BRIEF ANALYSIS ON PROFITS ALLOCATION

OF IOT INDUSTRY CHAIN

Sun Qin and Lu xi-yan

Beijing Jiaotong University, Jiaoda East street, Haidian District, Beijing, China

Keywords: Internet of Things, Industry Chain, profits Allocation, Shapley value.

Abstract: The development of Internet of Things (IOT) is in its infancy in China, many key technologies and core

problems of the industry chain are not resolved, including how to allocate profits of companies on the

industry chain to promote the development of the whole industry is important. This paper analyzes the IOT

industry chain under the model dominated by Chinese Telecom Operator, and put forward the basic

principles of the benefits distribution and proposes own view on the whole industry chain in the distribution

of interests of all parties by using the Shapley-value model.

1 INTRODUCTION

The "Internet of things" is going popular in China,

many areas with government support, strongly build

industrial park of IOT, however, the domestic

research on the Internet of Things is still in the

initial stage, most researches like all business areas

in Chinese market have the problem of "important

hardware, less software", as the situation is often a

talk about IOT is the sensor, chip, RFID,

communications modules and other technologies,

and the researches on development of industry and

industry chain as a whole are very few. Therefore, a

full understanding of the structure of IOT industry

chain, coordinating upstream and downstream

business activities in industry chain, potential

customers of the classification, definition, needs

analysis as the core, diversification of production,

personalized information products, to expand the

services market , to bring more revenue for the

members of the industry chain than the previous

collaboration, those are significant.

To maintain sound and stable industrial chain, the

distribution of benefits is the key, if the distribution

of benefits on the industry chain is not fair; it will

affect the enthusiasm of cooperation and partnership

and could even lead to failure. Thus, in the initial

stage of IOT in China, we should adhere to the

principle of fair and equitable, considering the

investment of core business (such as telecom

operators, system operators) in the industrial chain

as well as to take the risks, to establish a rational

profit distribution mechanism , balanced the interests

of members of the industrial chain business , so that

the members can fully share the incremental benefit

of the industry chain, stabilizing relations of

cooperation, optimize the industrial chain.

2 INTERNET OF THINGS

INDUSTRY CHAIN

2.1 Definition

The paper "Internet of Things" is called the third

wave of the world information industry, following

the computer and the Internet. Early in 1999 China

put forward the "Internet of Things" concept, but

instead it was called sensor network is not called

"Internet of Things." November 27, 2005, in Tunis

Summit on the Information Society, International

Telecommunication Union (ITU) released the "ITU

Internet Reports 2005: Internet of Things", formally

proposed the concept of IOT. Internet of Things is

based on the computer, the use of RFID, wireless

data communications technology, to construct

internet of things covered everything in the world. In

this network, the Goods (commodities), and between

objects, people and goods can all "communicate"

with each other. In actually it uses radio frequency

identification (RFID) technology, through the

computer internet realized goods (products) of the

automatic identification and interconnection and

165

Qin S. and xi-yan L..

BRIEF ANALYSIS ON PROFITS ALLOCATION OF IOT INDUSTRY CHAIN.

DOI: 10.5220/0003549001650169

In Proceedings of the 13th International Conference on Enterprise Information Systems (ICEIS-2011), pages 165-169

ISBN: 978-989-8425-56-0

 2011 SCITEPRESS (Science and Technology Publications, Lda.)

Perception

Information

transport

Processing

Users

sharing of information.

Industry chain is a kind of vertical Strategic

alliance relational chain, in which the relevant

enterprises in different industries products,

technology and capital as the link with the value

added in a certain geographic area. Different

scholars give a different definition of different chain,

but one thing is consistent point of view, that within

the specific industry chain, in all aspects of the

industrial chain the close alliance and collaborative

relationship, and midstream and downstream

industry links, even the entire life cycle, are

ultimately designed to meet consumer demands.

IOT in their own development, led the

microelectronics, sensing devices, automatic control,

machine intelligence, intermediary services, systems

integration and a series of sustainable development

of related industries, bringing huge industry cluster

effect, and form a unique IOT chain. IOT chain

refers to the economic activities of IOT, based on

the inherent economic and technological relations,

the relevant enterprises linked together, end-to-end

forming the interlocking chain structure. The

formation is not only to make his related companies

value added, the value of industry chain is greater

than the overall value of various enterprises, but also

make things a sustainable development.

In short, the formation of the industrial chain of

IOT, their value added, can be able to achieve the

purpose of "win-win" and sharing risk.

2.2 Structure and Relationship

of IOT Industrial Chain

IOT are divided into three components: perception

layer (providers of sensor information or services

that base on sensor information), transport layer

(intermediates who provide the market platform to

connect providers and customers), application layer

(consumers querying information).However, the

division of the industrial chain of IOT does not

correspond to them. The participants are the sensor

equipment suppliers, sensor information providers,

content providers, system integrators, network

operators, terminal providers, users and so on.

Among them the telecommunications network

operators have the source of valuable customers and

operational support platform, then become the core

of the industrial chain.

IOT needs a broad network of industry

applications, but the development of industries are

not balanced, as a whole, IOT industry in china is

still at an early stage, technologies, standards,

products, and market are all not mature, there are

Value‐added

Information

processing

Value‐added

RawMaterial

Of

A B C

Figure 1: Structure diagram of IOT industry chain. A

stands for sensor supplier; B stands for network operator;

C is for system integrator.

many problems in the Internet of things industry

chain, one of them is that profits distribution of the

members affects the stability and improvement of

the industrial chain, and restricts the creation and

increase of the overall value in the industrial chain.

The following section will specifically discuss the

content of the interests distribution of the industry

chain.

3 THE RELATIVES

OF BENEFITS DISTRIBUTION

IN IOT INDUSTRY CHAIN

3.1 The Theoretical Basis of the

Benefits Distribution

Enterprises stakeholder theory referred to as

"stakeholder theory", the theory holds that every

enterprise can not develop without the input and

involvement of various stakeholders. In the search

for their own interest, other stakeholders' interests

could also be taken into account. In the chain, every

enterprise contributes their core competence to the

collection of information of products, contents,

services and so on, and links together to achieve

resource sharing, risk sharing, control the market

demand and aims at "win-win".

3.2 Interests Allocation Relations

among the IOT Industry Chain

Enterprises in the industrial chain stays in interest

alliance, mutual influence, mutual development,

interdependence, among them there are highly

dependent on the needs of the chain, through

information products, technologies or services to

associate the enterprises. Companies (network

ICEIS 2011 - 13th International Conference on Enterprise Information Systems

166

operators, system integrators, etc.) in the

downstream industry chain, only a few, basically

have a monopoly. For there are a lot of similar

companies, suppliers are in the fierce competition,

the product demands of upstream and downstream

enterprises are very important for suppliers, if not

demands for its products, supplier may be closed,

while the information products of suppliers are also

very important to downstream enterprises, and are

the existence foundation of the market.

In industry chain enterprises are independent

stakeholders, the distribution of benefits between

them need the price of intermediate information

product flowing on in the chain. Sales revenue of

perception layer is the cost of the downstream

businesses, the former companies would want

intermediate products to have the higher price, the

better will be. The latter is the reverse, which wants

the prices as low as possible; there is a game

relationship between them.

3.3 The Principles of Benefit

Distribution in IOT Industry Chain

In the industry chain of IOT, it is known that the link

of network operators is more mature, whose

advantage lie in operations support platform and

client resources, can act as the organizer of the

industrial chain, IOT is providing a turning point in

the development of network operators, they no

longer satisfy with the information plumber's role,

using their own advantage actively to improve and

perfect the industry chain. Now we mainly talk

about some principles of the benefits distribution

under the network operator-led model in IOT

industrial chain.

* Equality and Justice

Equality and justice are the basic principles of the

benefits distribution of IOT industry chain. The

management equity theory tells us that enterprises in

the chain not only concern about the interest

increase of their own, but also concern about the

benefits increment of the relatives, in order to

determine the reasonableness of their own interests

acquired. It greatly affects the basis of stability in

the entire industry chain. As the core business,

network operators should regulate the interests-flow

reasonably in the chain, avoiding too little interests

for sensor suppliers, frustrating the enthusiasm of

suppliers, then affecting the fundamental things of

the formation of IOT.

* Incentives for Suppliers

It is necessary to establish incentives for information

suppliers. At present it is in its infancy for IOT

development, industrial chain links are not perfect,

there are various key technical issues, For example,

and the sensor ports are not unified in the phase of

WSN. For that it will need to pour into many funds

and undertake high risk in developing core

technologies, generally suppliers can not afford, and

require the support and guidance of network

operators.

* Initial Price must be Low

The key problem of benefits distribution is about

pricing intermediate product, which mainly divided

into three categories: the negotiated transfer pricing,

the market transfer pricing and the cost of transfer

pricing. The pricing of Information products is

different from that of traditional commodities; the

pricing based on fixed costs is not established.

Because of network effects, customers making

access to the market of IOT will become more, and

more information products used, greater the value of

the product will be, then lower the cost. At one

stage, information services may even be free and

available to all consumers. When at low prices, the

value of the product has to be increased, to attract

more consumers to join and expand the market of

IOT, and then create more value in the whole

industry chain.

4 MODEL FOR THE

DISTRIBUTION OF BENEFITS

IN IOT INDUSTRY CHAIN

The enterprises on the chain have a win-win

cooperation relationship; their problem is essentially

a matter of cooperative game interests’ distribution.

This paper will carry out a study into benefits

distribution of the participants in the chain with

Shapley- value, then to establish the model of

benefits distribution.

In game theory, Shapley -value model was

presented by Shapley In 1953, describes one

approach to the fair allocation of gains obtained by

cooperation among many actors, and has wide

application prospects in cost distribution for many

participants. The basic premise is as follows: a

coalition of actors cooperates, and obtains a certain

overall gain from that cooperation. When people

have non-antagonistic activity of the interests, the

cooperation does not cause the increase in the

number of benefit reduction. For example, a piece of

BRIEF ANALYSIS ON PROFITS ALLOCATION OF IOT INDUSTRY CHAIN

167

cake, more big, if add more people, although less

share, but there is an increase in the cake.

The cooperation of all n individuals should bring

the greatest benefits, in a cooperative game among

the enterprises; each enterprise shall deserve their

share. Since some participants may contribute more

to the coalition than others, the question arises how

to distribute fairly the gains among the participants.

Or phrased differently: how important is each player

to the overall operation, and what payoff can they

reasonably expect?

We start out with a set I (of n players), S (S is

disjoint subsets of I and it is super additive.) and a

function V, that goes from subsets of players to

real’s and is called a worth (or value) function, with

the properties.

v(Φ)＝0(1)

v(S1



S2)≥v(s1)+v(s2),s1∩s2=

(2)

The interpretation of the function v is as follows:

if S is a coalition of players which agree to

cooperate, then v(S) describes the total expected

gain from this cooperation, independent of what the

actors outside of S do. The super additivity condition

(second property) describes the fact that

collaboration can only increase the benefits but

never hurt in a cooperative game.



()

niIvx

,...2,1,

∑

(3)

()

niivx

,...2,1, =≥

(4)

Where:

is the share of i player from the

maximum benefit of the cooperation v (I), clearly,

the successful cooperation must meet the above

requirements. The function (3) is called collective

rationality conditions; the sum of all the players'

value should equal the maximum available from the

game.

v ( I) must be splitting. Otherwise the players

will not agree. Also, the distribution of the total can

not exceed total benefits, or distribution would be a

"blank check”. These two cases both meet this

function:

()

Ivx

≤

∑

Function (4) is called the individual rationality

conditions. We can understand that if player obtains

less in cooperation than it did alone, obviously, it

will not participate in the IOT industry chain.

When

Isi ⊂∈

() {}()

isvsv

−

is set up ,

Then

()

0=v

(5)

This means that no contribution, no benefits.

is disjoint subsets of I and contains player i.

(

)

is the amount that player i gets if the gain

function v is being used. The Shapley-value is given

as follows:

(

)

(

)

(

)

(

)

[

]

niisvsvswv

,...,2,1,\ =−=

∑

∈

(6)

()

(

)

(

)

!1!

ssn

−−

(7)

is the number of players in the subset s. v(s)

is the amount of utility that the players of coalition s

can obtain from the game.

()

isv \

means the gains

of coalition s without i players.

()

is weighted

gene.

The distribution of benefits based on Shapley-

value model is neither the average distribution, but

also different from the distribution of proportion of

investment costs, but on the importance to be

assigned a distribution produced in the process of

the overall profits in the IOT industry chain. In

comparison, the method has certain rationality and

superiority. However, this method also has some

limitations in considering the relationship among

enterprises, whose affection is not deep enough.

5 EXAMPLE ANALYSIS

Consider an industry chain of IOT, forming by three

companies A, B, C, A is provider for the sensor, B is

the telecom operator, C is the system service

provider.

Let A, B and C have 5, 10, 6 million RMB.

The coalitions

{

}

30,, =CBA

million RMB;

{}

20, =BA

million RMB;

{

}

15, =CA

million RMB;

{}

22, =CB

million RMB.

If the total profits divided equally, each firm

gains 10 million. Clearly, this method can not

inspire the parties, especially for B Company, the

interest did not increase, therefore, may be unwilling

to join the industrial chain. How to allocate 30

million reasonable? The Shapley value method will

give us the answer.

We say that the coalitions

{}

CBA ,,

is I= {1，2，

3},

And note independent business profit v (1) = 5, v

ICEIS 2011 - 13th International Conference on Enterprise Information Systems

168

(2) = 10, v (3) = 6. The value of a coalition S = {1，

1 U 2，1 U 3，1 U 2 U 3} is the sum of parties for

the efficient allocation when the set of participating

agents must include 1.From the above, we can know

v (1 U 2) = 20, v (1 U 3) = 15, v (2 U 3) = 22, v (1 U

2 U 3) = 30. Grinding through the Shapley value

calculation (see the third section), the value of the B

enterprise distribution of benefits is calculated as

follows:

Table 1: Shapley- value calculated.

{}

2,1

{}

3,2

{

}

3,2,1

v(s) 10 20 22 30

()

2/sv

0 5 6 15

() ( )

2/svsv −

10 15 16 15

()

() ( )

[]

2/svsvsw −

10/3 5/2 8/3 5

(

)

()

(

)

(

)

[]

5.132\

=−=

∑

∈

svsvswv

Similarly we

can easily get

()

=7.5 million,

()

=9 million.

Finally, we get the allocations of A, B, C which add

up to the entire 30 million.

The share of three enterprises is greater than the

interests of their individual production or greater

than any gain from the two co-production, that is

,greater than the overall effectiveness of their

production and operation of a gain, which is not only

the basis of stability of industry chain, but also the

reason why we should establish the industry chain of

IOT.

We set the initial data by analyzing the

importance and risks taken by the players and other

factors. With the development of the industrial

chain, the distribution of benefits will gradually be

clear and data oriented. In short, the construction of

the industrial chain of IOT is very important, and the

reasonable profits allocation is the foundation of the

development of the chain.

6 CONCLUSIONS

This paper analyzes the relationship and interaction

among various enterprises in the IOT industrial

chain. In order to promote the collective interests

and to resolve the distribution of benefits in the

industry chain, product pricing from the middle of a

detailed analysis of the distribution relationship

between the interests of enterprises then establish the

distribution of benefits with Shapley-value model,

further analysis positive relationship between

distribution benefits and contribution of participants

in industry chain. Besides, the distribution of

benefits should follow the principles as put forward,

there is some reference significance.

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