The availability of small, inexpensive connected devices is creating rapid growth in the long-predicted internet of things (IoT). What unique challenges does IoT product development present? And how does the versatility of IoT devices affect the kinds of business models that they can support?

In this episode of the EIU Digital Economy, the unique business aspects of “Thingonomics” are discussed by Serena Pau, head of product development at CLP, an energy provider in Hong Kong; Anvil Ng, senior manager for acceleration programs at Hong Kong Science and Technology Parks; and Florian Simmendinger, founder and CEO of music tech startup SoundBrenner.

Internet-connected devices now include a broad spectrum of products for business and consumer use. According to Anvil Ng, developing these products presents a unique challenge because they are a combination of sophisticated software and hardware. “The product is more complicated because you’re not just dealing with the app side. You need to build the application framework, Bluetooth connectivity, the hardware, even the design for manufacture,” says Ng. “Startups face a difficult challenge because this kind of development requires the team to have many skills in-house.”

Often, Ng says, companies will outsource hardware development to a trusted partner. That’s the approach Florian Simmendinger’s team took as it developed its first product, an IoT-based metronome that paces a musician’s performance with pulses they can feel instead of audible ticks. “I think any great IoT company is really a software company in disguise,” says Simmendinger. “It’s very important that we do the software development in-house, whereas it’s more acceptable to outsource some of the hardware development.”

The need to focus can be especially important for small companies developing IoT products for complex, highly-targeted applications. Serena Pau says that’s when ecosystems created by larger companies can help spur development, offering small, innovative companies access to markets, resources and expertise they might otherwise lack. “They need to invest a lot of resources to develop their product, [but] they don’t really have the outlet to sell the product because it’s a business-to-business sale,” Pau says. “They need to focus on product development. We have a customer base. We understand our customers. So that’s why I think this ecosystem approach … really makes sense.”

Many traditional products are sold to consumers with the expectation they won’t be purchased again unless the consumer needs to replace the item. IoT products, with their unique combination of hardware and software, offer companies more ongoing revenue-generating opportunities. And that means companies need to think more carefully about their business models.

“[Choosing a business model is] one of the things that [reveals] the difference between a first-time entrepreneur and a more experienced entrepreneur,” says Simmendinger. “The first-time entrepreneur is only about the product – and if the product is a great idea and has value to the customers – whereas a more seasoned entrepreneur will take the business model part far more seriously.”

IoT companies must also carefully consider the markets they’ll be selling to. That’s because legal standards for data management and privacy can vary widely from one region to the next. “We need to determine if their use case is still valid in other places,” says Ng. “They need to deal with differences in compliance, data production and even certifications. We also advise them to ensure they have adequate protection of their intellectual property because it may not be well protected in some places.”

IoT devices and their associated software are creating waves of disruption in every industry they enter. Pau says connected devices such as smart thermostats and other energy management tools are raising many questions in the energy sector. “With all the sensors that we [have and] the data that we have collected, what is it for? We need to make sense out of it and [decide] what do we want to do,” Pau says. “At the end of the day, we want to provide greater service to our clients, to understand them more, to give them the choices that they want.”

For more about the rise of IoT devices, their impact on product development and the business cycle, tune in to the full episode of EIU Digital Economy podcast.

Read the transcript of The Digital Economy (episode 8) – Thingonomics podcast