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1 IoT Market Trends & Revenue Model Anatomy (January 2016) by Guillaume Tourneur

IoT market trends and revenue model anatomy

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Page 1: IoT market trends and revenue model anatomy

1 IoT Market Trends & Revenue Model Anatomy (January 2016) by Guillaume Tourneur

Page 2: IoT market trends and revenue model anatomy

2 IoT Market Trends & Revenue Model Anatomy (January 2016) by Guillaume Tourneur

TableofContents

Introduction...........................................................................................................................3

Definitions.............................................................................................................................4

IoTMarketDriversandChallengesin2016.............................................................................5

IoTValuePropositionPerMarketSegments...........................................................................9

IoTRevenueModels..............................................................................................................12Categories......................................................................................................................................12Examples........................................................................................................................................15

TheValueofData..................................................................................................................22

AdditionalReferences...........................................................................................................25

AbouttheAuthor..................................................................................................................27

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3 IoT Market Trends & Revenue Model Anatomy (January 2016) by Guillaume Tourneur

Introduction

In this report, we will review some of the key market drivers behind the Internet of Things (IoT), the value proposition for each market segment, the common revenue models with some examples, and finally the value of data as it relates to the IoT. This report does not cover any introduction on the IoT or its market size because there are plenty of excellent resources available online. Although additional resources used for this report are listed at the end of this document, I particularly recommend the ones below to further explore the subject.

● Roundup of Internet of Things Forecasts and Market Estimates, 2015 ● IoT: Business Opportunities 2015–2025 ● Enterprise IoT: A Definitive Handbook ● Collaborative Internet of Things (C-IoT) ● IBM: The Business of Things ● IBM: The Economy of Things

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Definitions

For the purpose of this report, we will define the “IoT” and “wearables” as subcategories of “connected devices.” A connected device or smart device is a physical object in which electronics, software, sensors, and network connectivity are embedded to enable these objects to collect and exchange data. Both the “IoT” and “wearables” belong to the “connected devices” paradigm, whereas the “IoT” usually refers to connected devices that are not carried on the human body, a function that is fulfilled by the term “wearables.”

Although this report focuses primarily on the IoT, it also makes reference to “wearables.”

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IoT Market Drivers and Challenges in 2016

For many, 2015 was a year of exponential innovation in all areas. The CES 2016 conference was a living example, with drones, virtual reality (VR), 3D printers, and many more innovations that are further described in my previous report (Post-CES 2016: The Internet of Things and Wearables). As Dr. Michio Kaku remarked in “Visions of the Future,” a three-part BBC miniseries,

“Wearemakingthehistorictransitionfromtheageof

scientificdiscoverytotheageofscientificmastery

inwhichwewillbeabletomanipulateandmodelnaturealmosttoourwishes”

~Dr.MichioKaku In other words, we are evolving from passive observers of nature into its active choreographers. Below are several areas of exponential innovations that are rapidly bringing the IoT paradigm to reality, laying the path for a brand new connected world. ● As consumers are continuously connected to information in real time, primarily through their

mobile devices, they will expect not only real-time connectivity but also insightful real-time data with which they can make valuable, actionable decisions.

● Machine learning, a subset of artificial intelligence (AI), is a critical component of the IoT,

because a massive number of data points (big data) must be converted into valuable and actionable insights. Existing methods and systems are not fit for the job, and it is impossible for humans to review and process all this data. Machine learning systems are built to find patterns, correlations, and anomalies and boil them down to what is really meaningful (see deep learning, ANN). The long-term R&D investments of Google, Microsoft, and IBM in machine learning, cloud, and geolocation technologies are examples of how large corporations are leading the way. Most recently, Google has launched an open source machine learning project, TensorFlow, which gives developers the tools to build large, intelligent IoT networks using “If This Then That” (ITTT) rule engines to control and integrate IoT devices.

● Sensors have become commodities: As both size and manufacturing cost have decreased,

sensors have increased in both function and presence in connected devices. The sensors listed below are common in IoT environments:

○ Accelerometers ○ Gyroscopes ○ Magnetometers ○ Humidity Sensors ○ Pressure Sensors

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○ Temperature Sensors ○ Acoustic Sensors ○ Digital Light Sensors

● New energy harvesting technologies are making these sensors either energy independent or extremely efficient in both wearable and IoT devices.

“Thecommonfeaturewithallofthem[i.e.wearables]istheprominenceof

sensoroptionsasthekeyenablerfortheirmostusefulfunctions.

Sensorscollectdataaboutthephysicalandchemicalpropertiesofthebody

andlocalenvironmentanduseittofeedalgorithmswhichoutputinsightfulinformation.With

coverageofalloftheprominentincumbentsensorsandthemostpromisingemergingoptions,

thereportconcludesthattherewillbe3billionwearablesensorsby2025,withover30%of

thembeingnewtypesofsensorsthatarejustbeginningtoemerge.”

~IDTechEX,“WearableSensors2015–2025:MarketForecasts,Technologies,Players” “IHSpredictsthatfrom2013to2019theworldwidemarketforsensorsinwearableswillexpand

by67millionunits....Itsmarketgrowthisdrivenbytheincreasingnumberofsensorsineach

productsold.Thisbasicallymeansthatwithwearablesgettingmorecomplexandmeasuring

moreparameters,moresensorswillbeneededtobeinstalledinthem.Theypredictshipmentof

sensorswillrisefasterthanthemarketofwearablesthemselves.Theaveragewearabledevice

shippedin2019willincorporate4.1sensorelements,upfrom1.4in2013.”

~IHS,“MEMS&SensorsforWearablesReport” ● Network connectivity for IoT devices requires a better range of standard connections as well

as the ability to overcome obstacles (walls, floors, etc.). For this reason, the Wi-Fi Alliance® has introduced the low-power, long-range Wi-Fi HaLow™ designation for products incorporating IEEE 802.11ah technology.

● New sources of funding such as Kickstarter and Indiegogo allow for new and disruptive

products, however, more serious initiatives from large corporations such as Google, Microsoft, Intel, IBM, and Cisco are the main drivers

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Corporate Investors Participate in a Record Number of IoT Startup Deals In 2015 The challenges below will have an impact on the overall value of the IoT and its rate and length of adoption. ● Interoperability – The value of the IoT is “the sum of it all”: the more sensors, apps,

platforms, and data are interoperable, the more we humans will benefit from IoT.

“Rightnowpeoplemostlybuysingleproductsforasinglepurpose....

AsashelfiteminanAppleStoreorBestBuy,itworks.

Butifyouwanttomakethosethingssinganddancetogether,forgetit.”

~FrankGillett,avicepresidentandanalystatresearchfirmForrester.TheInternetofThingsIs

Everywhere,ButItDoesn’tRuleYet-WIRED(Dec2015) ● Consortiums – The majority of key players have not yet joined any consortium or alliance

(e.g., Zigbee, AllSeen). ● Security – Unfortunately, 2015 has been an exceptional year for data breaches, exposing

consumers’ personal records and financial and health information. Although consumers will be more cautious in 2016, the IoT market offers great opportunities for increased security for objects and communications.

“Securityisapotentialbarriertocustomersadoptingthenewtechnology.”

~JohnCurran,managingdirectorofcommunications,mediaandtechpracticeforconsulting

firmAccenture.

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“IoTisanespeciallypromisingmarketforthedigitalidentificationecosystem....WithIoT

rapidlytouchingallspheresofcommunication,thedigitalidentificationindustryhasfound

considerablemeritinenteringthemachine-to-machine(M2M)marketbyprovidingspecific

SIMsormodulesthatdeterminewhetherornottoallowamachineaccesstothenetwork.”

~Frost&SullivanDigitalTransformationGlobalProgramDirectorJean-NoëlGeorges. ● Privacy has been and continues to be an important subject in 2016, particularly in the

health sector. ● Big data has several challenging characteristics:

Volume: The quantity of generated and stored data. The size of the data determines the value and potential insight and whether it can actually be considered “big data” or not. Variety: The type and nature of the data: text, images, audio, or video. Complexity: managing data coming from multiple sources can be very challenging. Data must be linked, connected, and correlated so users can query and process it effectively. High velocity: real-time, performance and volume challenges (real-time analytics).

“A full 90 percent of all the data in the world has been generated over the last

two years.” SINTEF - Big Data for better or worse

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IoT Value Proposition Per Market Segments

The two tag clouds below are a visual depiction of tags generated using 2,066 company descriptions by firms that conduct business in the areas of connected devices (IoT, M2M) using DataFox data services, a deal-sourcing and research platform covering private technology companies. DataFox Intelligence organizes information about more than one million companies using machine learning and natural language processing algorithms. The color and font size represent the prominence or frequency of the tags’ use and how representative they are of market trends in the IoT. The first tag cloud provides a high-level overview of company trends. The following words were excluded from the list: “and, Internet, IoT, of, technology, things, wearable.”

Tag Cloud 1 - General

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In the second tag cloud, the following words were excluded from the list: “and, consumer, data, electronics, hardware, internet, iot, management, mobile, of, security services, software, technology, things, wearable” and provided a more granular view by exposing the primary areas of business interest.

Tag Cloud 2 - Granular

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IoT implementation and value proposition varies for each industry sector:

● Healthcare ● Home ● City ● Environmental ● Security and emergency ● Retail ● Logistic ● Industrial ● Agriculture ● Cars and transportation ● Energy

The interactive mind map below highlights common use cases for each industry sector as well as common values propositions. Click on the banner below to fully explore the mind map.

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IoT Revenue Models

Categories

This section reviews the various categories of revenue models in the context of commerce transaction types, and delves deeper into these models through specific examples. First, we provide a brief semantic review, as people tend to confuse the terms “business model” and “revenue model”.

A revenue model is a framework for generating revenues that identifies which revenue source to pursue, what value to offer, how to price the value, and who pays for the value. It is a key component of a company’s business model. Categories of revenue models – As the lines that separate the digital and physical worlds blur, so do the monetization models. Physical objects are becoming smarter and more connected and seamlessly integrated with services, allowing for various sources of revenue. For the purpose of this report we will focus on the following categories. Many companies, the B2B in particular, rely on more than two revenue models. ● Product purchase (one-time) – This model is common in the consumer electronics market,

selling devices with (free) embedded services or mobile applications (apps) in Apple or Android stores.

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● Product and services purchase (one-time) – In the B2B world, enterprise software is

licensed, hardware is sold, and consulting and training services are either bundled in the price or sold separately. As the industry is migrating to software-as-a-service (SaaS) or platform-as-a-service (PaaS) models, vendors adopt a subscription revenue model as a primary source of income.

● Subscription (recurring) – This model is prevalent in the consumer market and, as

mentioned previously, is rapidly growing in the B2B market. Usually, in the subscription model, the consumer can upgrade from a freemium model and buy more advanced features, increased privacy, and ad removal. This model applies to online services accessed through a web browser. Cloud services and storage vendors charge their customers a monthly subscription fee for a certain amount of storage or analytics services.

● Freemium – This is the dominant model for apps and online services that provide free

services with limited features in exchange for commercial use of data (e.g., targeted ads). Customers have the option to migrate to a subscription model as described above.

● Transactional – This is a pay per use model that is common with major IoT platforms. For

example, the Amazon AWS IoT platform charges per number of messages sent from/to each connected device. This model is explored further below.

● Leasing – This model is uncommon but still relevant in the hardware equipment market. The above revenue models can be attributed to two commerce transactions types (as well as two sub-categories): ● B2C – Business-to-consumer, such as apps or consumer electronic devices hardware

products sold directly to consumers. ● B2B Vertical – Business-to-business vertical for specific industries, such as Apple’s

licensing of HomeKit to develop home automation and security apps and products. ● B2B Horizontal – Integration via web services or business partnerships between IoT

vendors (cloud services, analytics, business intelligence, etc.) The diagram below presents both revenue models and commerce transaction types in the context of the IoT marketplace.

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Examples

The three juggernauts – Apple, Alphabet, and Windows are the “platform” leaders that encompass both B2C and to some extent the B2B markets with the greatest offering, greatest brand exposure, and strongest market cap and strategic acquisitions. Each table provides an overview of the market caps for these platforms, the various categories of acquisition trends in order of importance, their involvement in the IoT marketplace, and their various revenue models.

1 Company Name Market Cap Number of Employees

$541.53B 93,657

Corporate Strategy: Acquisition trends by sector in order of importance

music, security, computing, data, analytics, marketing, sensors, learning, facial

IoT Relevance

● IoT platform: Apple HomeKit home automation ● Strategic partners: Philips, Eve, Ecobee ● Wearable platform: iHealth/Apple watch ● Connected devices (smartphone, watch, tablet) ● Apple iOs and App store platform ● Apple car (codename: “Titan”)

Revenue Models

Multiple: products, subscription, freemium

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2 Company Name Market Cap Number of Employees

$477.59B 61,377

Corporate Strategy: Acquisition trends by sector in order of importance

web, advertising, satellite, AI, cloud

IoT Relevance

● SaaS / PaaS / Cloud-based services and storage ● Home automation: Nest ● Google Glass ● Brillo: embedded OS, core services, developer kit, and developer console for IoT ● TensorFlow: open-source AI engine

Revenue Models

Multiple: products, subscription, freemium

3 Company Name Market Cap Number of Employees

$407.3b 120,612

Corporate Strategy: Acquisition trends by sector in order of importance

customer, enterprise, pen, touch, data, analytics, home

IoT Relevance

● Strategic partnership with Samsung announced at CES - “IoTivity” ● OS platform, cloud services (Storage, PaaS, and SaaS) ● Microsoft Windows IoT core for small devices (and Samsung in the future)

Revenue Models

Multiple: Products and services, subscription, freemium

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3 Company Name Market Cap Number of Employees

$132.55B 95,764

Corporate Strategy: Acquisition trends by sector in order of importance

Mobile, medical, payment, storage, services

IoT Relevance

● Strategic partnership with Microsoft announced at CES - “IoTivity” ● Connected devices (smartphone, watch, tablet)

Revenue Models

Multiple: Products

The remaining examples represent a variety of IoT leaders through their innovation, revenue models, and/or market positioning. I had the opportunity to meet with some of their representatives during the CES 2016 convention. These companies appear in alphabetical order.

Amazon Web Services (AWS) is a collection of cloud computing services that includes the well-known Amazon Elastic Compute Cloud (EC2), offering virtual machines, and Amazon Simple Storage Service (S3), an online file storage web service. The AWS IoT

service, recently added to this list, allows connected devices to interact securely with cloud applications and other devices. Using the various existing Amazon services (e.g., Amazon Machine Learning, DynamoDb), IoT applications can be built to gather, process, analyze, and act on data generated by connected devices without having to manage any infrastructure. Amazon is well known for providing reliable, secure, and scalable cloud-based services at an extremely competitive cost. The AWS IoT service revenue model is as follows: ● Customers pay per messages published and messages delivered to devices or applications

(transactional model). Unlike IBM or Bosch, the price doesn’t vary by device type but by region (cost is higher for messages published or sent to Asia Pacific).

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Bosch is a multinational engineering and electronics company based in Germany. Bosch’s IoT market focus is on manufacturing of hardware

products with embedded software that can be mass produced. Bosch’s approach is similar to that of IBM: rapid prototyping, implementation, and valuation of an IoT platform for business customers using the XDK Cross Domain Development Kit.

The XDK Cross Domain Development Kit, which sells for $185 MSRP, includes eight embedded sensors. By combining this development kit with Bosch’s professional services, business customers have access to rapid prototyping, testing, requirements, specifications, mass series production of hardware embedded software, certification, and compliance support. ● Bosch’s primary revenue model in this market is a product and services approach (no cloud

services or apps).

La Poste is a postal service company in France and an interesting case study for the IoT. It has remained a public

company for many years. However, because of EU directives requiring member states to introduce competition in their postal service, in 2005 the French government allowed private

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postal service companies to begin operating and transformed La Poste into a public-owned company limited by shares in 2010. Because Internet development has reduced its postal activities, La Poste diversified its business and leveraged its brand as a trustworthy, secure company that delivers goods, mail, and services to consumers and businesses. La Poste is the second largest employer in France and offers web-based email to approximately 1.6 million active accounts. More recently, the group has created a document exchange and archiving platform called Docapost that has recently expanded its IoT activities by offering a business intelligence (BI) platform to enable businesses to connect and securely exchange data between connected devices and applications. Docapost has several revenue models: ● Subscription for SaaS, PaaS, and cloud storage ● Products and services for consulting and system integration offerings ● Cost is per device and not per message (transactional), unlike Amazon or IBM

Exosite provides a proprietary platform and consulting services to enable customers to deploy their IoT infrastructure. Because many hardware vendors realize

that unintelligent hardware are commodities, Exosite helps these vendors create “added value” services within their existing infrastructure. Exosite has several revenue models: ● Products and services through their professional services organization (Time and materials) ● Transactional costs messaging per device ● Subscription model for cloud storage

IBM is one of the biggest investors in the IoT with a focus in the B2B enterprise market that leverages its strength in analytics, business intelligence (BI), artificial intelligence (AI), and integration of these services into its “Cognitive IoT,” the “Watson internet of things.” Like Bosch, IBM leverages Texas

Instrument’s sensor tag for rapid prototyping of IoT solutions to help build customers’ ROI in a cost-effective manner. In a recent study, “The Business of Things,” IBM states that 65 percent of respondents were unsure about IoT ROI.

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IBM IoT platform revenue models include ● Subscription for their BlueMix SaaS, PaaS, and IBM cloud storage ● Products and services for consulting and system integration offerings ● Transactional cost model for messaging between devices and apps, which varies based on

device category

Oracle recently launched its cloud-based platform, the Oracle Integration Cloud Service (ICS), by converting some of its key customers and working toward converting its remaining

customers over time while gaining new ones. Oracle therefore is migrating from an on-premise business (product and service model) to an as-a-service strategy (subscription and transactional models). We can also envision a transition from traditional professional services to integration and implementation support. Oracle’s Integration Cloud Service (ICS) objective is to help customers streamline the rapid development and deployment of cloud-based services with pre-built integrations.

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Oracle Internet of Things (IoT) is a cloud-based offering platform within the ICS that allows companies to connect their devices to the cloud, analyze data from those devices in real time, and integrate their data with enterprise applications, web services, or other Oracle cloud services such as Oracle Business Intelligence Cloud Service. Oracle revenue models have the following features: ● Like Amazon, Docapost, and IBM, Oracle IoT Cloud Service offers a subscription model. ● Oracle charges customers a monthly fee per a certain number of devices with a range of

messaging per device per month (transactional model). Neither IBM nor Oracle charge all devices in the same manner, whereas Amazon has a single price for all.

The interactive mind map below highlights additional examples of vendors’ revenue models within each IoT market segment.

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The Value of Data

The core business objective of both the IoT and wearables markets is to capitalize on the value of data to drive innovative services with a quantifiable return on investment (ROI). The value of data depends on a company's core business. For example, companies that sell consumer electronic products rely on data as a means to improve their customer service and support, whereas those who offer free mobile apps or free online services rely on data mainly as a primary source of revenue through advertising. The diagram below represents the value of data in the “knowledge economy.”

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In the “Knowledge Economy,” data is vital for all business units, allowing for greater competitive edge, customer acquisition, retention, and targeting, as well as helping to define and refine pricing of products and services. For example, a product manager will use data to ● Assess how a product is used ● Identify success factors ● Identify future product requirements ● Allow for self/remote diagnostics ● Streamline and automate technical support ● Improve CRM (improve customer relation quality and strength) Data interoperability between various services and business partners provides great “functional value” that allows for better user experience (e.g., log into your Airbnb account via your Facebook account or apply for a job on the career page of a company using your LinkedIn account) as well as financial ones. In the consumer world, the “IoT product” becomes a “data-driven platform”; once activated, it provides customers with content and a digital experience. For marketers, the IoT product offers the ability to provide “on-demand personalized services and experiences.”

“Marketersdefaulttodeliveringadvertisingmessagesinaregularsequenceofcampaigns,

insteadof‘on-demand’personalizedservicesandexperiences.”

~AndyHobsbawm,theCMOofEVERYTHNG For shareholders of services businesses, data embodies financial potential or company value which is calculated through various formulas using the user base and data types (generic and personal data) owned by a company. Not all data points have equal value.

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Additional References

Wearable Sensors 2015–2025: Market Forecasts, Technologies, Players (IDTechEx) http://www.idtechex.com/research/reports/wearable-sensors-2015-2025-market-forecasts-technologies-players-000431.asp MEMS and Sensors for Wearables Report – 2014 (IHS Technology) https://technology.ihs.com/496122/mems-sensors-for-wearables-2014 Market Forecast: Wearables (CCSInsight) http://www.ccsinsight.com/our-services/1711 Unlocking the Potential of the Internet of Things (McKinsey) http://www.mckinsey.com/insights/business_technology/the_internet_of_things_the_value_of_digitizing_the_physical_world Who's Who on the Adoption Curve (MediaPost) http://www.mediapost.com/publications/article/257488/whos-who-on-the-adoption-curve.html?utm_source=newsletter&utm_medium=email&utm_content=bottom&utm_campaign=85737 Marketing and the Internet of Things, Closer than You Think http://chiefmartec.com/2015/06/marketing-internet-things-closer-think/ What’s The Value of Your Data? http://techcrunch.com/2015/10/13/whats-the-value-of-your-data/?ncid=rss&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Techcrunch+%28TechCrunch%29&utm_content=FaceBook&sr_share=facebook Apple and Google Know What You Want Before You Do http://www.wsj.com/articles/apple-and-google-know-what-you-want-before-you-do-1438625660?mod=e2li Wearable Technology Is Not Going Anywhere! http://www.wearable-technologies.com/2015/07/wearable-technology-is-not-going-anywhere/ WPC - The Wearable Future http://www.pwc.com/us/en/technology/publications/wearable-technology.jhtml Use Data Visualisations to Tell Stories and Gain Influence https://www.linkedin.com/pulse/use-data-visualisations-tell-stories-gain-influence-jay-zaidi?trk=hp-feed-article-title-share The Invasion of Wearables in the Workforce

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http://techcrunch.com/2014/12/14/the-invasion-of-wearables-in-the-workforce/ Wearables Will Be Routine in the Workplace by 2020 http://www.baselinemag.com/innovation/wearables-will-be-routine-in-the-workplace-by-2020.html The Inception of Wearables in the Workforce https://wtvox.com/2015/04/the-inception-of-wearables/ The Internet of Things (IoT) Has Arrived - What You Should Know (LinkedIn Pulse) https://www.linkedin.com/pulse/internet-things-iot-has-arrived-what-you-should-know-chuck-brooks

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About the Author

Guillaume Tourneur is a technology product manager and business development professional. His expertise is bringing new technology products to life in organizations ranging from bootstrapped startups to global Fortune 500 firms. He has led teams through the product development cycle, evaluated markets and potential ROI, and developed and implemented go-to-market strategies that have generated $20+ million in revenue. His industry background includes connected devices and the Internet of Things (IoT), with an emphasis on wearables for the sports and fitness industries, and entertainment/Internet technology such as video on demand (VOD), recommendation engines, and digital asset management systems (DAM). He has extensive experience in collaborating with agile development teams. Other interests include IRONMAN triathlon training. Email: [email protected]