The Best Business Model for the Internet of Things

By Tim

For wannabe providers of Internet of Things (IoT) services and solutions, traditional business models simply won't cut it. The days of producing a product, gaining a distribution channel, then stocking the shelves waiting for one-time customers to snatch up the new-and-improved "widget," is woefully inadequate in the fast-growing IoT market.

The problem with past business models as they relate to future technology growth trends is that those old-school methods would leave what would amount to billions of revenue dollars on the table for a competitor to snatch up. According to Gartner, by the end of this year there will be nearly 5 billion IoT connected "things," and 25 billion in just five years.

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Great news for device makers, right? Sure, but stopping there is old-school thinking because all those devices are just the tip of the revenue iceberg for tech leaders with the best business models.

What's the difference? For providers with the right approach, IoT devices offer a chance to develop long-term, ongoing relationships with consumers and verticals far beyond the initial sale.

The IoT customer relationship shouldn't end with the sale of a smart light bulb, or sensors that monitor a city's traffic patterns to enhance efficiencies and safety. Device upgrades, services ancillary to the initial IoT device, and the unprecedented amount of user data that is collected can drive additional revenue opportunities. The successful IoT service provider will recognize that first smart door lock is just one step toward a greater share of its customer's wallet.

As iFans certainly know, the vast majority of Apple's world-beating revenues are derived from its iPhone sales. Apple's (relatively) new iPhone 6 and iPhone 6 Plus led the way to yet another record quarter. To Apple's credit, and as another example similar to forward-thinking IoT providers, its business model goes beyond device sales as it attempts to diversify revenue sources and get people into the Apple "ecosystem."

Apple has used its iPhones to generate billions in app sales, including nearly $500 million in just the first week of 2015. Its iPhone acts as a gateway to additional sales, and with each app download Apple deepens its relationship with the customer. The best IoT business model needs to adopt that same concept to maximize revenues and fend off competition. The more entrenched a customer is with a provider, the less likely she or he will jump ship.

On the right trackLarge, established tech leaders like Google and IBM are two more examples of the best business models for IoT.

Google with its Nest hub, along with its growing list of smart home business partners, has positioned itself as one of the leading smart home product and service providers on the planet. And you can bet its business model doesn't stop at selling Nest devices to the world's consumers.

Beyond Nest and future upgrades, Google stands to gain immeasurably from its IoT ambitions because those device sensors give it the capability to collate, analyze, and ultimately utilize reams of consumer data to further its primary revenue source: digital advertising.

IBM is operating along the same lines as Google in that its Watson cognitive super-computer with its ability to "learn," along with its other big data solutions, are positioning it for significant IoT wins. IBM's business model is in full swing, as evidenced by its recent $3 billion investment to install and grow a separate IoT division.

The recent deal with The Weather Company is another example of the right IoT road map. Using Weather Company data from its 100,000 stations around the world, IBM intends to unleash its big data solutions to "translate weather into an outcome, a data product" that could be used by governments around the globe, utilities, and insurance firms using IoT-driven weather data to be proactive, rather than reactive to storms. That's thinking outside the box, which is exactly what the winners of the pending IoT revenue wars will need to do, and it starts with the best business model.

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Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Apple, Gartner, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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