Written by Senior External Advisor, Joakim Nelson
Internet of Things is gaining in momentum and the expected growth is paramount both in terms of number of connected devices but also regarding the size of the potential business. The complexity for companies approaching this area is high, and several decisions have to be made regarding technology choice, standardization alternatives, business models and IPR/Patent strategy. This document aims to highlight some of the alternatives and challenges most companies will face in the area of IoT. The document will not conclude on the right strategy for each individual company but rather outline the overall market, identify the key issues and the necessary strategic steps in order to define a viable IoT strategy as a part of the overall business plan and corporate strategy.
Market Outlook for IoT
New Business or?
The traditional mobile industry is in “wait stage” between 4G and the in 2020 expected 5G technology. This doesn't mean that there aren't any innovation or market changes, but rather that no paramount changes are expected as we have seen in the transition from e.g. 2G to 3G, etc.
This rather stable situation with a Consumer device business in the range of 350bn USD, typically also means that more and more focus will be on cost and optimizing production and product offerings. Typically this hurts the mobile device industry as well as the mobile operators since less profit may reduce R&D efforts and related innovation. However, this doesn't mean that companies like Apple and some of the main mobile operators will not make substantial profit. But it means that the market as such goes into a stage where mid-tier products create enough value for the consumer and that the operators see rather limited market growth in the developed part of the world (battle between giants about a rather stable consumer base) and most growth will be in low revenue and profit per user countries or segments.
So, the market outlook for the actors in the traditional mobile industry would look a bit dull if it wasn't for the opportunities with Internet of Things or People (further on called “IoT”). IoT not only introduces billions of new potential connections in addition to the 7bn people on earth, it also opens the door for new potential revenue models and technical solutions.
Figure 1. The potential growth of IoT from 2008 until 2020. The number of mobile phone subscriptions is indicative and is reaching the same magnitude as number of people on earth (some may have several subscriptions).
Companies like Ericsson and Cisco have expressed that there could be about 50bn connected devices by 2020 and this is of course good news for the industry as such. The question is merely for which industry and who will control the market?
If all existing mobile phone users connect 5-10 devices to the Internet we end up in the range of 50bn connected devices so there is a simple background to the figures (although the calculations from Ericsson and Cisco may be more complex). The question is if all these new connected things will be connected through the traditional cellular systems or if they will be connected into systems like Wi-Fi or Zigbee and will be out of reach for traditional mobile operators, etc. Today home alarm systems, music distribution systems, etc., are typically not connected to a cellular infrastructure only. The same goes for industry automation, etc., where private networks or Wi-Fi technology is used to set up a wireless infrastructure.
Another aspect is that new actors are emerging in the mobile market, and it becomes obvious that car manufacturers are offering mobile services (see Tesla, Audi etc.), and home surveillance companies also try to include more and more in the security offering. More about these new business models in the following paragraphs.
New technology or?
The wireless communications part
Most of the wireless technologies are not fully capable of handling billions of connected devices with extreme demands to low power consumption, limited signaling etc. The classical cellular technology does have the capability of sending packet data already from the early days of GPRS and similar to today´s IP based HSPA+ networks providing 100rds of mbps data, but the power consumption and robustness to handle low energy sensors with very limited battery capacity is simply not there yet. Another constraint is the amount of signaling all the connected devices may generate in an emergency situation (power supply shortage etc.). There are a number of initiatives ongoing also on the 4G+ standardizations to reduce duty cycles, improve robustness and optimize the signaling, etc., but quite a lot of players are waiting for the prevailing 5G technology that may be designed to handle these requirements from the start.
Figure 2. Overview of some of the most important wireless technologies/standards for IoT
Also technologies such as Zigbee and Wi-Fi are improving their capability to handle low bitrates, extremely low power consumption, reduced signaling etc. The dilemma is that these technologies try both to improve bit-rates up to the speed close to 1 GBps (for Wi-Fi) based on more advanced radio design (multiple antennas, dual path technologies etc.) and simultaneously try to cope with devices with rather limited demands on bit-rates, but where power consumption and robustness are key (like smart meters, sensors etc.).
So, yes, there will always be a technology evolution and the existing technologies will gradually migrate to handle the requirements of IoT, but it may take time and not all technologies may move at the same pace. IoT is outlined as one of the key areas for the next generation of mobile standard, called “5G”. 5G is assumed to increase bitrates, reduce latency, increase spectrum efficiency, lower power consumption, and increased number of units per square km etc. with a factor of 10-100 vs 4G systems. Several of these parameters have a direct impact on IoT or are driven by demands from different IoT services/applications.
The “Communications protocol” part
In this area there is a consensus that the IP (TCP/UDP/IP) technology will be used and the latest version of IPv6 has the capability of addressing “enough” of devices. So, this is good news since this means that transport protocol is set and basically the same between wired and wireless technologies.
The “application and services” parts
Here we see an immense number of different initiatives where all aim to create the “platform” where all devices can be merged. Typical issues are about how to register, identify, interconnect different systems and the format of the payload and security models etc. Higher levels of presentations are often handled by a WEB interface based on HTML5. The different alliances and initiatives outlined in the “IoT Landscape” part will describe this further.
What about the IPR landscape?
The big change with IoT from the traditional cellular industry structure is that the traditional “Consumer – (Smart) phone – Operator” paradigm is jeopardized. This structure has been rather intact for the past 25 years where operators purchase or get access to the cellular frequency-band through national or international legislation. They typically purchase phones and provide an offering to the consumer based on their communications demand. Traditionally, handset manufacturers have to respond to the demands from the operators and implement necessary functionality. Over time, the infrastructure providers such as Ericsson, Nokia Siemens, Alcatel Lucent and Huawei have become stronger and they they increasingly set the agenda for the network development. This is partly due to the fact that operators spend less and less on R&D. The same goes for the Phone manufacturers (OEMs) that always have strived to “own” the customer. Strong brands such as Apple, Samsung and Sony often have a stronger relation with the consumer than the operators, and it has, over time, become increasingly difficult for the operators to provide unique solutions apart from pricing plans.
The tremendous success of Android (more than 80% of all smartphones runs on the Android platform) and Apple’s sales successes have dramatically changed the telecom/mobile landscape and these players are stretching their offering outside the conventional telecom/mobile business and into the service and application domain. The creation of an open application environment (iTunes, AndroidPlay etc.) has totally changed the landscape and the related business models. Android collapsed the licensed Operative System market by releasing Android for free and thereby support their back-end advertising market.
The technology providers in the cellular business have an extremely strong position in related IPRs. Companies like Ericsson and Qualcomm have a strong portfolio of Standard Essential patents, and you can also see that the Far East players such as Samsung and Huawei are filing a lot. The focus on IPR filing was partly initiated by Motorola some 20 years ago, who claimed a number of patents related to the first and second generation of mobile phones. This situation made competitors like Ericsson and Nokia increase their efforts heavily to balance the situation.
Figure 3. Top PCT applicants in 2014 from WIPO Statistics Database
There are estimations indicating that you may have to pay up to 15 % of your handset/device net-sales in royalty cost if you do not have any patents to protect your business. This is, in most cases, an impossible burden to a sustainable business.
The conventional standardization activities are, to the same extent, a rather stable power game where the amount of R&D you put in is more or less equivalent to the IPR strength you obtain. The biggest change the past years is that the Chinese players like Huawei and ZTE have increased their efforts extremely and are now at par with the big US, European, Japanese and Korean.
So, how does this affect a player that wants to enter the IoT scene? The standard wireless technologies are fairly easy assessable as long as you use standard modules that are purchased from a certified vendor or pay a license fee to the standard “owner”. However, if your business is based on a modification of a standard, you need to understand the legal risks and business implications in depth. Further on, the applications and services utilizing the wireless standards may not be covered in the standards and could thus be protected by IPR´s either by you or a competitor. This is both an opportunity and a risk that has to be assessed before entering into this area.
How does this affect my business?
But for IoT the game is potentially somewhat different. Since IoT is stretching outside the conventional “Consumer – Phone – Operator” value chain. Most industries are trying to create loyalty to their brand and present their offering to the consumer when IoT is introduced. The power companies would like to be the hub in your home and they already have infrastructures that reach all the way out to the consumer although sometimes with a high-power copper cable. The car manufacturers like Tesla, Audi and BMW are trying to build an infrastructure into your home so that cars can get new software and applications during the night along with the charging, etc. Google, for example, is number 3 when it comes to patents related to self-driving cars - only surpassed by Toyota and Daimler.
The home surveillance/home alarm companies often have a hub in the home where all cameras and door sensors are connected. These systems are typical run on wireless and/or wired networks and outside of the conventional mobile market.
Another category of players include the media companies. Here we see players doing home game consoles such as Nintendo, Sony and Microsoft as well as cable TV or satellite players like Comcast, Boxer, Viasat, etc. Also traditional devices manufacturers like B&O and Sonos (home sound) are all trying to utilize their assets for a future battle around Internet of Things.
Several of the companies entering from the automotive, software or media area are now starting to file IPRs in the IoT domain. So, a number of very powerful players may target the same market and there is an obvious risk of heavy battles and double counting.
Figure 4. The picture depicts how competitors from other parts of the value chain may attack your core business. Inspired by Doblin.com 10 types of innovation.
Horizontal competition (competition from actors outside your core business)
When actors like Google acquire Nest (Thermostat Company) and power companies like EoN are introducing new services in the home surveillance area for free or introduce new business models, you really have to assess your competition and realize that your competitors may not come from your own “business”. And it may not even be based on the same business model. Competition may rather come from a player outside your conventional business. This may be unforeseen and unpredictable and even worse, it may totally jeopardize your business. Your competitor may give away assets for free that you plan to sell and create your turnover/profit with. An insurance company that gives away home security equipment or car safety devices to decrease insurance costs have a totally different business model than the ones trying to capitalize on hardware or a limited service offering.
Google can subsidize hardware in order to get into the “living room”, and a credit card company may give you vouchers or product for free if they can retrieve additional information for their business.
Another dimension is the IPRs these companies may have created and which are in the scope of your business. It may be very tricky to compete with companies like Google, Apple or Microsoft in the area of e.g. security or consumer applications if these companies have an extensive patent portfolio or key elements/technologies related.
White goods companies like Electrolux and Siemens used to fight about design, lowest power consumption and unique features for refrigerators and stoves, but in a world where you rather sell the capability of making fantastic food or protecting your food, companies like Samsung become the worst enemies you can think of. Samsung has an extensive patent portfolio in the mobile domain as well as in some other and have deep knowledge about connectivity end related IPRs, but also a direct relation to consumers using their smartphones. In a world of connected home appliances this may be crucial to the future business.
Vertical competition (competition within your core business)
In this area you probably have an excellent knowledge about your competition, at least the traditional players. Since more and more of the telecom players will come close to your business, at least if you are into the IoT business, you can expect these players to have IPRs/Patent close to your future business or in the area of your future business.
It becomes of vital importance that you start to assess the potential IPR threats, but also that you pro-actively start to drive an own IPR strategy in order to have the freedom to act in a later stage.
The IoT landscape
Figure 5. An overview of the eco-system related to IoT. The top section outlines some of the influential standardizations entities. The second layer depicts actors (service providers) that have showed interest in the area among others. This part just indicates that players from various areas have a focus in the area of IoT. The third layer, called main initiatives, depicts some of the alliances or initiatives that are trying to harmonize a “standard” around IoT. The forth layer shows some of the radio based technologies that are or about to be used for IoT.
The figure above exemplifies and depicts the industry structure related to IoT. The alliances formed by giants such as Apple, Google, Qualcomm, Intel and IBM are fighting to attract members to “their standard”, while some service providers are building their own structures. It is rather likely that there will be a consolidation over time, but more and more players are approaching the scene and today it is very hard to see who will be the winner long term. Note that several of the alliances claim that everything is open and based on open standards, etc., but that doesn´t mean that all IPs are free and accessible to all who would like to enter this market.
IPR strategy as a part of your overall company strategy?
Different companies will enter the IoT business with very different approaches and business objectives. Some will use well standardized components and technologies, while others will try to modify specific parts in order to create uniqueness in technology and/or product offering. Since the technologies related to IoT are handled by a variety of standardizations forum and/or industry initiatives, it becomes of the outmost importance to understand both the standardizations’ legal framework and the patent/IPR structure of the industry. Figure 5 above illustrates some of the main technologies, initiatives and standardizations forum in which a new player have to navigate.
It is our firm belief that most companies entering into the IoT domain need to have an IPR strategy that, as a minimum, makes an assessment of future business. This strategy gives you the opportunity to start identifying your business opportunities as well as avoiding some of the biggest threats. This strategy should be seen as a complement to the overall strategy work that is performed in most companies.