Financial Sustainability of IoT Platforms: The Role of Quality and Security

Abstract

The economic significance of Internet of Things (IoT) platforms is evident from the proliferation of smart home assistant platforms like Amazon Alexa and Google Home that center themselves around providing unique and connected experiences to users. Customers do not perceive these platforms valuable if they do not experience adequate levels of quality and security from both the platform and applications (apps) they use. Therefore, the IoT platform provider as well as app developers need to go beyond collaboration and cocreate quality and security for each app on the platform. In this setting, we study the dynamics of the financial sustainability of the platform provider and app developers and find that the collaborative nature of the IoT platform has a significant role in the behavior and profitability of all parties. Specifically, a neutral entrant to the platform not only increases the effort levels of all existing parties, but also increases the profits due to network effects that are intertwined with economies of scale. We further find that a substantial number of apps are needed in the platform for an economically viable platform and that a less efficient platform leader needs even a larger application base. However, based on the number of apps on the platform and which party is more effective in the collaboration, the platform provider might need to provide additional incentives, or sometimes, extract additional rent from the app developers to financially sustain the platform. Furthermore, we verify our results in the presence of competition or complementarity among apps and further derive additional interesting results and managerial insights. For example, we find that the entry of a competing app may be beneficial for existing apps under some conditions.