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Maturing offerings, vendors and customers prompt long-term IoT vendor growth

The continued interweaving of the technology component market with Internet of Things (IoT) techniques delivers a well-defined path to long-term sustained growth for many IT and operational technology (OT) vendors, especially those vendors that are best able to differentiate their portfolio and position themselves as critical partners for a wide set of IoT solutions.

The hype surrounding IoT has only served to confuse and overwhelm customers and vendors, but efforts by both parties to cut through the hype is driving the growth of installed IoT solutions. As the hype fades, vendors are better able to rationalize their go-to-market strategies and messaging, particularly around how to assemble IoT solutions, leading customers to better understand how to apply IoT.

However, while it is becoming easier to assemble an IoT solution, it is still challenging to design and implement the IoT technique. We don’t expect a huge explosion of revenue; IoT itself isn’t a “killer app,” but it will enable moderate and slowly accelerating revenue growth for the various components involved in an IoT solution.

In our 3Q18 reports and thought leadership, TBR will focus on three topics that we believe are currently the most impactful on the wider IoT ecosystem: the increasing maturity of the IoT technique, the growing consolidation of generic platforms, and how increasing commoditization around IoT is working in favor of economies of scale and enabling the growth of installed solutions.

IoT is growing up: Increased ecosystem maturity will lead to increased customer adoption

TBR, through discussions with vendors and customers as well as our use case databasing, is noticing growth in installed IoT solutions, whether from net-new deployments or expansions of existing IoT deployments, signaling improved maturity. IoT maturation is not so much about the components of IoT as it is about businesses developing their ability to leverage technologies and techniques that are increasingly applicable to a growing number of business problems.

A major driver of this maturity is greater clarity around IoT techniques, led largely by go-to-market realignment and improved messaging by vendors, organization around IoT by customers, shifts from competition to coopetition by vendors, and general improvements in the construction of the technology that facilitate advanced usage of the IoT technique.

Signals of consolidation appear in the cloud IoT platform space

Infographic discussing signals of consolidation appearing in the IoT cloud platform space

The cloud IoT platform landscape consolidates around largest vendors as customers seek continuity, consistency and the best tools

Cloud services revenue grew 48.2% year-to-year and increased as a percentage of total benchmarked Internet of Things (IoT) revenue from 12.4% to 15.8% year-to-year in 2Q18. Growth is driven by customers, especially those without deep legacy ties, moving their workloads to the cloud. The public cloud ecosystem is beginning to consolidate, with the top vendors competing on best-in-class tools, partnerships and business-problem-solving messaging.

Software, while still a sizable portion of benchmarked revenue, is experiencing slowing revenue growth, from 19% year-to-year in 2Q17 to 4.2% year-to-year in 2Q18. Software, along with ICT infrastructure, will continue to play a role in IoT solutions with the advent of edge computing, but as providers’ cloud platforms mature and tie-in deals with application partners are cemented, demand increases.

ICT infrastructure revenue grew 14.1% year-to-year in 2Q18 due to increased IoT deployments as well as hybrid IoT becoming an increasingly common IoT framework. ICT infrastructure gross margin rose 80 basis points year-to-year. TBR believes the increase stems from the need for more specialized or powerful hardware to handle the more advanced needs of IoT and its components, such as artificial intelligence (AI) and machine vision. Despite the increased utilization of ICT hardware due to hybrid IoT and the need for specialization, the long view for ICT infrastructure will be complicated by commoditization. TBR expects most ICT infrastructure companies to deeply invest in software and service components to buttress the profitability of customer engagements as the threat of commoditization looms.

Vendors across the technology spectrum are all fervently trying to crack the code for the “killer app” within specific verticals that can solve common business problems and be widely adopted by customers. The vendors that win with building the first widely accepted solutions will be set up for success, while others in the oversaturated market will at best become acquisition targets and at worst become history.

For more information, contact Analyst Daniel Callahan at [email protected].

Increased market clarity drives 16.1% year-to-year growth in commercial IoT revenue

Technology Business Research, Inc.’s (TBR) 2Q18 Commercial IoT Benchmark recorded revenue growth of 16.1% year-to-year, to $10.3 billion, in 2Q18, among the 28 IT and operational technology (OT) vendors we benchmark. The revenue growth is largely a result of continued implementation of Internet of Thing (IoT) and growth of installed IoT solutions.

The dousing of rampant IoT hype, which only served to confuse and overwhelm customers and vendors, is helping drive the growth of installed IoT solutions. As the hype dies out, a wave of increased clarity and maturation is forming with vendors rationalizing their go-to-market strategies and messaging, leading to customers better understanding how to apply IoT and vendors learning how to assemble solutions. Packaged solutions are emerging as vendors cooperate, focusing on their strengths, and assemble components sets that solve verticalwide challenges. TBR believes these factors are driving tactical business-focused IoT projects to supersede overambitious projects stuck in proof-of-concept limbo.

However, while easier than in the past, IoT design and implementation are still a challenge. TBR does not expect a huge explosion of revenue beyond midteen growth going forward.

Total 2Q18 commercial IoT benchmarked gross profit increased 16.6% year-to-year to $5.1 billion. Reduced complexity in IoT due to increased knowledge around building and applying IoT as well as the streamlining of portfolios as a result of increased partnering is improving vendor profitability. Also, vendors are leveraging specialized tools, such as artificial intelligence (AI), to justify higher pricing.

 

TBR’s Commercial IoT Benchmark highlights current commercial IoT revenue and gross profit for vendors. TBR leverages financial models and projections across a diverse set of IT and OT components. Additionally, the benchmark outlines the major vendor drivers and trends shaping the market.

Customer IoT maturity: A key market driver

One of the most important governing factors in the adoption of Internet of Things (IoT) is the maturity of the companies considering, buying and implementing IoT. While these companies have varying degrees of maturity in IT and in operational technology (OT), maturity in implementing IoT is a different matter, requiring additional organizational capabilities. This report looks at IoT maturity — what it is, how it can be assessed, and what the implications are for vendors and for the market.

It’s hard to grow up in IoT

One of the most important governing factors in the adoption of Internet of Things (IoT) is the maturity of the companies considering, buying and implementing IoT. Vendors can improve their go-to-market (GTM) tactics by varying their approach to potential customers with different degrees of maturity. Assessment of maturity helps in predicting and targeting growth opportunities in vertical and geographic market segments.

A mature process for a single IoT solution is easy to describe but challenging to carry out. A team including members with business knowledge, operations technology knowledge and IT knowledge works together through the process of problem selection, solution design, solution implementation, and ongoing solution operation and refinement. As most IoT implementations present opportunities for enhancement and further integration, the team continues to work together indefinitely.

For an organization to be mature in IoT, it must be able to sustain multiple projects, at different phases in different parts of the organization and at varying levels of scale. The projects must be compliant with company and regulatory policies, secure and, ideally, scalable and efficient, leveraging to the extent possible organizational resources and standard practices. The data generated by the IoT projects must be secure, but it must also be visible and available to others in the organization who could benefit.

Additionally, the mature IoT organization keeps the process of continual distributed innovation going, with employees throughout the organization actively looking for opportunities to improve operations using IoT, as well as other innovative technologies. While encouraging broad innovation, the organization manages, prioritizes, allocates resources for and socializes the projects.

The organization described above is an ideal, but comparing an organization with this standard helps us know at what level a business is operating in IoT. This ideal process applies not only to IoT but also to all projects leveraging new technologies.

For vendors, IoT maturity can help with identifying potential customers and approaching prospects. With mature customers coordinating multiple IoT projects, there is the opportunity to be included in the company’s portfolio of vetted preferred vendors or products. With a less mature customer, the best outcome is engagement in a single IoT project. These two different scenarios demand different messaging, sales tactics and, sometimes, offerings.

In a growing market — and IoT will be growing for a very long time — the trailing edge is always much larger than the leading edge. Even as the average level of maturity increases, most target customers will be on the less-mature end of the spectrum. Vendors and offerings that fit the needs of the target market, including simplicity, extensive support and membership in robust partnerships, will have an advantage. Offerings that help develop the customer, moving them up the maturity ladder, will also have an advantage.

IoT maturation isn’t about the technology of IoT; it’s about businesses developing their capability to leverage technologies and techniques that are increasingly applicable to an increasing number of business problems. The same maturation encompasses things like analytics and artificial intelligence, blockchain, edge computing, and mobile computing. Looking at customers and prospects in terms of maturity in leveraging technology helps in selling and delivering technology products that drive businesses forward.