Monetizing the Internet of Things: What We're Doing Wrong (and How To Fix It)

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Monetizing The Internet Of Things: A Convenient How Not To Guide Paul R Brody Prepared for Semicon West July 2015

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The future is already here, it’s just not evenly distributed. William Gibson

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We started making devices digital because they’re cheaper that way VS 3 © 2015 Ernst & Young LLP Images creative commons, flickr

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The result was a world of smart things that weren’t especially clever at all 4 © 2015 Ernst & Young LLP Image from technologizer.com, Panasonic

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Things have kept getting smarter, but we don’t seem to be very happy with how they’re turning out. ➡ ➡ 5 © 2015 Ernst & Young LLP Lots of smart appliances now available Very few stand-out success stories

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Three substantial problems have delayed the arrival of a more useful Internet of Things Failing the jobs to be done test No meaningful ROI No credible level of security or privacy 6 © 2015 Ernst & Young LLP

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The biggest failure in the Internet has been the failure to focus and improve upon the “job to be done” by the device Features of a new $1,700 “Smart” Washing Machine: •Start, stop, and check status remotely •Notification when laundry cycle is complete •Assign tasks to other family members •Remind you to do the washing 7 © 2015 Ernst & Young LLP

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ROI is important, and costs are too high while returns are far too low to justify replacing existing capital equipment Case Examples: ROI on Smart Sensor Use Cases $300 Maintenance • 5% annual chance of mechanical problem • Average truck roll costs $100, 1.5 per repair • Smart systems eliminate some repairs and reduce average truck rolls total to 1.0/repair • $25 tag cost on BOM, 10% annual ROI Energy • $250 for a smart thermostat at home • Average of $141/year in savings reported for Nest thermostat users • 56% annual ROI on average Tag Cost Return $225 $150 $75 $0 Maintenance 8 © 2015 Ernst & Young LLP Energy

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As for security and privacy: it’s a disaster and there are no participants left who have any credibility in this space •Security is an afterthought in most smart product design today •The foundations of many of these designs are dated to begin with •Feature bloat adds bugs and security risks. 9 © 2015 Ernst & Young LLP

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Show me the money. Jerry McGuire

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Two technological revolutions are emerging that will reshape how we design and build smart devices Cheap system-on-chip computers designed for Android Phones: 11 © 2015 Ernst & Young LLP The Block Chain (underlying technology for BitCoin):

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The first transformation in computing involves hardware. Modern Era Embedded Computing on Devices 12 © 2015 Ernst & Young LLP Post-Modern Era General Purpose Computing Everywhere

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It’s now cheaper to make things smart than it is to make them stupid. Powerful System on Chip costs are dropping so quickly, they are converging with traditional embedded chip costs: At higher end of the market, this shift has already started: Illustrative: As SOCs drop in price, customization will shift to software, not hardware Apple Lightning HDMI Adapter Non-Recurring Engineering Cost for Customized Embedded Chips • Full ARM SoC with over 256MB of RAM • Boots OS X Core when plugged in • Conducts software conversion of MPEG to HDMI in real time Embedded Unit Cost Average Embedded Cost Average SOC Cost Shift to SOC with software customization here Time 13 + © 2015 Ernst & Young LLP + + + These high powered SOC chips can run the full Block-Chain stack including doing transaction processing (mining).

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By 2020, billions of ordinary devices will in fact have far more computing power on them than is actually necessary Global Installed Base of Computing Devices
 Millions of Units in 2015 10,000 1,000,000 Global Installed Base of Computing Storage
 Estimated Petabytes in 2014-5 890,000 2,222 890 1,000 10,000 900 100 300 100 10 40 5.6 1 AWS Servers 14 300 PCs SmartPhones 1 Dropbox Facebook Microsoft Installed base and company data center sizes are estimates based on limited public information. PC & Smartphone shipments from statistia.com. Storage data estimated assuming 1TB per PC. © 2015 Ernst & Young LLP AWS PC Storage

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Alongside the revolution in hardware, a revolution in software is brewing at the same time: BitCoin Secure Transparent Open 15 © 2015 Ernst & Young LLP

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BitCoin is the re-invention of the most basic workload in the world of modern computing: transaction processing. The Block Chain CICS in 1966 16 © 2015 Ernst & Young LLP

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As a transaction processing engines go, the BlockChain is a terrible design and horribly inefficient. Slow 17 © 2015 Ernst & Young LLP Redundant Wasteful

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Why use the Block Chain? In a word: trust. 
 You don’t need it. 18 © 2015 Ernst & Young LLP

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The core functionality of BitCoin, known as the BlockChain is now being re-purposed into all kinds of applications. Application Development Environments Marketplace Infrastructure Systems of Record Distributed Social Networks 19 © 2015 Ernst & Young LLP

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At the intersection of these two trends is a new world order. Modern Era Post-Modern Era Expensive Computing High Trust Environment Centralized Internet 20 © 2015 Ernst & Young LLP Free Computing Low Trust Environment Distributed Internet

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There are two key take-aways from the intersection of these technologies 1 2 21 No business case is required to make devices smart The Cloud applications required to integrate & manage these devices are, if properly architected, free © 2015 Ernst & Young LLP

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Smart devices will connect assets to marketplaces and help us make better use of what we’ve already got. Typical Productive Asset Utilization Levels 100% In commercial real estate alone, the opportunity is enormous: 50% -42% 75% Properties used IoT systems to allocate and manage space instead of long term leases. Average lease prices based on time & location would plunge. $128 Billion In savings for consumers and businesses leasing real estate space. 60% 50% 50% 25% 20% 22 ne Ai rp la i Ta x e O ffi c is D La w hw nm as ow he r er 0% ar 1% 4% C 4% © 2015 Ernst & Young LLP Case study data from the IBM Institute for Business Value, “Economy of Things” report.

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Slowly going forward ‘cause we can’t find reverse. The Firm

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As with each new wave of technology, we should expect a 10X increase in device volume $500,000 $500,000 >> Thousands $375,000 >> Tens of Thousands $250,000 >> Hundreds of Millions $125,000 >> Billions $50,000 $0 Mainframe 24 © 2015 Ernst & Young LLP $5,000 $500 $50 Mini PC Phone Thing

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The rise of IoT will very likely upset the balance in the semiconductor industry Era of embedded computing is over. The new data center is everywhere. Security through transparency. Entirely new customer base. Life cycles are going to get longer. 25 © 2015 Ernst & Young LLP

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@pbrody linkedin.com/in/pbrody paul.brody@ey.com 26

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