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 Knowledge@Wharton
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.
Knowledge@Wharton: 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.
Knowledge@Wharton: 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.
Knowledge@Wharton: 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 IoT 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.
Knowledge@Wharton: 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.
Knowledge@Wharton: 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.
Knowledge@Wharton: 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.
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 IoT 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.
Knowledge@Wharton: 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.
Knowledge@Wharton: Can
you give us a couple examples of that — maybe one company that has failed at
this, and another one that has succeeded?
Rhee: Well, I wouldn’t
say anybody has “failed” yet. It’s still an early stage and everybody’s putting
in a lot of time and effort. It’s an ongoing process. There are certain
companies that have made more headway — usually, those that have said, “Well,
we’re going to do it this way, and whether we fail or not, we’re going to go
this way.” That’s the case with GE, and also with Bosch, the Germany industrial
company, which is actually taking a similar type of approach.
Knowledge@Wharton: People
say — especially with innovation — that you need failures to learn — that
failure is not a bad word. You just can’t have too many of them.
Rhee: Absolutely. Without
failure, you don’t learn. And if failure itself does not generate revenue, it
is going to generate tons of data, so when you have your next challenge, you’ll
be able to look at the data you accumulated and make adjustments faster than
others.
Knowledge@Wharton: How
do you regulate cyber-physical systems? And how do you secure them, especially
given the increasing levels of cyber-attacks and hacking?
Rhee: Regulation and
security are two different things, actually. Regulation is really the policy
issue that government or other bodies should think about. Security comes down
to more of a technology issue. In terms of regulation, there are a lot of
discussions going on right now inside of the government, but they’re still a
fairly early stage. We are probably in the first inning of the ball game at
this point. And some would say, “We haven’t even started the game yet, so how
are we going to regulate when you don’t even know the game that we’re going to
play out?” There are a lot of discussions, and I think government is ready to
jump in when it needs to jump in, but at this point, we are just looking into
what’s going on and trying to decide.
Knowledge@Wharton: And
what about security, in terms of guarding against cyber attacks?
Rhee: One thing that we
have to think about in cyber-physical systems and IoT is that the security
issues are different than conventional cybersecurity issues.
In conventional cyber security issues, if your PC gets hacked,
you’re going to lose your credit card number. OK, that’s not good. But in CPS
and IoT, if something gets hacked, somebody may die because of it. Having said that,
conventional cybersecurity is always thinking about, how are you going to
actually look at the network, and how we can actually use either firewall
technologies or something to block any kind of intrusion?
However, if you look at it from the IoT perspective, now there
are physical systems involved, so there are different dimensions that you can
deal with regarding the cybersecurity. For example, even if somebody breaks
into the system, if the system itself is designed so it’s physically protected
from doing any harm, then that cyber-intrusion doesn’t really mean much,
because the hackers cannot really do anything.
To give an example: If there’s a car running and it’s connected
to the Internet, somebody could hack into the car and take control — if the steering
system and brake system are somehow connected to that Internet link. But that’s
not exactly the best design in the world. As an engineer, if I were the
designer, I probably could design a complete decouple between the Internet and
those live, safety-critical components of the car’s network. You can design a
car that way, so that you can still watch movies through the Internet, but you
don’t connect that directly to the steering wheel.
Knowledge@Wharton: What
haven’t I asked you that would be important to understand about your world?
Rhee: One thing that is
extremely important is the issue of collaboration. IoT by definition is about
connectivity, so if you do not work together, the value is not going to be
realized, because if you do not connect to each other, that’s not good, that
doesn’t really generate any kind of value. But that’s now understood very
widely.
A lot of companies do their own thing, a lot of academic
institutions do their own thing, but when you go out to talk to the actual end
users, their needs are different. Let’s take the case of smart city technology,
which is one great example of IoT deployment. When companies try to sell to the
cities, city authorities say, “I don’t really need this, because you’re telling
me that your product is going to have a better battery life, or something like
that. I don’t need to worry those things. I need to have fewer traffic jams. I
need to have a better emergency-response scheme, for example. How can you help
me with those things?”
The requests coming from the end users are not exactly aligned
with the problems that these companies are solving today. So the important
thing is to have an end user and a company communicating, and include
government from the beginning of the product design and deployment process.
That way, whatever effort they put in is not wasted.
http://knowledge.wharton.upenn.edu/article/internet-things-success-lies-services/?utm_source=kw_newsletter&utm_medium=email&utm_campaign=2016-02-12
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