How to Become a Platform Business Using the Internet of Things

John Rossman head shot

This is the fourth of a series of exclusive articles by John Rossman*, a former Amazon executive and the author of “The Amazon Way on IoT: 10 Principles for Every Leader from the World’s Leading Internet of Things Strategies“.

When a platform is self-service, even improbable ideas get tried, because there’s no expert gatekeeper ready to say “That will never work!” Guess what?
Many of those improbable ideas do work.

—Jeff Bezos, 2011 Letter to Shareholders

Imagine for a moment that you own a business that provides a service to your community, a market, or an industry. To make your service the best in the world, you also design, build, test, and use innovative tools and capabilities that not only make your business better but can be sold to other businesses. Your business gets bigger and bigger because your service gets better and better, and your innovative tools become more and more in demand. It’s a virtuous circle. In other words, you’ve become a platform company—your platform and the innovative tools you build are your service.

Principle 6: Building a platform business model, which allows others to leverage your capabilities to build and grow their own businesses, creates a stronger sustainable, competitive advantage for your business. The Internet of Things creates exciting possibilities for companies to develop a platform business model, leveraging their connected devices for other companies use.

How’s your IoT plan?
Read The Amazon Way on IoT to learn how Amazon and other great companies are using the Internet of Things as an innovation driver.book: the Amazon Way on IoT by John Rossman

The Amazon Marketplace platform powers many of Amazon’s retail capabilities and core assets and enables millions of third parties to sell and deliver items to customers. Amazon’s retail business needed scalable technology infrastructure and tools. It turns out other businesses needed the flexible technology infrastructure as well, and the Amazon Web Services (AWS) cloud business was formed, serving both Amazon the retailer and thousands of other clients. Now Amazon sees an opportunity for an Internet of Things platform. Enter Alexa, poised to become Amazon’s Trojan horse for IoT.

Through Alexa, the Internet of Things is developing as yet another platform business for Amazon. I expect it to expand for them in much the same way that AWS and Marketplace have. Already Alexa is a voice-controlled interactive platform leveraged by thousands of other companies. This is good news for you because Amazon and other IoT platforms can fuel your IoT plans. These companies also create a model for how to build an IoT platform business. Not every company has what it takes to build a platform—but if you’re interested in getting your feet wet, there are a few questions you should ask yourself before diving in.

Platforms — the Amazon Way

A “platform” is a system that can be programmed and therefore customized by outside developers—users—and in that way, adapted to countless needs and niches that the platform’s original developers could not have possibly contemplated, much less had time to accommodate.

—Marc Andreessen

When I was at Amazon in the early 2000s, we developed the concept that Amazon was fundamentally two types of businesses. First, it was an online retailer selling everything from books to shampoo. Second, though, it was a platform business that built capabilities for outside companies. Those capabilities were used by Amazon the retailer as well as other companies.
I ran two of Amazon’s platform businesses: First, I launched and scaled the third-party Marketplace business, which today is responsible for more than 50 percent of all units shipped and sold through Amazon. Second, I ran the Enterprise Services business, which ran other large retailers’ e-commerce infrastructures for them, including website infrastructure and management software and branded fulfillment and customer service. Target.com, Toys “R” Us, Marks & Spencer, Sears Canada, and the NBA have all used Amazon’s Enterprise Services platform.

As I worked to build those businesses for Amazon, I was following four clear rules for successful platform business:
1. Platforms Should Simplify Complexity.
2. Platforms Use APIs to Make Embedding Easy for Customers.
3. Platforms Provide Ongoing Value.
4. Eat Your Own Dog Food.

Examples of platforms that Amazon has built and operates today include the following:

  • Amazon Web Services. As we mentioned above, AWS is the leading cloud-computing-innovation company. In case you’ve been hiding in a computer closet for the last ten years, its diverse set of on-demand infrastructure, data management, and solutions make up a $10 billion business annually, with operating margins greater than 20 percent. It also happens to be growing at more than 60 percent year over year.
  • Fulfillment by Amazon. Fulfillment by Amazon, known as FBA, allows sellers and companies to use Amazon warehouses to store inventory and fulfill orders (sold either on Amazon.com or through other websites). Thousands of small and medium-sized companies use Amazon’s more than three hundred worldwide fulfillment centers to store and ship goods, giving them a global distribution network they could only dream about. Over one billion items were shipped by Amazon on behalf of third-party sellers in 2015.
  • Amazon Machine Learning. Machine learning can be extremely technically complicated, based on complex algorithms and technology. But Amazon’s machine learning service gives developers at all levels a set of visualizations and wizards to help walk them through the process of creating machine learning models.
  • Amazon Marketplace. As we mentioned above, Amazon Marketplace accounts for more than 50 percent of all units sold at Amazon. The key to Marketplace’s success was threefold—we didn’t compromise on the buying experience for customers shopping with third parties; we created a simple, intuitive seller experience despite the complex integration and set of choreography and data required between the seller and Amazon.
  • CreateSpace. Amazon’s self-service, on-demand publishing platform lets authors like me easily write, design, and publish books. It facilitates print and e-book distribution without authors having to go through the traditional-publishing-house gatekeepers. One huge advantage is Amazon’s on-demand printing capability.

The Echo: Amazon’s IoT Trojan Horse
Amazon’s Echo looks simple enough—it’s a cylinder-shaped consumer electronic device, sleek, dark, and unassuming. Don’t be taken in. That trim black exterior is just the pretty face on a bundle of features, each designed to enable the Internet of Things.

With its sophisticated form—a seven-microphone array, subwoofer and tweeter speakers, advanced voice-recognition software, remote control, and onboard computer with processors, memory, and power supply—even the earliest version of the Echo seemed to early adopters an innovative gadget for their home. They could ask Alexa all kinds of convenient things. Things like:

  • “Alexa, play my country playlist.”
  • “Alexa, what is the weather forecast?”
  • “Alexa, add Gatorade to my shopping list.”

Over the past year, the Alexa teams have continued to add to her list of skills, with over one thousand skills built by other companies and developers. Alexa’s integration with third-party devices and services is growing exponentially:

  • “Alexa, arrange an Uber to the Seattle airport.”
  • “Alexa, tell Garage.io to close the garage door.”
  • “Alexa, how much gas is in my Ford car?”

The teams behind Alexa and Echo are constantly working with third-party vendors like Uber, Garage.io, and Ford to add integrations with their products. Each of these third-party applications can be downloaded to and managed through your Echo.

It takes coordination to integrate each of these new capabilities. Within Amazon’s organizational structure, Echo is composed of several hardware teams (to create both internal and external device hardware), several software teams, and several partner teams to create these external relationships with partners. Each of these teams has its own independent strategy, product roadmap, business plan, and adoption scenario. And each of these teams is actively coordinating with the strategies, roadmaps, business plans, and adoption scenarios of Echo’s other teams.

Watching the growth of Echo’s “talents” over the last year, it has become clear that, in Amazon’s mind, the Echo is far more than just an interactive home speaker. To Amazon, it’s a new type of computing interface that helps customers interface with their connected devices.

Think of Echo as Amazon’s first Internet of Things PC. It’s a computing device that performs calculations and beams queries to your connected devices, but instead of a keyboard and mouse acting as the primary interface, it uses voice for input and sound for output. And if Echo is Amazon’s connection to the Internet of Things, the bridge between home and Internet, then Alexa herself becomes much more than just a disembodied voice spouting facts and playing music. Alexa is Amazon’s first hands-free operating system.

The Secret Sauce
When Echo launched in 2015 as a plug-in, always-on listening device, it was the only device using Alexa. Since then, Amazon has introduced the Tap, a portable battery-operated version of the Echo, and the Dot, a smaller Alexa interface. There are rumors also of a voice-activated Kindle tablet on the way.

In the end, though, all of these devices are really just the container for Amazon’s secret sauce—Alexa.
At its simplest, Alexa provides three critical capabilities:
1. Sophisticated Speech-Recognition Capabilities. Similar to Apple’s Siri, Alexa Voice Services allows connected devices like Echo to recognize and assign meaning to users’ vocal commands. Alexa Voice Services uses cloud computing and machine learning to improve its recognition capabilities based on individual interactions with users. And, much like Google Search uses machine learning to improve itself with each use, Alexa Voice Services pools its learning across all users to improve user interactions and the accuracy of search results.
2. Event Triggering. Alexa provides event recognition, a rules engine, and the technology interface to run third-party applications. At Amazon, each custom application is referred to as a skill. For example, an Uber skill allows a user to request an Uber ride. There is a combination of tools built by Amazon to enable this event recognition capability, but it essentially consists of defining a keyword to trigger your skill, a set of voice-command keywords, such as “start” or “order,” and then a list of rules on what to do or what to return. There are hundreds of third-party skills available today, and the platform is just getting started.
3. Software Platform for Voice Interaction and Integration. Finally, Alexa can be used as a software platform on other products, similar in nature to an operating system. Amazon allows other companies to download and license the Alexa software and use it on their own devices and products for free.

Alexa is a Trojan horse. It’s a Trojan horse that creates many opportunities.

The IoT Platform Opportunity
What can other companies take from this IoT platform strategy? Other than “consider using Alexa as your voice-recognition software solution” (this is not a trivial suggestion!), the potential is this: building connected devices could be a Trojan horse for becoming the embedded infrastructure for your customers. You have a chance to build a platform that is valuable for other companies to participate and leverage your connected devices in ways you could monetize.

When you become the operating infrastructure, your products become much harder to replace. Your partners will teach you a tremendous amount about the usage and problems of your product and services. Your revenue model will likely be accretive and recurring. And when your product and capabilities can be “programmed” into environments, likely through an API, the cost of replacement skyrockets. Ripping and replacing programmed infrastructure is hard and expensive.

Of course, Amazon isn’t alone in recognizing the power of platform. Apple, Facebook, and Google have all leveraged some variation with similar traits. Together, Apple, Facebook, Google, and Amazon have come to be known as the Gang of Four. As Eric Schmidt commented, “It seems to me that there are four companies that are exploiting platform strategies really well.”

In B2B industries, there will be many opportunities to create unique platforms within the realm of IoT based simply on where your company’s products are already located and how they’re already being used. A company that manufactures and installs hand dryers, for example, could leverage the physical position of its equipment to create a platform for monitoring and serving bathrooms and patrons. Example scenarios could include notifying cleaning teams of needed supply replacements, reordering supplies themselves, and providing security services. The maintenance ecosystem could leverage the “hand-dryer platform” to monitor water on the floor to avoid slip-and-fall situations. Video monitoring, voice and event identification, and other data sensors, all potentially positioned from the physical unit, could be valuable to many other companies. You now have a platform.

Bigbelly, a trash-equipment company, is already building out an IoT platform strategy around another unglamorous but huge opportunity—garbage cans. By thinking in concentric circles, Bigbelly has created a better municipal and public trash receptacle—solar-powered sensors monitor capacity and supply power to a compactor, which creates up to eight times more capacity. This has also allowed Bigbelly to add new services and revenue opportunities—a “clean management system” provides real-time data to drive operational improvements and serves as a platform for an ecosystem of additional services. Security and Wi-Fi hotspots are two early use cases.

This pattern of leveraging infrastructure to allow others to access, operate, and extend their services is the same platform strategy Amazon has repeatedly used to innovate and gain scale.
But this is so much more than a technical and architecture question. The most common mistake companies and leaders make is thinking that platforms are, at their core, a technology challenge.
As Phil Simon wrote in The Age of the Platform, “An overall mind-set based on openness and third party collaboration is absolutely essential in building a true platform. That mentality is much more important than any individual API or technology.”

How to monetize? How to partner and build the ecosystem? How to operate and update the infrastructure? How to manage risk and liability? How to provide high availability? How to do updates? How to manage security? A successful platform play will need to address all of these and more.

IoT is providing this set of opportunities to many more companies going forward, as each device category opens up a new set of scenarios. There are many IoT platform opportunities, essentially each unique operations or physical domain—buildings, bathrooms, emergency rooms, basketballs, delivery trucks, even shoes. Any device that is in a situation that is a good “perch,” or crow’s nest, for monitoring, collecting data and events, and allowing other entities to leverage (and pay) for the access to that perch is potentially in a position to become a platform.

That being said, though, building a platform will only be the right strategy for a minority of companies. Becoming a platform is yet another big change to add on top of the transitions needed to move from a product company to an IoT-enabled service company.

Are You in a Good Position to Become a Platform Company?
As you consider whether your company might benefit from investing in the infrastructure and services it takes to create an IoT-based platform, evaluate the following.

1. Location and Positioning of Product. The location and positioning of your product or company assets can determine the strategic nature of the data and events that could be captured. Do you have a “perch”? A well-positioned product provides a valuable crow’s nest, whereas a product with narrow visibility has less potential to act as a platform. Positioning is also a big determinant to the connectivity options available to the device, which impacts both costs and the amount, speed, and reliability of data connection and transport.
2. Form Factor of Product. Does the form factor of your product provide a basis for integrating other sensors and the associated infrastructure? Could your device allow for other sensors to be located on it? Incumbents, because of their install base and industry relationships, can have an advantage here, but their success should not be taken for granted. Look at connected-home startups like Nest and Scout as companies that are disrupting incumbents.
3. Technology Chops. What’s your pedigree or your interest in being a technology company? You will become a software and technology company if you decide to proceed with a platform strategy. This is a major strategy decision that should include many considerations. Should the platform be generally “open” or “closed” with a limited number of partners?
4. Operating Environment Complexity. You now have to operate a high-availability platform within a complex ecosystem. When an issue happens or a software update needs to be made to a device, that adds complexity to testing and release. Data-sharing rights, security, updates, and reporting will all need to be added to your list of operating considerations.
5. Play the Long Game or the Short Game? Becoming a successful platform company typically requires playing the long game. It takes time and investment to build competencies like testing platforms, APIs, and developer engagement. It takes time to drive customer adoption and use of the platform. If you’re a company that needs to find short-term, revenue-generating wins, becoming a platform may not be the strategy for you.

For traditional product and service companies evaluating making an IoT platform, these considerations hold true. The best IoT use cases flow across multiple products and typically across multiple enterprises. The prior discussed example, Audi, DHL, and Amazon have partnered in Germany to enable a package to be delivered to the trunk of your car. Structuring and operating ongoing partnerships like this is complex and vital for compelling IoT capabilities, and the skills to build these partnerships put a premium on “partnership” capabilities in organizations that may traditionally not have partnerships like this. Partnership capability will be an organizational muscle that is developed for IoT business to flourish.

* About the Author:
John Rossman is a Managing Director with Alvarez & Marsal, specializing in technology strategy, multi-channel operations scaling and platform enablement in multiple industries including retail, service and public sector. John is the author of The Amazon Way: 14 Leadership Principles of the World’s Most Disruptive Company and The Amazon Way on IoT: 10 Principles for Every Leader from the World’s Leading Internet of Things Strategies.
+1 425 324 6749 | jrossman (at) alvarezandmarsal.com

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