The Internet Of Things: Why Success Lies In Services

The Internet of Things is a fast-growing phenomenon in which formerly dumb devices get chips and sensors to become smart gadgets, connected to a network as part of various cyber-physical systems. Sokwoo Rhee, associate director of the Cyber-Physical Systems Program at the National Institute of Standards and Technology, is one of the government’s chief overseers of this rising trend.

Rhee spoke at a recent Wharton conference titled “Strategies for Success in the New Era of Connected Ecosystems,” sponsored by the Mack Institute for Innovation Management. Separately, he spoke with [email protected] about some of the less obvious trends in the Internet of Things, how companies are adapting their business models, the government’s role in this cyber world, and how we should secure new smart devices coming online from potential hackers and cybercriminals.

An edited transcript of the conversation appears below.

[email protected]: You’re the associate director of the Cyber-Physical Systems Program, which is part of the National Institute of Standards and Technology. What is that?

Sokwoo Rhee: Cyber-Physical Systems is pretty simple, actually. Cyber means connectivity, Internet and software. Physical means sensors, actuators, anything you can touch — cars, chips, radios, etc. So when you combine anything with a networking software component with anything that is physical — those are cyber-physical systems. That’s really what the Internet of things is about. There’s a slight difference between CPS, that’s what it’s called, cyber-physical systems, and IoT. CPS puts a little more emphasis on security issues, and risk management issues and robustness and reliability issues. That’s really the only difference — generally, it proves the same.

[email protected]: And the National Institute of Standards and Technology?

Rhee: The National Institute of Standards and Technology is actually part of the Department of Commerce. A lot of people think that it’s an independent lab, but that’s not the case. We are part of Commerce, and we do a lot of standards and measurement science, research in all the different areas, including chemistry, physics, all the way down to food science, color measurements and optics — anything you can think about.

“A lot of manufacturers think that it means they are going to sell more chips.  … The real value comes from establishment of services on top of the connectivity.”

[email protected]: What is the state of cyber-physical systems’ implementation in the U.S. today? Where are we? What more needs to be done?

Rhee: I’m going to talk in the context of IoT because it’s what a lot of people understand. The U.S. and Europe and Asia are on three different paths right now in terms of implementing IoT in general. The U.S. is leading in terms of technology, but in terms of investment, probably the Europeans are ahead. They’ve been investing in internet of things and CPS for more than 10 years. So the U.S. is lagging in terms of that. But in the end, I believe the U.S. industry has a lot more potential to invest a lot more funding to this, so I believe it’s going to catch on pretty soon.

[email protected]: How can cyber-physical systems help the U.S. become more competitive and how can they spark growth in more mature industries, in particular?

Rhee: A lot of people think that IoT is all about sensors and chips and radios, and a lot of manufacturers think that it means they are going to sell more chips. But that’s probably a very small piece of the whole IoT value. The real value comes from establishment of services on top of the connectivity; that’s where the value is going to be. The manufacturers in the industry will have to think about how they can transform themselves to [adopt] a completely different business model.

[email protected]: Could you give an example of that?

Rhee: Sure. What GE is doing right now is a great example. GE, traditionally, has been selling jet engines, for example … they are big in jet engines. And the traditional model is, they sell a jet engine at a unique price. There’s typically a warranty for a few years, and after that, they offer a maintenance agreement. So if something goes wrong, they come and fix it. They’re now changing to more of a subscription model. They practically give the jet engines away for free. However, they charge a monthly or annual subscription, and it comes with a guarantee. They don’t necessarily guarantee the product, but they guarantee the trust. Meaning that if you have this subscription, then you don’t have to worry about the repairs or anything like that. If anything goes wrong, GE is going to come in and replace the engine. So whenever you turn the switch, you can have a certain trust that it’s ready and the engines will turn on. That’s the model.

[email protected]: So it’s a rental or leasing model, in a way.

Rhee: Yes. However, here’s the interesting play. To make the model work, GE has to know exactly when its engines are going to fail. Here’s why: If you replace an engine too early, you are leaving money on the table, because the engine could have gone even longer. And if you wait too late and a disastrous situation happens, planes are going to fall. So you have to know exactly when it’s going to fail.

“If your PC gets hacked, you’re going to lose your credit card number. OK, that’s not good. But in CPS and internet of things, if something gets hacked, somebody may die because of it.”

To determine that, GE started putting many, many hundreds of sensors around the engines for several years, and then they monitored the status and health of the engines in real time. They have 100 year’s worth of experience in the diagnostics model; they have tons of data. They can combine these internet of things sensors with their big data analytics, and it tells them exactly when each engine is going to fail — and that’s how they make money.

[email protected]: How receptive has the private sector been to developing cyber-physical systems? Does it require a big investment? What’s the ROI?

Rhee: The ROI question is tightly connected to the business model question. Again, there are still companies who think they are going to sell more chips and more radios, and they will make more money that way. But really, they have to think about how they can create a real ecosystem around their existing products, and then create more services that they can charge for, instead of thinking about each piece of hardware as a unique prize that they’ll sell once.

That’s where the GE model is a very interesting model. The companies that are trying to embrace that model are embracing a new reality. Now, they’ll have to go to the next step, not just to manufacture through the factory. The problem is, that takes a lot of creativity. These are not the kinds of changes where you can copy somebody else’s model and implant it on yours — because, for example, not many companies make jet engines. You have to devise your own creative model for your own company, and that is the hard part of this for most of the companies out there. Getting there, it’s tough.

[email protected]: Can you give us a couple examples of that — maybe

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