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Smart city projects have CIOs on the hunt for new business models

Becoming 'smart' is on every city's agenda these days. But what projects should be extended beyond a pilot phase and how cities should fund the initiatives remain unclear.

Smart cities are a typical internet of things story: Sensors are cheap, the cloud is readily available and vendors are pedaling smart wares for just about every square inch within a city -- from water meters to parking meters, from streetlights to manhole covers. It's a blessing for cities looking to modernize.

But urban modernization-by-sensor can turn into the curse of the shiny new tech object. While it may be easy and even useful to accept a vendor's offer to demo a smart product free of cost or at cost, said Jennifer Belissent, an analyst at Forrester Research, without a vision, strategy and business model, city CIOs will find it "very difficult to find the budget going forward."

That's put CIOs -- both chief information and chief innovation officers -- on the hunt for business models that can tackle the tough question of sustainability. Belissent along with CIOs in the smart city trenches said forging relationships with vendors and private partners that have a stake in the game is key.

Beyond the pilot

Jennifer Belissent, analyst, Forrester ResearchJennifer Belissent

Smart city pilot projects provide an opportunity for city CIOs to give the new technology a test drive and pin down the ROI, if one exists at all. And, although CIOs often find they can't dip into the tax base to pay for these experiments, getting subsidies through grants or agreements with vendors isn't terribly difficult.

But if the pilot proves to be valuable, city CIOs face a hard question: How do they keep it going? Smart city projects aren't like the standard services cities provide: Constituents pay to have their garbage picked up once a week, and the city ensures it happens. The quid pro quo of smart city economics is less apparent, at least for now.

"As you go to pick pilot projects that don't have internal economics, but of course are the right thing to do and are a good thing to do, then you have this business model [quandary]: Who is going to pay for the scale up?" said Ted Smith, former chief innovation officer for Louisville, Ky.

Indeed, according to Smith, aim No. 1 for city CIOs is to figure out how to get the business model solved. "It's silly to imagine that city governments are going to be financing all of this stuff out of tax coffers," said Smith, who is now the CEO at Revon Systems Inc., a medical software company.

Belissent agreed: She encouraged CIOs to focus on developing business models that clearly lay out how to fund smart city projects in the long term. One model she's seen work involves partnerships in which vendors share in the revenue or in the risk when extending smart city projects beyond the pilot phase.

Private-public partnerships are a good way to retool the funding mechanism, according to Smith. Vendors will work with cities to map out viable business models and even take an active role to keep smart city projects going. "[Vendors] don't have unlimited patience for pilots. So they want pilots de-risked in some way," Smith said. 

Jascha Franklin-Hodge, CIO, city of BostonJascha Franklin-Hodge

That doesn't mean city CIOs should buy what vendors are selling hook, line and sinker. Jascha Franklin-Hodge, CIO for the city of Boston, is all for experimentation. But he maintains a healthy skepticism about vendor relationships precisely because vendors have a lot to lose if things go south -- or in a different direction from the model that makes the vendor money.

"It's very clear from the pitches that we see from the bulk of technology companies that they're selling what's on the truck," he said. Technology, rather than city outcomes, tends to drive the smart city conversation, in his view. Rather than get caught up in excitement (and vendor hype about the technology), Franklin-Hodge is careful to focus first on the challenges his city faces and how smart technology will address those challenges. 

He's not alone. Barcelona, the poster child for smart city pilots, is also taking a pragmatic approach to scaling out its pilot projects, Belissent said. "They had a smart parking solution where they embedded sensors into the streets at specific intervals. And they said, 'Look that's really interesting, but we can't afford it,'" she said.

Whereas when it came to providing public Wi-Fi, Barcelona formed a revenue-sharing agreement with a provider to offer a basic level of service for free; if users needed more bandwidth to, say, stream a movie, they'd have to upgrade to a higher level of service. "Doing so created an entry point offered by the city, but it also allowed the vendor to recoup some of the cost of the investment to put in the infrastructure," Belissent said. "It's a win-win."

Sharing the wealth

The same kind of revenue-sharing partnership is getting started in Kansas City, Mo., which is seeing steady growth and attracting the interest of Millennials. The city partnered with Cisco, Sprint and about a dozen other companies to transform 2.2 miles in the heart of the downtown into an IoT testbed. Sensors capture information on traffic flow, available parking and the utilization of a recently debuted streetcar. "The private sector partners contributed about $15.8 million to that project and the city contributed about $3.8 million," said Bob Bennett, chief innovation officer for Kansas City.

While it's still technically a pilot project, Bennett believes that when the time comes for expansion, the private partners will continue to fund it because, quite simply, "they're finding value in what they're getting," he said.

Bob Bennett, chief innovation officer, Kansas CityBob Bennett

Case in point, Sprint owns the wireless network that transmits IoT data in Kansas City. It gives the city about 50% of its network, which is divvied up between providing public Wi-Fi (40%) and powering IoT projects (10%), according to Bennett. What does Sprint get? The data.

"When you sign the terms and conditions and you log in just as you would at a coffee shop, they get the phone data and then they monetize that," he said. "That's how they make money."

Bennett is in the midst of another revenue-sharing initiative. About a year ago, the city unveiled the first of 25 internet-enabled kiosks, which provide tourists and constituents with hyperlocal retail, restaurant, transportation and event information.

But the kiosks also function as new advertising terrain for the city. When they are standing idle, the screen alternates between city content and paid content every 30 seconds. When they're in use, the bottom third of the screen is reserved for advertisement.

All of the advertisement translates into new revenue for the city, which currently amounts to about $5,000 to $10,000 a month. But, Bennett said, interest suggests significant growth is coming -- enough to pay for kiosk maintenance and the expansion of the network.

The model has taken root with the Kansas City convention bureau, airport and University of Missouri-Kansas City lining up for the next 20 or so kiosks. "The good thing for us is that this system of kiosks is becoming an anticipated part of the landscape for Kansas Citians," Bennett said.

Success hinges on sustainability

But private-public partnerships don't have to focus on revenue sharing to be successful. Models in which cities and private companies share the risks inherent in smart city projects have also worked.

Belissent pointed to Schneider Electric, in Rueil-Malmaison, France, as an example. The energy management company "does quite a bit with third-party financing and guarantees of cost savings," she said. Schneider will take on a project of, say, energy retrofitting municipal buildings and will guarantee the results will net a certain amount of cost savings over a certain period of time. The company will then bring in a third-party financier, who fronts the cost of the project.

Ted Smith,CEO, Revon Systems Inc.Ted Smith

In Louisville, the private-public partnership hinged on data collected by smart inhalers. Smith, the city's former chief innovation officer, wanted to gather data on the high propensity for asthma in the city. The pilot project started with distributing 300 smart inhalers purchased with philanthropic funds, and it eventually caught the attention of the Robert Wood Johnson Foundation.

"They asked us if we would submit a proposal to scale it up dramatically," Smith said. "They ultimately funded somewhere to the tune of about $800,000, putting 1,000 units out on the street."

As a condition of the grant, the RWJ Foundation asked that Smith and his team engage with employers in the community. Those who participated would have access to smart inhalers for their employees at no cost. Once they saw how smart inhalers could save money in emergency room visits and overall healthcare costs, the employers would be expected to continue funding the smart inhaler program for their employees -- at no cost to them.

By taking on the risk of funding the program for a year, the RWJ Foundation "engineered sustainability into the program," Smith said.

Next Steps

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