McRock' Powering The Industrial App

APPS FOR THE INDUSTRIAL INTERNET The Future of Industrial Software

Apps For The Industrial Internet Contents Pg 2 – Executive Summary Pg 3 – The Consumer App Explosion Pg 5 – Improving Industrial Software Pg 8 – The Rise of Industrial Apps Pg 11 – GE Case Study

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THE OPPORTUNITY FOR INDUSTRIAL APPS

The rise of consumer apps on mobile devices created a massive new market for software developers. Since 2008, over 300,000 developers have created more than 2 million apps. This level of distributed development has fostered innovation and led to a host of new services and tools used by billions of people every day.

Apple recently announced it has paid out over $10 billion to developers, $5 billion of that in the past year alone. Although the market is huge, making money has become more and more difficult for the average developer. Today just a few developers make the majority of the money, and most apps gross less than $500 per month. Despite the benefits of the app store model, tough competition makes it difficult for newcomers.

Much of what has been learned in developing consumer apps could be put to use in other sectors. Increasingly industrial assets, like those in power plants, oil fields, or water systems, are being equipped with sensors and connected to networks. Already data generated by machines is growing faster than data from humans. This represents a significant opportunity for software and analytical tools that are fast, easy to use, and insightful.

Today there are a host of industrial equipment companies like GE, ABB, Siemens, and others making disparate hardware devices and software systems for industrial settings.

While progress is being made towards more modern platforms, fostering a true “industrial app ecosystem� will require further work in making platforms standardized and developer friendly. Platforms must become safe from cyber-attacks, robust enough to run apps without endangering operations, and offer high quality software development tools and methods for accessing data for 3rd party developers.

Existing consumer apps, such as Google Maps or Waze, already have capabilities that could be used by enterprises and even by industrial companies for activities like fleet tracking, asset mapping, and data storage. The potential exists, it just needs to be unlocked.

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THE CONSUMER APP EXPLOSION The recent growth in mobile apps has been driven by an unprecedented rise in powerful, connected devices, running on a consolidated set of platforms with access to online data, good security and development tools.

More than two million apps are available for download today, generating a projected $25B in revenue in 2013 alone. This market for new software was made possible by the global growth in smart devices (tablets and Mobile Data Use phones) – with more than 800 million tablets Exabtyes per Month and smartphones sold in 2012, and 1.7 billion expected to be sold in 2016. Unlike traditional PCs, smart devices are portable and often have high speed connections (over 2 billion have 3G or 4G connections globally). This portability and connectivity allows consumers to spend more time using devices and apps (2.5 hours per day on average today, 80% within apps). In Source: Cisco Visual Networking Index, 2012–201 addition, devices have access to massive amounts of online data, which is often free and accessible via standardized protocols. Mobile traffic is growing astronomically, and according to Cisco, will grow on average over 60% annually between 2012 and 2017.

The rise in online data has been supported by improving anti-virus and cyber-security systems that have increased user comfort in putting personal data online.

Today, well over 300,000 developers and designers globally work on creating apps for mobile platforms. Nearly 70% of developers work alone or at small firms with only 2-3 employees.

Surprisingly, over 90% of developers are male, but they are not as young as stereotypes might suggest (40% are 35 or older). Platform convergence and development tools have made creating apps much easier.

Almost 90% of smartphones and tablets run iOS and Android today, meaning developers have to program on fewer platforms (on average 2.6 in 2013, compared to 2.7 in 2012 and 3.2 in 2011).

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Platform companies also make publicly available high quality software developer kits (SDKs), and application programming interfaces (APIs) that allow 3rd party developers to tap into existing tools and resources on their devices or online without having to recreate functionality.

App Stores, rising competition, and new opportunities App stores have proven to be a successful business model for both platform companies and developers, providing access to customers and generating billions in revenue. However, competition is intensifying and the market is becoming increasingly concentrated - nearly 50% of all revenue today is earned by just 25 developers. Consumers have come to expect apps to be free or nearly free (80% cost $0.99 or less) and developers are relying on other monetization strategies. Most of the highest grossing apps are games, which earn a significant portion of their revenue from in-app sales of add on features. Other developers use a “freemium� model, where a basic version of an app is offered free, while an enhanced version is sold to a subset of users (often as few as 2-5%) for a fee. Overall, making money can be very difficult for the average developer. Over 50% of apps make less than $500/week and roughly 34% of developers make less than $15,000 from apps.

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Since their creation, apps as we know them have existed for less than 5 years.

Technology analysts say that enterprises tend to lag the consumer world in adopting web technologies by roughly 2 years and in recent years a subset of apps has started to make the transition from consumer to enterprise use. Take for example Google Maps, which companies can use to manage assets or fleets on the move. The easy to use interface that Google created – and improved through their recent purchase of Waze for an estimated $1 billion – proved its scalability and reliability in the consumer world. As we discuss in the next section, while industrial companies (e.g. power, water, oil and gas) can be slow to adopt new technology, they represent the next area of opportunity for apps.

Cisco Systems is seeing a trend towards connecting billions of “things” to the internet.

The Internet of Things has already begun and is expected to rapidly accelerate in the coming years with 37 billion things joining the web by 2020. The potential economic value of improving industrial software is massive and should not be ignored by today’s app developers.

According to Cisco Canada’s Director of Strategic Initiatives, Paul Howarth, “the ability to interconnect physical assets, machines, sensors, and people through the internet will create significant value by bringing massive offline industries, online”.

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IMPROVING INDUSTRIAL SOFTWARE Like consumer apps, Industrial Software is a large, growing industry with on-going innovation, but companies are structured differently, platforms are generally not standardized, and security and data tools are still limited compared to the consumer market.

Industrial Software is a $22 billion market today and growing quickly. The market is made up primarily of a few large firms - like GE, ABB, Rockwell, Scheider Electric, and Siemens - with large and growing software development departments (e.g., 1000-10,000 programmers) which they have built up organically and through recent acquisitions. Projects tend to be larger and more customized. In 2010 a survey of utility companies planning SCADA projects (including upgrades and expansions), projects averaged more than $3 million each. Industrial Software traditionally refers to “operational technology�

(OT) like SCADA systems, but increasingly includes conventional enterprise IT systems and their integration to OT systems. Software is used to monitor and control industrial assets (e.g., turbines, tanks, pipes) and processes in power generation, water treatment, oil and gas extraction or in transportation systems.

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Industrial Software M&A Large industrial engineering and automation companies have spent billions in the past few years acquiring smaller software companies focused on a variety of new areas

Siemens has made numerous acquisitions in the software space over the past few years. In 2012, they acquired Innotec, a provider of integrated plant management software for energy and process industries, as well as LMS International a mechatronics design simulation software company.

In 2011, they bought EMeter, which had about 40 million smart meters under contract with utilities. In 2009 they acquired the French company Elan Systems, which does manufacturing execution systems.

Historical Challenges & Emerging Solutions: Engineers and IT executives in industrial settings often take on a “don’t touch it… ever” mentality with respect to upgrading their mission critical systems. This caution is important, but the hesitance to upgrade has led to pockets of legacy software and numerous hardware form factors within companies and across industries. To overcome this fragmentation, improving cybersecurity and data storage standards are allowing industrial platforms are start to move data storage and processing functions “into the cloud”, reducing the need for standardization of software at the plant or systems level.

Security: Counter-intuitively, industrial software platforms haven’t historically had the same level of security capabilities as consumer applications.

This stems from a legacy of systems that were unconnected or connected only in isolated networks. Today, industrial assets are increasingly being connected and exposed to a greater number of threats. A 2013 report by the SANS Institute (a network security research and education organization), showed that about 30% of industrial companies suspect they have suffered an attack.

The US government believes a majority of power sector companies faced cyber-attacks in 2012, with 55% of attacks targeting industrial control systems like SCADA. Rising threats have also increased awareness and represent a new business opportunity for security companies. Increasingly mainstream security companies like McAfee and Kaspersky are announcing products specifically designed for the industrial segment.

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In 2010 ABB spent $1 billion to acquire Ventyx, a leading software firm focused on operational and information technology for asset intensive industries, including smart grid systems.

Ventyx, had revenue of $250M at the time of acquisition, and about 1000 employees.

In 2011 Schneider purchased Telvent, a Spanish IT and industrial automation company, for nearly $2 billion. Telvent had over 5000 employees at the time of the acquisition.

Data: Increasing amounts of industrial data is being generated today – in fact industrial data is growing twice as fast as any other segment, including consumer sources. Despite this rapid growth, data storage technologies and standards in the industrial world lag consumer-grade applications. Leading technologies for storing, transmitting, and compressing data - like Hadoop and historian programs for time series data - are just beginning to be implemented. Industrial software that makes use of these tools, will be able to store and recall large time-series data much faster and more efficiently, enabling better real-time analysis and processing.

THE RISE OF INDUSTRIAL APPS While industrial software serves a very different purpose from its consumer counterpart, there are lessons to learn from the consumer app development model. Industrial Software can become cheaper to develop and more responsive to customer needs by adopting a model of “mass innovation” using a global community of 3rd party developers to create “Industrial Apps” for a limited number of platforms. In some cases today, companies are already developing industrial platforms that use consumergrade technologies and provide easier access to data sources.

However, in most cases further work is required to improve the accessibility and security underpinning platforms. As well, platforms need to be made more developer friendly and provide developers with the tools they need to create apps.

Finally, developers need a business model that builds on the App Store concept, but adapts to an industrial market with fewer, larger customers.

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Role of an Industrial platform

INDUSTRIAL STRENGTH PLATFORM

Apps

Management tools

Reliability: First and foremost, platforms must ensure total reliability of underlying industrial processes and assets. Compared to any other computing system, the consequences of a power plant or water system crashing are particularly dire.

Platforms should be designed to limit apps access to critical functions, and insolate apps that might crash from industrial processes. Even if an entire platform were to crash, it should not affect the underlying industrial control system.

Interface devices (PCs, Smartphone, Tablets, HMIs)

APIs Platform Layer

Industrial control / automation system

Sensors & Devices

Industrial security, cloud connectivity: Cloud processing and data storage holds significant potential to reduce the costs and improve the performance of running industrial apps. However, cyber-security needs to be further improved to increase operator comfort with 3rd party apps running in the cloud. Improvements should focus on designing systems and networks to be secure from the ground up, developing better intrusion detection tools, implementing strict user and administrator procedures, and in some cases encouraging government regulation for industry-wide standardization.

Scalability & Flexibility: Huge time-series data sources are generated in industrial processes. Platforms must be able to collect, store and access this data at speeds approaching real-time. Platforms will likely need to be built with the same “consumer-grade� data management tools such as Hadoop for distributed data storage as well as access resources and apps both locally and in the cloud.

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EMPOWERING 3RD PARTY APP DEVELOPERS

Developer + Domain: Creating useful industrial apps will require pairing programming and development skills with industrial domain expertise. Industry leaders can facilitate these connections by hosting “developer + domain” sessions where experts explain industrial processes and share pain-points with app developers. On-going partnerships between developers and industrial engineers will be required to design apps that can work within real-life industrial processes.

Developer tools: As with consumer apps, industrial platforms must become more developer friendly by publishing Software Development Kits (SDKs) and APIs that make coding easier and more modular. These tools will allow developers to access industrial data and devices without having to recreate basic functionality, or delve into the details of device or sensor operating systems.

Training data sets: To allow developers to innovate and test new ideas, platform companies or end-users should publish large, non-confidential, scrubbed datasets that allow developers to create and train new applications and algorithms.

Creating a Business Model and the “Industrial App Store” Distribution & App Stores: Apple and Google have created win/win situations with their app stores, generating significant profit and helping apps gain wide access to customers. In the industrial setting, this model could be even more valuable. By creating an “Industrial App Store”, a company like ABB, GE, Siemens, etc, could offer their customers access to a certified “Industrial App Store” which would include a set of 3rd party apps that have been verified for use on their platforms. Third party apps could also be white-labeled and sold under an existing brand, or bought outright from developers. By using the existing relationship that industrial companies have with their customers apps gain credibility and platforms become more valuable to customers.

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Pricing: In the consumer world apps are priced very cheaply to overcome user hesitance to try out products from unknown developers. Developers make their money from the high volume, or by using in-app sales or a freemium pricing model.

In the industrial world, this will not translate directly due to the smaller number of potential customers. As discussed on the previous page, the first way to overcome operator hesitance will be to distribute apps via Industrial App Stores. On the pricing side, apps could offer a free trial period to encourage adoption, followed by an ongoing monthly fee tied to the level of service provided (e.g., number devices or assets being monitored, or number of operator access points). Unlike the consumer market, industrial apps have potential to create significant financial value to end customers, especially those that drive equipment efficiency. Developers who calculate ROI metrics may be able to justify higher upfront and on-going prices for their products.

GE CASE STUDY +

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= Industrial Internet

In June 2013, GE announced a new “Industrial Strength Platform” with a series of expanded products and partnerships in industrial data storage and real-time analytics. The platform is based on better data storage using their new Hadoop-based Proficy Historian HD which is designed for industrial data and according to GE has “a secure, closed-loop architecture”. GE expanded its "Predictivity" line of data analytics to help improve industrial asset efficiency.

GE announced a “strategic relationship” with Amazon Cloud Services who will be the cloud provider for the industrial platform. Despite this relationship, GE describes their platform as cloud-agnostic, meaning it can run on-site at a user’s location, at GE, or at another public cloud.

Other partners include Accenture who is helping develop industry specific analytics tools and Pivotal who is building the underlying “consumer-grade capabilities”. GE recently stated, “by installing sensors and software to make machines smart and applying deep analytics to understand the data they generate, industrial companies are building a new Industrial Internet that will improve safety, increase productivity and unlock hundreds of billions in value.”

MCROCK TALK: GE’s foray into creating an industrial platform is an admirable first step. By focusing on increased standardization across industries and by offering more robust data tools, GE is starting to create the conditions needed for wider use of more innovative industrial software. However, they have yet to discuss how or if they will empower 3rd party developers to create a wider variety of tools. They are currently relying on in-house Accenture and GE software capabilities. While this may allow them to capture immediate value, they are missing a longer-term opportunity to drive greater innovation and create a lasting ecosystem around their platforms via compatible “Industrial Apps”

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McRock Capital is the first dedicated iNtelligent iNfrastructure venture capital fund focused on the intersection of sensors & software and large industrial markets - some are calling it the Industrial Internet. We are in an era of profound transformation as the digital world is helping us maximize the efficiency of our most critical physical infrastructures.

Scott MacDonald

Whitney Rockley

Special thanks to Stephen Young, Associate at McRock, for his contribution on this report. Stephen is completing his MBA at Harvard and has worked as an advisor to the Ontario Minister of Transportation and Infrastructure and as a consultant at McKinsey, with a focus on infrastructure and energy.

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http://mobithinking.com/mobile-marketing-tools/latest-mobile-stats/e#endofpaidapps http://mobithinking.com/mobile-marketing-tools/latest-mobile-stats/a#subscribers (Canalys Feb 2013) http://mobithinking.com/mobile-marketing-tools/latest-mobile-stats/a#subscribers (Informa) http://blog.flurry.com/?Tag=smartphone (Flurry Analytics) http://www.cisco.com/en/US/solutions/collateral/ns341/ns525/ns537/ns705/ns827/white_paper_c11520862.html 54% of developers based in US (based on WSJ article: http://blogs.wsj.com/digits/2013/03/11/the-surprisingnumbers-behind-apps/ ) and 155k developers in US (2011, based on TechNet report: http://www.technet.org/wp-content/uploads/2012/02/TechNet-App-Economy-Jobs-Study.pdf ) http://blogs.wsj.com/digits/2013/03/11/the-surprising-numbers-behind-apps/ GigaOMPro Report: “A demographic and business model analysis of today’s app developer” VisionMobile Developer Economics 2013 Report http://www.canalys.com/newsroom/top-25-us-developers-account-half-app-revenue Distimo (January 2013), http://blogs.wsj.com/digits/2013/03/11/the-surprising-numbers-behind-apps/ GigaOMPro Survey http://bhc3.com/2010/03/17/the-two-year-lag-from-web-2-0-to-enterprise-2-0/ http://www.bloomberg.com/news/2012-12-06/siemens-pushes-industrial-software-with-purchases-to-liftprofit.html http://www.elp.com/articles/powergrid_international/print/volume-16/issue-2/features/the-state-ofscada.html Remarks by Charles Edwards, Deputy Inspector General of the Department of Homeland Security (DHS), briefing to the House Subcommittee on Cybersecurity and Infrastructure Protection and Security Technologies Wikibon Report, 2013

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