The IoT platform wars continue

September started big for anyone following the evolution of industrial IoT.

In the US, MunichRe’s Hartford Steam Boiler division bought Relayr last Tuesday. Almost simultaneously, in Europe Nemetschek SE announced that it had bought MCS, a leading IoT platform for building management.

These two acquisitions follow an accelerating trend of consolidation in the IoT platform market that is occurring at two levels.

First, platforms are dying due to lack of scale. Of the 450+ IoT platforms identified by IoT Analytics in 2016, 30 platforms had ceased to exist in 2017. Smaller startups, in particular, find it hard to scale — with only 7% of platforms having over $1mn in revenue in 2016, while the largest players saw 50% annual growth.

IoT platform acquisitions (Source: Hampleton Partners)

Simultaneously, new platform acquisitions have been on the rise, with 1H 2017 seeing a new high of 18 transactions, representing 28% of all IoT transactions. Other notable acquisitions include Stream Technology (acquired by ARM, July 2018), Dattus (acquired by Plex, July 2018), Spacetime Insight (acquired by Nokia, May 2018), Utopus Insights (acquired by Vestas, Feb 2, 2018), Arrayent, Cumulocity, and Xively.

The most common acquirers are enterprise software vendors (Software AG) or system integrators (Accenture) — established companies that are seeking a combination of capabilities and clients to build out a portfolio of “smart” services.

These two latest acquisitions illustrate and reaffirm several common aspects of such acquisitions.

First, valuations are typically capped. Relayr was one of the early movers and most high profile contenders in the platform wars that included C3IoT and (at one time) Predix. In view of the valuation (USD 300mn), there is a clear ceiling to the value IoT companies can expect to achieve via a trade sale.

Second, it is clear that valuation multiples have come down. While neither transaction revealed company revenue, to those familiar with such transactions multiples have clearly come down from the heady days of PTC acquiring ThingWorx. As noted by Hampleton Partners, average 30-month trailing revenue multiples for IoT M&A transactions fell from 4x to 3.5x in 1H 2017, from the prior 6-month period. Returns, however, can be high — given exit horizon for startup investors are reasonable. For Jadeberg Partners, the majority investor in MCS, the time to exit was a mere 3-years.

Finally, while transactions in the earlier days were all about capability enhancement alone, today’s acquisitions are as much about buying a fuller suite of developed services and clients. MCS, for instance, started out as a facility management platform but grew to develop a complete suite of solutions for real estate, energy, and facility management including for O&M and workplace management. Similarly, while Relayr has continued to be a horizontal IoT platform that includes device management and middleware, it had developed analytics capabilities and focused on a few verticals in order to acquire clients more effectively.

For companies looking to succeed on either side of these transactions, the choice of verticals is important. While interest in IoT enablement is high, actual adoption and corporate spending continue to lag the ambitious forecasts made over the past few years. The latest IDC forecast, for instance, reduced forecasts for 2018 to levels just above those of 2016, and concluded that spending would reach the $1 trillion mark in 2020 vs. earlier forecasts for $1.3 trillion that year.

Global share of IoT projects (Source: IoT Analytics)

An analysis of over 1,600 IoT projects found that 50% of projects were in just 3 use cases. The top 5 use cases were in manufacturing operations, freight monitoring, asset management, smart grids, and smart buildings.

IoT enablement is leading to a significant change in industry. Marginal cost of service delivery, as more assets are connected, means businesses shall move to an opex-focused, service-centric business model. In such a world companies that “own” either the customer or the data associated with an asset shall be best placed to capture a greater share of industry profit share.

The IoT landscape offers a window for ambitious and fast-moving players to capture that opportunity. This requires developing meaningful, if fleeting, technical differentiation; achieving rapid client growth — be it organic or inorganic; and focusing on those verticals and segments of the market that have the highest near term potential.

For those still on the sidelines several other opportunities remain. Expect to see more consolidation in the next 1–2 years.

Over the past 2 years I have evaluated over 50 such platforms and over 200 analytics companies — and have been exposed to many more. For our clients investing or operating in industry, we have also prepared a detailed overview of the market, its value chain, and vertical specific market maps. If you would like to receive more information, please write to us.