A decade ago Timothy Chou was convincing vendors and users alike that cloud computing and SaaS revenue models were more than passing fads. Today, he’s all about smart machines—the bigger the better, the more the better.
Chou, a former Oracle executive, and currently angel investor, author, board member and Stanford University lecturer, is now evangelizing the IoT as a way to boost sagging manufacturing sectors, optimize capital investments and finally use the ginormous warehouses of stored data to corporate—and even societal--advantage.
To date, the IoT has focused primarily on making intelligent consumer products. But there’s a vast, untapped potential for the IoT to connect smart machines that will yield new industrial business models, Chou says. He envisions a manufacturing transformation mirroring what SaaS has done for the software industry—offering machine services to yield better offerings at lower costs. Many of the lessons learned in the software business will also apply to businesses that build machines. “Aren’t machines increasingly being driven by software?" he asks pointing to the latest Tesla as an answer and to prove his point.
Third-generation Enterprise Software Emerging
In his new book, Precision: Principals, Practices and Solutions for the Internet of Things, Chou writes that many technology trends are coming together to completely transform power generation, construction and farming: Cell phones are driving the cost of sensors and local compute; networks are becoming more sophisticated and able to deal with a range of data rates, distances, location and power requirements; and cloud computing is delivering low-cost compute and storage services around the world. Moreover, artificial intelligence technology focused on replicating human tasks can now be applied to machines. “With these rapid shifts in the economics of computing, we can move to the third-generation of enterprise software and tackle the challenges of precision agriculture, power, water, healthcare and transportation, and fundamentally reshape business and our environment,” in Chou’s view.
Traditionally, he writes, manufacturers of large, capital-intense machines--such as combine-harvesters, gene sequencers, wind turbines, locomotives and coal-mining equipment--were focused on building machines that were mechanically sophisticated but rarely connected or software-enabled, but that's all changing.
Although we are still in the early stages—about where SaaS was 10-15 years ago—changes are coming quickly. Once companies become more software-savvy and adept at finding meaningful information from their massive databases, they can transition to business models where they earn more from services, not products—just as GE has done for the past several years. In 2015, GE’s machine-sales revenue was $60 billion, while revenue from services was $47.9 billion. As an early pioneer in the field of selling services, GE is “going all in on this,” Chou says, and others can follow suit. “Most of the software developed to date is for the Internet of People (IoP). People are not Things, Things are not people. We’re going to need new software to build IoT apps.”
By connecting “things” to the Internet, not only is there a potential for additional revenue, but also the ability to provide better service, less downtime, performance, security and change management, according to Chou. Think of it as big data meets IoT meets SaaS.
“Soon, manufacturers will see that ‘you don’t need to own this anymore, I will manage everything for you,’ which is what all of the SaaS companies do today,” Chou adds. In the future, whether you build wind turbines, seed-drills, compressors, gene sequencers, forklifts or solar arrays, you can do the same thing. This model transforms large capital expenditures into a pay-by-usage operating expense: Tires can be sold by the number of miles driven; compressors by the amount of air compressed per minute, and coal-mining machinery by the number of cubic meters of coal mined.
In the software business, “companies that moved to powerful new business models are the winners,” Chou explains. “Every power, water, agriculture, construction, transportation, healthcare, and machine company now has the opportunity to build precision-connected machines powered by software.”
And there are implications for future careers, as well. Chou advises his students to focus on the new ABCs—Artificial Intelligence, Big data, Cloud Computing--a phrase coined by one of his former students who is now Chief Innovation Officer at Children’s Hospital in Orange County. Chou’s vision goes far beyond manufacturing transformation and into the future. Global economic growth is rapidly shifting, led by Southeast Asia, Latin America and Africa. Nigeria, for instance, is a slated to be the third largest country in the world following India and China by 2040, he says. All need electricity, food, healthcare, and telecommunications which can be based on next- generation systems and precision machines. “We have the ability to use software and data to operate machines more efficiently, use less pesticide, less water, less fuel and to harvest at the precise time to insure the most nutritious and best-tasting food.” It’s an optimistic outlook that may already be in its infancy.
Also watch a recent video conversation with Tim about AI and the future here.