Profits Distribution of Operators Led Internet of Things Industrial Value

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1 Profits Distribution of Operators Led Internet of Things Industrial Value Chain Based on Game Theory School of Economics and Management, Beijing Jiaotong University,Beijing, 00044, China Abstract The paper summarized Significance and principles of the distribution of benefits of Internet of Things and analyzed the different role of leader and other subsidiary of the participants of value chain, then constructed the distribution of profits model of Internet of Things value chain led by the operators based on the game theory. By comparing the benefits between the operators led value chain and all participants on the equal status value chain, we show that total profits of value chain has an advantage when it is led by operators. Keywords: Internet of Things, Value Chain, Profits Distribution, Game Theory. Introduction The Internet of Things refers to uniquely identifiable objects (things) and their virtual representations in an Internet-like structure. The term Internet of Things was first used by Kevin Ashton in 999 []. The concept of the Internet of Things first became popular through the Auto-ID Center and related market analysts publications. Internet of Things (IoT) is an integrated part of Future Internet and could be defined as a dynamic global network infrastructure with self configuring capabilities based on standard and interoperable communication protocols where physical and virtual things have identities, physical attributes, and virtual personalities and use intelligent interfaces, and are seamlessly integrated into the information network. [] In the IoT, things are expected to become active participants in business, information and social processes where they are enabled to interact and communicate among themselves and with the environment by exchanging data and information sensed about the environment, while reacting autonomously to the real/physical world events and influencing it by running processes that trigger actions and create services with or without direct human intervention. Interfaces in the form of services facilitate interactions with these smart things over the Internet, query and change their state and any information associated with them, taking into account security and privacy issues. [3] Because of the Internet of Things enormous development and application prospects, many countries have taken it as an important national strategy. However, even with the governments strongly support, the industrial advantages of the Internet of Things has not been fully realized. The Internet of Things industry is still in its infancy, most of the studies focus on the separate player of the Internet of Things, research for the value chain as a whole is still in its infancy [4]. As global markets grow increasingly efficient, competition not only takes place between individual businesses, but between entire value chains collaboration.. The Internet of Things Industrial Value Chain and Its Leading player According to Porter's value chain theory, every enterprise is the joint of the value chain. From the perspective of the value, the industrial value chain could be defined as the activities cost chain during the process of economic activities related to the execution of the productive management and operation. Hence, the value chain of the Internet of Things is, without any doubt, the profit chain formed due to series of economic activities. The development of any industrial chain depend on the convergence and coordination of all members in the chain and reasonable distribution of benefits. There should have a dominant member to push the development of the whole industry at the right beginning. [5] Advances in information Sciences and Service Sciences(AISS) Volume4, Number3, Dec 0 doi: 0.456/AISS.vol4.issue3.7 55

2 .. The Model of Internet of Things Industrial Value Chain From the business perspective, the composition of the Industrial Value chain includes the (figure ): [6] () Terminal Equipment Provider In the Internet of Things industry, terminal equipment provider provides data acquisition and capture necessary equipment, the original carrier of information, including the provision of electronic tags, readers and related equipment, smart cards. The positioning of the terminal equipment provider is responsible for the manufacture of chips, sensors and other hardware devices. The profitability of the business of this participant is not stable, and more rely on technical means to reduce production costs, increasing the profits of an enterprise. The challenge to the terminal equipment provider is: the number of terminal equipment manufacturers is large, no uniform standard and specification, so the versatility of end product is a big problem. () Network Provider The Network Provider refers to the network service provider for data transmission and bearer of the Internet of Things. As in the introduction phase of the Internet of Things, it is not yet clear whether network provider services may be provided by the telecom operators or nominated by government. There is no intense competition in this field. (3) System Integrator The system integrator of the Internet of Things refers to the hardware and software integration for a solution to an integrated program based on business need. System integrators as both professionals in the field of business and application knowledge, but also system platform solution provider who is familiar with the matter networking equipment, system integrator plays a role as a bridge critical to value-added impact in the value chain. (4) Operation and Service Provider Operation and Service Provider, which located in the downstream of Internet of Things industry chain, is an important part of composition networking. Operator is an important bridge of the upstream business and customer connections to meet the size required for effective Internet of Things and mobility, plays a key role in the development to promote the Internet of Things. Operation and service Provider provides customers with authentication, authorization, billing and other functions. (5) Application Provider Application Provider provides application services and intelligent solutions to the end user of the Internet of Things based on business needs. Sensor/chip Manufacturers manufacturers, Network Providers providers System Integrators Network providers User Software/application developers Operators Figure The Composition of The Industrial Chain of IOT 56

3 In the business of the Internet of things within the industry, equipment suppliers, network providers, system integrators and operators have their own advantages. Equipment provider and networking business provide related hardware and devices, network providers, system integrators and application developers provide network access tools and software technical support. Operators and service providers provide top-level content and applications. At the beginning, they will try best to maximize their own profit, but with reasonable effective [7] [8] division of work and cooperate together, it will have the effect of +>> in the industry chain... Analysis of Internet of Things Industrial Value Chain As Internet of Things industry chain still in its infancy stage, it has some problems, the development of each member on the industry chain is imbalance. Also, there are differences in the order of obtaining profit and the future development space. And the leader of the industrial chain is not clear and external support is not good enough. The paper will give further and in-depth analysis about those issues to explore effective and reasonable solution. ()Lack of leading enterprise The development of any industrial chain must depend on the convergence and coordination of all members in the chain and reasonable distribution of benefits. There should have a dominant member to push the development of the whole industry at the right beginning. () Unbalance and weak coupling capability. This is mainly reflected in the RFID field. Low-frequency RFID technology is more mature while UHF and microwave RFID is in its initial stage. The key technologies such as chip, antenna and package and related equipments are controlled by some companies. The lack of the coupling capability has two reasons: no unified technical standard and lack of effective coordination and mechanism for rational distribution of benefits among members. (3) Lack of support from the external environment The relevant laws and regulations, security measures and public recognition are far from satisfaction to support the whole industrial chain..3. Leading Player of Internet of Things Industrial Value Chain:Operator The leading player of Industrial Value chain refers to the key player in a leading position and a driving role in the development of the industrial chain. In the process to maximize value for customers, leading player can help other sectors involved in market cooperation and competition. [9] According to the current industrial status of the Internet of Things, sensors / chip manufacturers have broad market prospects, and play a certain role in promoting the development of the networking industry. However, with the continuous development of the Internet of Things industry and power changes of chain enterprises, part of the value-added in the networking industry chain will gradually shift to the rear of the industrial chain, the leader will also change. Operators have following features: () Operators generally were very large and powerful enterprise and easy to get support from government, while prosperity of leading enterprise is inseparable from the support of the Government. () Compare with other parties of industrial chain, Operator had strong market competitiveness and comparative advantage. (3) Operator had close correlation of the industry in the chain, its aggregation effect can drive the development of the industry chain other enterprises. (4) Operator had a decisive resource, the decisive resource is the fundamental competitive advantages of the industrial chain. Businesses which have a decisive resource have a leading role in the development of the industry and occupy the dominance of the industry chain. According to the above analysis on the Internet of Things, Operators is can be selected to take the leading role in the industrial chain and can promote the industry alliance formed by the upstream and downstream cooperation. [0] 57

4 3.The Profit Distribution Model: Operators Led vs All Players on the Equal Status in the Value Chain 3.. Assumptions and Variables () The total income of Internet of Things Industrial Value chain is R, total profits is π () The efforts made by operators (A) and other players of the industrial chain (A) for the gains of Internet of Things, are recorded as, (3) The fixed remuneration to other players paid by operators is T (4) The profit sharing ratio between Aand A in the total income of the Internet of things industry chain, are recorded as -S and S. (5) The fixed and variable costs of Aand A recorded as C( ) and C( ), fixed cost coefficients are,,variable cost coefficients are α, β. The further assumption is: variable costs of A and A and total income of Internet of Things Industrial Value chain are quadratic function of the level of effort, and plus all the functional coefficient of 0.5 is for the computation of simple convenience. From the above assumption of total income R and profits of Internet of things industry chain π can be expressed as: R( a, a) = ( a + a) + ( a + a) p ( a, a) = R( a, a) - C( a ) - C( a) The profits of Aand A are: Q = ( - s). R -T - C( a ) Q = T + s. R - C( a) The variable costs of Aand A are: C( a ) = C + a C( a) = C + ba In the different development stages of industrial chain, Each party will choose different strategies for their own interests, then it will form different game behaviors, For the Operators they are more willing to choose the Stackelberg equilibrium, while for other members of the chain, they will choose the Nash equilibrium. 3.. The Game Model and Equilibrium Solutions Parties of the Internet of Things Industrial Value chain will choose different strategies in the competition for their own interest, it will form different game behaviors. This section will study two cases: sequence game of Operators led industry chain and game of all players on the equal status in the [] [] industry chain. 3.. The Profit Distribution Model: Operators Led Industry Chain According to the analysis of part, Operators will take a leading position and other members of the enterprise are the followers in the profit allocation process. In the game of Operators led industry chain, the leading operators can determine the proportion of the distribution of profits (-S) and maximize their own interests by adjusting efforts and actions, other players will decide their own level of effort according to the value determined, and the prerequisite is: the other members of the whole industry chain must be profitable and have the ability to determine their own efforts and actions, so as to pursue the interests of the maximization. When Operators and other members of the industry chain are in the same position, this dynamic game will result Nash equilibrium. [3] 58

5 The game process is: first of all operators and other members enterprise determine a common profit allocation proportion by the negotiation, then all participating members adopt appropriate strategies to pursue the maximization of their own profits. According to Stackelberg game backward induction method, the game should start from the second stage. Firstly, in order to get the profit maximization of other members of the industry chain, the function should be a convex function and derivative function equal to zero: [4] Q = s é( a + a) + ] - ba = 0 a ë Then: s( a + ) a = b - s Then it shows: to other members of the networking industry chain enterprises, the level of effort and its profit distribution ratio is a positive correlation coefficient and variable costs are negatively correlated. Secondly, Operators adjust their own efforts and the determination of S to pursue their own maximized interests according to the other members of the level of effort: ì Qa b ( - s)( a + ) = - a = 0 ï a ( b - í s) ï Qa b ( s)( a ) ( b s)( b a b a b s s ) = = 0 ï 3 î s ( b - s) From above equation, the optimal efforts of Operators deduced, then the optimal effort of other members of industrial chain is a and Profit sharing ratio s a. can be 3.. The Profit Distribution Model: All Players on the Equal Status in the Industry Chain As the other members competitiveness gradually strengthened, relationship between Operators and equipment manufacturers, software and application developers, system integrators will arise a series of corresponding changes, their negotiation abilities will be constantly enhanced and start to pursue equal position in the profit allocation process. [5] In the case of all players on the equal status in the industry chain, Operators and other member companies determine a common recognition of the profit sharing ratio by negotiation, then participating members pursue to maximize their own profits with the appropriate strategy. [6] Q a = ( - s) é( a + a) + ] - a = 0 a ë Q a = s é( a + a) + ] - ba = 0 a ë Then Optimal effort of Aand A are: ( - s) b a = ab - ( - s) b - sa sa a = ab - ( - s) b - sa Then, when the System Integrator and Operator are in static game, the optimal strategy, namely Nash equilibrium solution is: p p a p a = g + g = 0 s a s a s The profit sharing ratio of Operators is: b - - s = ( a - ) + ( b - ) The profit sharing ratio of other members is: 59

6 a - s = ( a - ) + ( b - ) a The only one Nash equilibrium is (, s, a ) The Data Simulation and Analysis In this section, simulation data will be used to compare efforts, the profit sharing ratio and total income of different game model. Assumption: () Both parties in the game are risk-neutral; () Fixed cost C of A =0., Cost coefficient of A: α=4; (3) Fixed cost C of A =0., Cost coefficient of A: β=; (4) Fixed remuneration to other players paid by operators T=0.0. Then by the above formula the following game data can be obtained (shown in table ): Table Profit Distribution simulation data and result a s a Q Q p Stackelberg(Operator s Led Industry Chain) Nash (All Players on the Equal Status) In the game of Operators led industry chain, profits of operators Q is greater than profits of other members Q (0.05>0.054); in the case of all players on the equal status in the industry chain, Q is greater than Q (0.53<0.857), the total profits of Internet of Things Industrial Value chain π is greater than π. From the above comparisons, it indicates that when the Operators obtain a dominant position in the Industrial Value chain, it will get more profit and total profit of whole industry will be greater than the case of all players on the equal status. For the Operators they are more willing to choose the Stackelberg equilibrium point, while for other members of the chain of Internet of things industry enterprises, they are more willing to choose the Nash equilibrium point. According to the data simulation and analysis, the industry chain total profit of operators led is greater than the case that members in the equal status of the overall profit. In the initial stage of development of the Internet of Things, Operators have the initiative in the distribution of benefits, Stackelberg equilibrium point will be achieved. With the growing maturity of the industry chain development of the Internet of Things, the networking industry chain of equipment manufacturers, software and application developers, system integrators and other enterprises negotiations constantly enhanced, equal status between the operators and other vendors will be taken at this time, it is Nash equilibrium. [7] 5. Conclusion As global markets grow increasingly efficient, competition no longer takes place between individual businesses, but between entire value chains. Collaboration through intelligent e-business networks will provide the competitive edge that enables all the participants in a value chain to prevail and grow. Collaboration requires individual participants to adopt simplified, standardized solutions based on common architectures and data models. [8] The paper is dedicated to the application of the game theory upon the quantitative model research of the Internet of Things industrial value chain. From the above analysis, the following conclusions can be drawn: () Determine the leader of the Internet of Things industrial chain. 60

7 The development of any industrial chain depends on the convergence and coordination of all members in the chain and reasonable distribution of benefits. There should have a dominant member to push the development of the whole industry at the right beginning. The leader of the industrial chain can not only strengthen the coupling capability between members in the industrial chain, but also improve the selection and mutation ability of the industrial chain when continuous improving. () Establish the reasonable mechanism for cooperation and competition The members can achieve co-evolution by exchange of information and complementary of resources. According to the data simulation and analysis, the industry chain total profit of operators led is greater than the case that members in the equal status of the overall profit. In the initial stage of development of the Internet of Things, Operators have the initiative in the distribution of benefits, Stackelberg equilibrium point will be achieved. With the growing maturity of the industry chain development of the Internet of Things, the networking industry chain of equipment manufacturers, software and application developers, system integrators and other enterprises negotiations constantly enhanced, equal status between the operators and other vendors will be taken at this time, it is Nash equilibrium. The conclusions of the study are based on two participants of the industrial chain and not cover all participants, while the real case was often a number of industrial participants will interact in a complex network. These issues means there is further research requirements on the profit distribution of Internet of Things Industrial Value chain. Acknowledgements. This Research was supported by the Fundamental Research Funds for the Beijing Jiaotong University under grant No. 0JBM049. Reference [] Kevin Ashton, That 'Internet of Things' Thing. RFID Journal, July 009: - [] The Cluster of European Research Projects on the Internet of Things, Internet of Things Strategic Research Roadmap, 8 April 0:6-7 [3] Wei Liu, Hongmei Wang, Qing Xiao, Jian Yang, the Concept Analysis of the Internet-of-Things [J]. Telecommunications Technology,00 (): 5-8. [4] Du Jin, Application of "Internet of Things" in Electronic Commerce, International Journal of Digital Content Technology and its Applications, 0.6(8): ~ 30. [5] Yao Weixin, Atomic models of closed-loop supply chain in e-business environment. International Journal of Business Performance Management, 006, 8():4-35. [6] Debo L., Savaskan C, Wassenhove L. N, Coordination in closed-loop supply chains. Quantitative Approaches to Reverse Logistics, Springer, 003: chapter. [7] XinqinLi,Li Shiming, Lanyong, Structure and Types Analysis on Industrial Chain[J].Journal of University of Electronic (Social Sciences Edition), 004, 4(3): 6 8. [8] Murayama, T, Hatakenaka, S, Hashimoto, M.Simulation-based evaluation of forward and reverse supply chain. Transactions of the Japan Society of Mechanical Engineers (PartC), 006, 7(8): [9] Huang Haiping, Wang Ruchuan, Qin Xiaolin, Sun Lijuan, Jin Yichao. A Novel Internet of Things Paradigm for Smart Home Using Agent-Based Solution with Hybrid Intelligence. Journal of Digital Content Technology and its Applications, 0, 5(0): 36-5 [0] Andrew Cox, Power, value and supply chain management, Supply Chain Management, 999,4(4): [] Wei Jinshi, Lan Hongjie. Establishing Food Traceability System based on Game Theory: from the Perspective of Retailers. Advances in Information Sciences and Service Sciences, 0, 3(6): [] Changbing Jiang,, Chunhua Ju, An Empirical Research on Relativity between the Allocation of Logistics Resources and the Economy, Advances in Information Sciences and Service Sciences, 0,4(4):-7. [3] Tayur S, Magazin M, Ganeshan. Quantitative Models for Supply Chain Management. Boston, MA, Kluwer Academic Publishers, 999:

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