A lot has been said about General Electric Company's (NYSE:GE) industrial Internet, but a lot less about how it's likely to favorably change the operating metrics of the company. Investors' primary focus is usually on a company's bottom line and how much they are paying for it.
With this in mind, let's take a look at five ways the industrial Internet could make General Electric a more profitable company.
Industrial Internet and productivity
At heart, the industrial Internet is the embedding of Internet-enabled devices within hardware solutions. The data created by these devices enables the creation of insights that can be used to maximize productivity. A practical example of how this works involves the usage of sensors on an industrial gas turbine in order to monitor when the turbine might need maintenance or repair -- something that helps make turbines work more efficiently.
The example above focuses on the customer; however, consider that General Electric is also a major user of the industrial Internet in its own operations. As such, the company can increase productivity and cut costs. Indeed, at the recent Minds + Machines event, CEO Jeff Immelt outlined how the company had generated "$400 million of internal productivity on our analytics," which he expected to grow to $1 billion.
Moreover, Immelt claimed that, thanks to utilizing the industrial Internet, the new H-class industrial gas turbine was "designed in half the time" that "it used to take." Clearly, the potential for cost savings is significant -- good news for the bottom line.
High value add
The embedding of devices and software in hardware also implies the selling of higher-value-added solutions. For example, instead of selling a mechanical wind turbine, General Electric can sell wind turbines with sensors that constantly monitor and adjust the turbine's position so as to maximize efficiency.
This means General Electric is selling a lot more than just hardware into its customer base. Doing this creates the opportunity to expand sales without any significant increase in sales and marketing expenses -- a positive scenario that should result in margin expansion as well as sales increases.
Another aspect of the increased interoperability that the industrial Internet brings is the potential for an increase in customer retention. So for example, if a customer has gotten used to the productivity benefits of using General Electric's hardware in conjunction with its analytics platform, then it stands to reason that he will be incentivized to continue buying hardware from General Electric in future rather than switch to a rival.
The benefits to the industrial giant's bottom line could be significant because, with all other things the same, any increase in the retention ratio for a company usually increases the lifetime value of the customer. In other words, the long-term value in making an initial sale is likely to go up with the industrial Internet.
As detailed previously, General Electric makes the bulk of its industrial profit from its services rather than hardware. Clearly, if the usage of intelligent sensors will help companies better monitor hardware performance and service requirements, then General Electric is likely to see the benefit of increased service revenue.
It's a win-win scenario. The customer gets to utilize assets efficiently thanks to servicing them (gas turbines, aircraft engines, locomotives, etc.) at the right time, and General Electric benefits from its stream of revenue from servicing. Moreover, since its services revenue tends to be higher-margin, the industrial Internet could result in increased operating margin for the company.
Predix and big data analytics
Immelt made a big play on discussing the potential for the company's Predix Cloud offering. In a nutshell, it's a platform-as-a-service, or PaaS, cloud solution designed to help customers capture and analyze industrial data. The company plans to start moving its software and analytics to the Predix Cloud in the last quarter of 2015.
One of the major benefits of getting customers onto the Predix platform is helping secure that customer -- benefiting General Electric in the long term. Indeed, for similar industry-specific reasons, many of the leading software companies like Oracle and Microsoft are selling PaaS solutions.
Moreover, General Electric's management believes Predix will "drive the next phase of growth for the Industrial Internet and enable developers to rapidly create, deploy and manage applications and services for industry." The more applications and services designed on Predix, the more customers will want to use the platform.
All told, the industrial Internet is exciting conceptually, but it also has the potential to help increase sales and margin at General Electric. In addition, retaining customers and increasing services revenue should be easier with the Predix platform, and the company can utilize the industrial Internet to increase productivity in its own operations.
In short, the company's operational metrics look set to benefit in the long term from the initiative, and investors should start thinking of General Electric as being partly a software company, too.