Skip to Content

IoT: Connect Physical and Digital Worlds for New Business Models

Sogeti Labs
September 22, 2015

(This article is a review and summary of different white papers, books and courses referenced in the bibliography section, focusing on business models and some examples of them.)

The Internet of Things (IoT) represents the vision that every object and location in the physical world can become part of the Internet: Objects and locations are generally equipped with network, storage and computing capacities and so they become smart objects that can take in information about their environment and communicate with the Internet and other smart objects. So, smart things are hybrids, composed of elements from both the physical and digital worlds (see fig 1. from [1])

Image 1

Figure 1 : Value‐creation Layers in an Internet of Things Application (in [1] Fleisch, E., Weinberger, M., Wortmann, F)

The key layer connecting both worlds is the connectivity layer. The physical world is not just about hardware, but also more and more software nowadays (think cars). However, a physical thing becomes “smart” when it connects to the digital world. The layers 2,3 and 4 allows us to invent and propose to individuals (customers but also citizens) new services (digital services of layer 5). One important fact is that layers 1 through 5 cannot be created independently of each other. That is why the arrows connecting them are bi‐directional in fig 1. An IoT solution with value is usually not the simple addition of layers, but rather, an integration extending into the physical level. How the hardware is built, for instance, is increasingly influenced by the subsequent digital levels and on the other hand, software which compose the digital levels and must be designed to fit the physical levels.

The connection between the two worlds allows new business models to emerge across manufacturing industries (i.e. industry that designs and builds physical world products). Here are some examples:

  •  Canary ( or Netatmo ( companies offer a smart home alarm system that includes a variety of sensors, from temperature or movement sensors, up to a camera. The basic function of monitoring rooms during the resident’s absence and sending a message to a smart phone app in the event of anomalies, is included free of charge in the price of the system. Other services are proposed with additional cost. It is the physical ‘freemium’ business model.
  • You have a car and you want to travel abroad, where not all risks are covered by your insurance. In this case, if your automobile’s performance can be configured using software and the vehicle is a node on the Internet, you can purchase from third party the right additional mini-insurance policy just for this journey. It is the Digital add-on business model.
  • By pointing a smart phone at a product, an Internet website opens where that same product – including replacement parts, accessories, and consumables – can be purchased. Amazon already offers this type of service for products with a bar code that are carried by the e-tailer. In this case, the product itself becomes a point-of-sale. It is the “product as point-of-sale” business model.
  • Your heating system orders itself oil refills as soon as a certain level of liquid is noted in the oil tank. You have nothing to do! The Thing has the ability to independently place orders on the Internet. The idea of self‐service no longer refers only to the customer; now things can serve themselves too. It is the Object self-service business model.
  • Brother (, offers leases for laser printers, for example, without any base leasing rate – only the pages that are actually printed are invoiced. In the past, the technology required to monitor remote usage was complicated and relatively expensive but as the IoT expands itself quickly, the costs required diminish, making this pay-per-use model very effective and attractive for customers. It is the remote usage and monitoring business model.
  • Another powerful idea is collecting, processing, and selling for a fee the sensor data from one sub-section to other sub-sections of the fog and Cloud computing infrastructure and ecosystem. The measurement data from the physical world are no longer vertically integrated, collected, stored and processed for just one application but instead for a broad array of potential applications. In this Sensor as a Service business model vision, value is created by making sense of data, not from the physical product itself, which will be usually inexpensive (at least compared with existing solutions until now). Fig.2, from the 2014 Vision Mobile report (reference [4]) illustrate this point.

Image 2

Figure 2:Value in IoT is created by making sense of data (report: Breaking free from internet and things – vision mobile 2014 – CC-BY-ND)

Implementing these business models is not trivial. Issues arise from the key different characteristic of the physical world (i.e. product) and digital world (i.e. service)

  • First, services differ fundamentally from products because they cannot be stored and as a rule they are provided at the customer’s site while collaborating (there are some interactions human or IT related in the delivery of the service), and they are generally paid for, in many smaller amounts, spread out over time.
  • Second, the difference between physical and digital products are particularly noticeable in product development. In the digital world, agile development processes are the norm today. When a bug can be repaired with an update at almost no cost, even in an installed base counting millions of instances, speed, early customer contact, and aesthetics are of utmost importance in development. In the hardware business, however, and in the world of embedded computing as well (i.e. mix of hardware and firmware/software), an error in a product that has already been sold usually results in an extremely costly, image‐damaging recall action (remember car recall action because of mechanics or software defects)

However, nowadays, digitalization of hardware function is becoming more and more important and advanced (see Software defined X technologies in IT infrastructure –e.g. Software defined Network, Software defined storage, etc…) and this trend will for sure help to solve the gap between physical and digital cultures.

Traditional business models put emphasis on products, technology and specific verticals. That makes sense when customers are known and their needs are well understood. The IoT is different. The demand for billions of connected devices will come from people using services and apps that make sense of the data that those devices generate.

The future leaders of the IoT will win by building community of entrepreneurs around of their products and services, which means put in place technology community platform (i.e. a system that can be adapted to countless needs and niches, see Marc Andreessen – founder of Mosaic and Netscape – definition of a platform). To be successful you will have to master both technology and the human art of managing ecosystems.

It is the key success factor to build the new business models fostered by the IoT.



[1] Fleisch, E., Weinberger, M., Wortmann, F.: Business Models and the Internet of Things,

Whitepaper of the Bosch Internet of Things and Services Lab, a Cooperation of HSG and

Bosch (2014).

[2] Fischer et al. (2014); Fischer, Thomas; Gebauer, Heiko; Fleisch, Elgar: Service Business Development:

Strategies for Value Creation in Manufacturing Firms, Cambridge University Press, 2014

[3] Fleisch 2010: What is the Internet of Things? An Economic Perspective, Auto‐ID Labs White Paper WPBIZAPP‐053, ETZ Zürich & University of St. Gallen, January 2010,

[4] Schuermans &Vakulenko (2014); Schuermans, Stijn; Vakulenko, Michael: IOT: Breaking Free From Internet and Things, How communities and data will shape the future of IoT in way’s we can’t imagine.

VisionMobile Report, 2014

[5] Fog Computing and Its Role in the Internet of Things, Flavio Bonomi, Rodolfo Milito, Jiang Zhu, Sateesh Addepalli, Cisco Systems Inc, 2012

[6] The Fog Computing Paradigm: Scenarios and Security Issues; Ivan Stojmenovic, Sheng Wen; Proceedings of the 2014 Federated Conference on Computer Science and Information Systems; ACSIS Vol.2, 2014

[7] Fog Networks and the Internet of Things; MooC learning; University of Princeton; Mung Chiang and al., 2015;

About the author

SogetiLabs gathers distinguished technology leaders from around the Sogeti world. It is an initiative explaining not how IT works, but what IT means for business.


    One thought on “IoT: Connect Physical and Digital Worlds for New Business Models

    Leave a Reply

    Your email address will not be published. Required fields are marked *

    Slide to submit