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When it comes to smart cities and the internet of things, everyone asks, “Where is the money?” I have observed very dissimilar points of view on financing for the IoT in keynote topics in conferences and in discussions throughout the year, in particular at the recent Internet of Things Forum in Cambridge in the U.K., and the M2M & Internet of Things Global Summit in Washington D.C. It struck me that the ideas were as far apart as the venues themselves. It’s important to understand these different funding models, because they are driving the development of the IoT.
There is no easy answer to the funding question because the IoT market is still very fragmented. From our perspective of sensors and hardware, we see small pieces of revenue coming from many different verticals. I think of these as trial balloons, just validating the huge potential of the IoT and its power to be the next technology revolution. Even so, we see smart agriculture and smart cities as the verticals with the most traction right now. Differences in these two sectors shed light on the key question of funding the IoT. Will it be public or private?
The three primary funding models
Smart agriculture is privately funded in many cases, and the return on investment has to be obvious from the start. Smart cities have so many more stakeholders and the approach is not so clear-cut. There are many different ways to support their development, some coming from academia, communities, and industry.
1. Public money. In my view, had it not been for the economic crisis, public funding would have been the normal route. Right now European Union funds play an important role in allowing a number of connected smart cities pilots to really test the technology and accelerate the uptake of services. The existence of these European Commission funds makes the difference between what we see happening in Europe vs. the US market, allowing Europe to lead the way.
At Cambridge people thought of Europe as ahead of the U.S. in the IoT, whereas in Washington there were fears that a “go-with-grants” model is harmful because it is an unsustainable business model. The U.S. wants to see how Europe will maintain smart cities projects over time, and several critics point to the lack of a business model in flagship smart cities projects funded with EU funds. It’s true that these projects are usually led by academia, and business sustainability is not usually the focus. But don’t forget: the very first step is validating the technology.
2. Public/private partnership (PPP). In PPP, private companies invest and go on a cost-savings-share model with municipalities. It is a viable funding mechanism for smart cities, and in fact, the US has a history of finding capital for transportation and infrastructure projects this way. PPPs can create new forms of cooperation and resource sharing.
In this model, who would be the perfect private partner? Here, we stumble into a paradox in the nascent IoT market. Due to the similarity between IoT networks and telephony networks, operators should be the logical owners of IoT infrastructure as a new connectivity channel. However, the system integrators are the ones leading the way. This is because an operator needs to cover a whole country, or at least a circuit including major cities, and that requires a lot of investment. On the other hand, integrators can jump from project to project, testing the hottest verticals. But keep your eye on the bouncing ball, because this situation is evolving. Today operators are letting the integrators pay for their education.
3. Citizen participation. Community-led projects that apply the current trend of crowdfunding through platforms like Kickstarter are gaining momentum. I know of a number of civic projects that are spearheaded by citizen activists, such as AirQualityEgg, a device that measures air quality, or SafeCast’s network of individual airborne radiation sensors in Fukushima (Libelium was a partner in this project).
This is such an interesting model, and I wonder if governments can incentivize citizens to acquire the sensors and build the systems themselves, perhaps by offering tax breaks or other benefits.
Investing the funds: hardware or services?
Once the money is raised, how will we spend it? In Cambridge, the prevailing view was that IoT money should be devoted to infrastructure. In Washington D.C. people were not so sure, because they believe in a model where services generate more money than hardware.
For the sake of argument, I like to compare the IoT to the railway age. There are many parallels, not only because both of these inventions are industrial revolutions with the ability to change everything. For a moment, try to imagine railway and train builders pitching to raise money. Would venture capitalists just tell them “Nah! We prefer to invest in companies that will be handling the ticketing system…?” Of course not! No services are possible, nor is any other type of future business, if we do not have the infrastructure in place.
Someday, it is true, hardware will be commoditized, and revenues will come from services associated to data, but if we are in the midst of raising a new market, that day is still really far away.