by Scott Nelson

How hardware builds two-sided markets in the Internet of Things

May 06, 2016
AppleComputers and PeripheralsInternet of Things

3 lessons on how to use hardware to create self-sustained value.

“Hardware is hard” is the mantra of Silicon Valley – I have heard it firsthand more than once in discussions along Sand Hill Road. The phrase goes hand-in-hand with Marc Andreessen’s “Software is eating the world.” Both statements are profoundly true and, in my experience; create the foundational doctrine for most venture capital today whether in the Valley or not. But these two statements, taken together or separately, do not define the opportunity in technology today — they define conditions of opportunity.  And in the Internet of Things (IoT) hardware actually provides the key to that business-model-of-choice that Andreessen has so successfully driven with his investments in Facebook, Pinterest, Airbnb and LinkedIn — the two-sided marketplace.

Sangeet Paul Choudary is a modern day evangelist of two-sided markets with his Platform Economy series. Choudary’s teachings and thought leadership on the subject are some of the best. But the model is not an artifact of the Internet. Economists define the two-sided market place as follows:

Two-sided markets, also called two-sided networks, are economic platforms having two distinct user groups that provide each other with network benefits.

Examples of well-known companies employing two-sided markets include such organizations as American Express (credit cards), eBay (marketplace), Taobao (marketplace in China), Facebook (social medium), Mall of America (shopping mall), (dating platform), (recruitment platform), Sony (game consoles), Google (search engine) and others. —Wikipedia

Choudary and Bonchek first referred to their two side marketplace as a “platform model” which unfortunately, as Choudary recently addressed, confuses the subject in the IoT because of all the cloud platform descriptions. Their analysis focused on three “transformative technologies: cloud, social and mobile” that are consistent with Andreessen’s idea of software eating the world. Choudary’s template and recipe for the two-side market is clear and clean. I recommend it for anyone considering taking on the two-sided market way of thinking.  

However, if one considers the economists’ definition above and this template, one can see that city square markets were early versions of two sided markets. City officials created a destination for both vendors and consumers alike and monetized through simple “booth fees.” Indeed, the Mall of America is sited as a modern day bricks-and-mortar version of the concept. But these models do not scale the way modern investors demand. Modern investors are attracted to the likes of Facebook, LinkedIn and YouTube because these Internet-based two-sided markets are global in scope and immediate in their financial execution through modern digital banking technology. 

IoT startups and transforming manufacturers alike commonly claim to be building “new business platforms.” The structure is as well-known as the expectations of creating a unicorn. But the most often cited examples are Internet companies as opposed to IoT companies — the data that creates the platform comes from the users themselves – their personal data and activity data. The role of hardware in these marketplaces is either computing or commerce, e.g. eBay. However, there are examples that better inform those pursuing two-sided markets in the IoT.

Unique hardware technology

Sony created the world’s most successful gaming marketplace, PlayStation, with hardware. Playstation sits at the center of Sony’s Gaming group and generated over $13 billion of revenue for Sony in 2015. What is less well known is that the PlayStation story began with technology, more specifically hardware technology. Sony wooed critical gaming software vendors from the gaming titans at the time, Nintendo and Sega, with breakthrough 3D graphics generation supported by more open content distribution capabilities via CD ROM and DVD technology — also hardware. Sony PlayStation demonstrates how superior hardware technology can lead the creation of a two-sided marketplace for digital content and experience.  

Superior hardware experience

Steve Jobs was perhaps the preeminent creator of two-sided marketplaces using hardware. First he and Apple used superior user experience in the form of hardware, the iPod, combined with a new customer experience model, iTunes, to disrupt the entire music industry and create a massive two-sided marketplace for artists and listeners.  Then he repeated the process with the iPhone, a completely new hardware experience for users combined with an application marketplace that revolutionized the mobile phone world by creating a curated, global market place for app developers and every phone consumer. Today the App Store generates over $20 billion in revenue as a marketplace netting over $6 billion for Apple.  But this amount actually pales in comparison to the over $231 billion Apple generated with iPhone hardware during the same period. So not only can hardware be the key to creating a marketplace, in this case through great user experience, but Apple also showed that the hardware can also be the mainstream of the company success.

Hardware ecosystem that drives adoption

I recently came across a third method of leveraging hardware to create a two-sided marketplace while researching a post on geolocation and this one that is dead center in the IoT dialogue — creating a hardware ecosystem that captures data in a way that brings developers and customers together. One company practicing this method is Geotab. Geotab has created its ecosystem beginning with a hardware standard. While so many IoT manufacturers complain that the lack of standards are preventing adoption and thus success, Geotab has leveraged an existing hardware standard to facilitate new IoT value. The Geotab Go is an aftermarket device that captures data from vehicles according to the OBD-II standard. Since 1996 all automobiles and light trucks have had an OBD II port that today provides data regarding everything from the engine performance to vehicle diagnostics to proprietary systems data.

Originally the OBD data was used by automotive manufacturers, mechanics, and the occasional emissions regulator. The standard for the hardware interface and data was created by manufacturers so it served their needs for compliance and maintenance.  But over the past two decades additional communications and sensors have been added to devices that leverage the OBD port to create new applications that range from usage-based insurance to fleet management to watchful parenting of teenage drivers.  The key to all of these new applications has been the blending of the OBD data standard with new streams and new analysis that enable specific applications for new customers.

Geotab created an easy to install OBD-II device augmented with GPS, I/O, and cellular connectivity for fleet management. The I/O port provides the flexibility to connect to additional hardware devices and sensors that generate other types of data from sensors and vehicle accessories. I spoke with Neil Cawes, CEO of Geotab, about their hardware design.

What we’ve seen in the Geotab system is that this is not just about telematics and tracking a vehicle anymore. This is about a data gathering platform.  It’s an IoT platform for getting data from all sorts of different systems that might be somewhat related to a vehicle.

This is where Geotab changed the business model. In a traditional business model each new application from these different “data gathering” systems would be monolithic and integrated with the hardware. But Geotab has created a cloud resource where the data is available to an app marketplace where Geotab or any third party can place new applications for that data — new applications that customers want. The data brings developers and customers to Geotab Marketplace — a two-sided marketplace — and has made Geotab the fast growing fleet management company today. Cawes again:

In order to have a really strong marketplace and ecosystem, you need to be very, very open. As a company, we have to focus on what does it mean to be open. Our APIs are open. Anything that we can do in the system, our partners can do in the system.

We document it really, really well. We get lots of samples and source code. Even our hardware’s open. We have so many partners that plug into our hardware. We give them the schematics. We give them all the protocols. They can add all the connectivity onto the hardware. We have this kind of expansion system, which is really cool in our hardware, but they can go and add on whatever extra products that they want. That’s what makes the ecosystem so powerful.

Geotab has created a two-sided IoT marketplace with hardware, hardware built from a standard but made flexible to bring in more kinds more data from other hardware. The standard facilitates widespread adoption. But the approach of open data and hardware specifications allows ecosystem developers to bring new applications to the marketplace thereby attracting new customers who in turn buy the hardware to get to the application thereby generating more data.  

Hardware generates the data

Data is the key to an Internet two-side market, lots of data, and in the IoT data starts with hardware. Companies today tout their “IoT business platforms” and most monetize on data. The challenge for all is getting that data. Only through hardware does data flow in the IoT so follow the leaders and use these methods to create the two-sided market:

  1. Develop unique hardware technology that generates valuable data and enables software to create valuable information – hardware that attracts application developers.
  2. Build hardware that creates a superior customer experience and thus higher adoption that creates more user data that in turn attracts application developers.
  3. Create a hardware ecosystem that leverages and extends adoption through data that supports new applications for both the hardware and the data.

“Hardware is hard,” but “hard work pays off.” This proved true for Sony and Apple and is certainly proving true for Geotab now in the IoT. Two-sided markets are the perpetual motion machines of the business world. The laws of physics deny such things in the physical world. Hardware can create them in the Internet of Things world.