselves,makingthemdifficulttocompare,andthey
targetanewmarket.Theyaresmall,relativelyinexpensive,oflowervalueandwithtightmargins,atleast
whenmeasuredbytraditionalmetrics.Creatingabusinesscaseexanteisoftenfraughtwithmajor
uncertainties.Giventhis,itstandstoreasontotestthedevelopmentofhybridIoTproductsbyusingthe
solutionssuggestedbyChristensen(1997)forcompaniestryingtomanagedisruptiveinnovations.The
keyliesincreatingortakingoversmallindependententrepreneurialunitsthatcorrespondintheir
dynamismandwageandreportingstructurestothedimensionsoftheirtargetmarketandthatcanact
independentlyofexistingcustomersandfinanciers.

The strategic value of development communities


Smallunitsthatcanandmustoperateinthetraditionofleanstartups10areadvantageousinaddressing
anotherchallenge.Theirleannessitselfforcesthemtoworkondevelopmenttogetherwithinanetwork
ofpartnerswhichincludetheircustomers.Thisimpliesnotonlyaleaduserapproach11but
encompassesanentireecosystemasfacilitator.Inthedigitalworld,theonewhobringsthemost
developerstoitsplatformwins.Forexample,todayAppleandGoogleandyesterdayMicrosoftandSAP
specifiedsomeoftheirsoftwarefunctionsthroughAPIsandopenedthemuptothirdpartiessothattens
ofthousandsofdeveloperscouldcreatemillionsandmillionsofappswithrelativelysimplemeans,
quicklyandinexpensively,asNest,NetatmoandCo12areattemptingtodotoday.

8
Andreessen(2011)
9
SeeChristensen(1997)
10
SeeRies(2011)
11
SeevonHipple(1986)
12
SeeSchuermans&Vakulenko(2014)
Fleisch/Weinberger/Wortmann2014 15|P a g e
Handling application data
Inmostinstances,hybridsolutionsmeanthatthepartyofferingthemmusthaveaccesstodatathatis
constantlygeneratedfromapplicationofthesolution.Thisisnewforclassicproductioncompaniesand
bringswithitbothmanyopportunitiesaswellasrisks.

Theopportunitiesincludeinputthatisbasedondigitaldatasoitisfinegrained,unaltered,andcomplete
andcanbeusedtoenhancethesolutionand/ordevelopnewproducts,tooptimizecustomer
segmenting,responsiveness,earningsmodelandpricing,andfordynamic,situationspecific,and
automaticconfigurationofofferingsduringruntime.Professionaluseofthismassdata,whichisdiscussed
todayundertherubricsofanalytics,bigdata,ordatascience,isanewfoundationalcapabilitythat
companiesmusthaveordevelopinordertoexploittheseopportunities.Forthisreason,OReilly(2005)
andothershavefamouslysaid,"SQListhenewHTML,"and"Datascienceiscool."

Thechallengescoveralltheissueswrappedupintheusersinformationalselfdetermination,in
particularthoseregardinguseincompliancewithregulationsanddatasecurity.Whoownsthedata
generatedbytheapplication?Theuser,thepartysupplyingthesolution,orboth?Therelativelynew
approachtakenbyPentland(2009)amongothersseemspromising.Heviewsdataasanassetthat
belongstothepartiesgeneratingthedata,whoarefreetodecidewhattheywanttodowiththatasset.
Theycantreatitlikemoneyandkeepitastheywish,spendit,ortradeitforanothercurrencyorquidpro
quo.Itisbeyonddebate,however,thateveryhybridsolutionneedsaclearconception,transparentforall
involvedandreliablyimplemented,ofhowithandlesapplicationdatathatisgeneratedbythecustomer.
Thatistheonlywaythatboththecustomerandthesuppliercanderivelongtermbenefitsfromthedata.

Summary and outlook


Thegoalofthisessayistoinspireinnovatorsfrombusinessandsocietyatlargetodevelopbusiness
modelsusingtheInternetofThings.ItanalyzestherolethattheInternethasplayedinbusinessmodelsto
date,documentsthespecificeconomicenergyoftheInternetofThings,andderivesfromthatthe
generalproduct/servicelogicthatcanserveasthefoundationforspecificcomponentsandpatternsof
InternetofThingsbusinessmodels.Finally,itindicatessomeofthekeychallengesinvolvedinits
implementationthatwillconfrontinparticularcompanieswithasuccessfulhistoryinmanufacturing
industries.

ThisarticledoesnotshedlightonmanyaspectsthataredirectlyconnectedtoInternetofThingsbusiness
models.Forexample,thereisnomentionofthediscussionthatissoprominenttodayabouttechnical
standardsatallthedifferentlevelsofcommunication,inparticularthelastmile(fromsmartthingstothe
firstclassicInternetcomputer),noristhereconsiderationoftherapidevolutionofwirelessprotocols,the
energyissuethatovershadowsallelse,andquestionsofsystemrobustness,maintainability,andsecurity.
Thisarticlealsodoesnotattempttodescribethetopographyanddevelopmentofthesuppliersmarket,
orthespecificrolesofthemanufacturersalongthestepsinFig.4.Thisessayalsocannotgointoindustry
orprocessspecificapplications.Thecentralroleofthemobilephonethatmediatesbetweenandamong
people,smartthingsand/orasmartenvironmentandtheInternetofThingsisnotdiscussed,noristhe
emotionalizationofthephysicalworld,whichoccurswhenathingrespondsinrealtimetoits

Fleisch/Weinberger/Wortmann2014 16|P a g e
environment,awakenedtowhatfeelslikelife13andinfluencesthebehaviorofitsenvironment,including
people,inaqualitativelynewway.

Indeed,thisessayraisesmorequestionsthanitanswers.Somecannowbemorespecificallyformulated.
ItisrevealingtoreadtodaywhatwaswrittentenyearsagoabouttheInternetofThings.In10yearsitwill
beinterestingtolookbackandseewhichofthetermsanddevelopmentsoutlinedhereprovetobe
lastingandwhichhaverecededfromview.TheInternetofThingsremainsanacademicallyand
economicallyfascinatingandrewardingphenomenon.

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Christensen(1997);Christensen,Clayton:TheInnovator'sDilemma:WhenNewTechnologiesCause
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Fleisch2010:WhatistheInternetofThings?AnEconomicPerspective,AutoIDLabsWhitePaperWP
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