Why IoT subscription revenue streams failed spectacularly
Forget sales - subscription was poised to be the big moneymaker in the emerging industry of the Internet of Things. Early vendors bet big that revenue in the connected space was not limited to physical product sales. Rather, other sources of profit would become possible after the initial product sale, including value-added services, subscriptions, and apps.
As we now know, subscription-based revenue over-promised and under-delivered. Today, only a fraction of customers pay for extra premium services with the majority satisfied with remote control and access to real-time data. The soaring promise and spectacular failure of subscription-based revenue, however, has given rise to other industry innovations which might not exist otherwise.
Let’s explore why subscription revenue streams failed and the innovation which followed in its wake.
The promise of subscription predictions
It is easy to see why subscription services seemed the likely source of industry revenue in those early days. The potential of connected devices meant that over-the-air updates, new features, and functionality could be pushed to the customer on a regular basis. Products, therefore, would no longer be one-and-done. Device creators thought the ability to track products in use would make it possible to respond to customer behavior. This would then lead to new analytics and new services for more effective forecasting, process optimization, and customer service experiences.
The forecast of additional services which would exceed the initial purchase price made sense at the time. Paid subscriptions would generate predictable and recurring revenue streams to lock the customer in for a certain period of time. Companies could then focus their sales resources on closing new accounts instead of trying to re-sell to the current customer-base every quarter or every year.
Expectation and reality, however, do not always agree. Today, the rise of cheap, widespread cloud hosting means “freemium” is the norm for most products and consumers. Just like what happened to music and news services, customers largely do not expect to for something they learn to view as free. The reality of subscription revenues is in stark contrast to that which was promised - forcing vendors to rethink their entire business model.
Hardware power to the rescue
Early vendors must feel cheated. Competition is much fiercer and receipts are much smaller than many had predicted. As a result, however, new ways to compensate for the lack of subscription-based revenue have arisen.
For example, advanced hardware has become so inexpensive that vendors can store and host the data themselves on the “edge”. Instead of relying on cloud hosting and the privacy issues that entails, edge computing brings information closer to the location of where it is needed.
Vendors in this scenario often use peer-to-peer connections to ensure privacy while housing data on the device which produced it, thus cutting out the cloud hosting middleman and boosting performance.
Some vendors create platforms with pricing which can be costed into the product. Video surveillance cameras, for example, normally come without a subscription fee and require the vendor to foot the bill for connection services between the camera and apps. This is achieved by keeping the running costs per camera so low that the final price reflects the total operating costs.
There is no denying these solutions do not generate as much revenue as companies might have hoped one decade ago. Nonetheless, they do demonstrate a viable way forward following the crashing and burning of projected subscription revenues.
Answering the revenue question
Vendors need to be pragmatic to find success. Every company must plot their own path to find a pricing structure that works for them. An IDC survey reports an estimated 33 percent of IoT producers currently derive half or more of their revenue from hardware. Meanwhile, an estimated 38% of respondents derive half or more of their revenue from services.
It is important to remember customers do have money to spend on IoT. Global spending in the sector is expected to hit $1.29 trillion by 2020, with B2B applications projected to account for about 70 percent of the total value. Clearly, vendors need to find the sweet spot between performance and price to secure customers.
The spectacular failure of subscription revenue continues to be a pain point for many early vendors. However, it is incumbent upon the entire industry to recognize the desire of customers and pivot accordingly. The industry’s continued success depends upon it.