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The “internet of things”: disrupting the disruptors?

Malcolm Dowden, Consultant at Charles Russell Speechlys, was a key speaker at the RICS Telecoms conference in November 2015, on the topic of the regulatory and commercial challenges arising from the Internet of Things.

As an expert on the topic, Malcolm updated the delegates on the challenges from the perspective of the regulators and contract managers and suggested new business structures. A summary of key points addressed can be found in this article.

Malcolm will be presenting a workshop on a similar topic in Singapore on 15 December for Thomson Reuters and Asian Legal Business. 

The “internet of things” (IoT) already exists, is growing rapidly, and is beginning to have a significant effect on business structures, commercial contracts and contract management in all sectors.

IoT connects devices and objects, using low power sensors and transmitters to gather and send information about those objects and devices and, crucially, about their users. IOT data can include anything from physical location to environmental conditions, from stock levels to price comparison, from energy consumption to security status.

It can also gather and transmit information about humans who interact with connected devices, including the rapidly developing range of wearable technologies designed for healthcare applications.

New challenges for regulators and IoT developers?

Research conducted by Cisco predicts up to 50 billion connected devices by 2020, up from approximately 18 billion in 2015.

The pace and scale of IoT adoption clearly depends on viable and secure communications, and is likely to require governments and electronic communications regulators to rethink their approach to the management of spectrum and of data.

The prevailing approach to spectrum management involves the auctioning of frequencies, providing licensed operators with a government-backed monopoly over the use of those frequencies. That approach has provided the economic underpinning for developments in mobile telephony and data services in recent decades.

Yet with Cisco’s research indicating that “traditional” mobile network operators will carry only up to 20% of IoT connections, it is clear that the regulatory model must change.

In the UK, Ofcom is making available for IoT development a range of unlicensed frequencies, including those vacated as part of the switchover from analogue to digital tv – a process currently underway in Singapore.

The use of unlicensed spectrum alongside expensively-acquired licenced frequencies creates significant new challenges as a rapidly expanding universe of IoT devices, often characterised by “frequency hopping” to find available channels, must co-exist with licensed networks and services.

In some jurisdictions, licensed operators are demanding a “kill switch” mechanism, under which any interference from IoT devices will be resolved by remotely disabling those devices to preserve quality of service by the licensed operator. That logic is sound: licensed operators carry calls and data not only for businesses and individuals, but also for life-saving emergency services.

However, the sensitivity and calibration of any “kill switch” mechanism will be a crucial issue for IoT developers, with business and investment cases fatally undermined if the balance lies too far in favour of licensed operators.

Faced with this problem, the UK’s Ofcom has opted as a temporary measure to establish “guard bands” which must remain unused as a barrier between licensed and unlicensed spectrum.

How far, and how fast, that issue is resolved globally will be central to the further development and roll-out of IoT.

New challenges for contract managers?

IoT promises to provide vastly more data, at vastly increased speeds. As well as generating concerns over data handling and security, it is likely to revolutionise contractual relationships, first allowing and then compelling a far more dynamic approach to contract formation and termination, ordering, price and supplier comparison.

The potential of IoT is already becoming apparent in logistics and shipping.

Equipped with an IoT-enabled tag, an individual shipping container can sense and transmit a wide range of data. GPS data can establish in real-time its location and direction of travel, as well as conditions such as temperature and humidity that can provide a strong indication of the conditions within the container.

Armed with that data, a contract manager might adopt dynamic ordering, conforming or cancelling orders for goods depending on key metrics while those goods are in transit.

Buyers might well enter into multiple contracts, accentuating competition between suppliers and moving ever-closer towards truly “just in time” contractual relationships.

Faced with those changes, contract law, contractual structures and drafting must adapt. Currently, even the most high-value and time-sensitive contracts tend to include a significant degree of fairly basic human intervention.

Orders forming part of a long-term supply contract often require written notice. Variation or termination also require written notice.

Research published annually by the International Association of Contract and Commercial Management (IACCM) shows that disputes often relate to those mechanical and “boilerplate” elements of a contract, rather than to the more extensively negotiated commercial terms.

Commonly-disputed issues include the validity of notices and whether a customer’s conduct amounts to a waiver of any claim where a supplier is in breach of an obligation – for example, where delivery is late.

In those cases, much depends on how the recipient of a notice or the customer behaves, and that behaviour is often judged by reference to the information available at the time. As IoT generates and transmits more information, and as the associated data analytics processes become more sensitive and timely, the need for rapid response must increase.

The ability to object to a notice, or to cancel a contract for non-performance or late-performance, might well become a matter of minutes rather than days.

Indeed, as with financial markets, it is entirely possible that contractual decisions will be driven by algorithms rather than direct human intervention. The result may well be increased volatility, creating opportunity for some and disputes for others.

Certainly, the demands on contract managers and contract management systems will be amplified.

New business structures?

IoT is also driving the creation of new joint ventures and business structures. Many IoT developers are start-ups, often connected with universities commercial spin-out or knowledge transfer programmes.

Others reflect new ventures by experienced hands in the technology sector, moving into a vibrant new area of development.

Many of those undertakings present alluring targets for takeover – witness Huawei’s September 2014 acquisition of IoT pioneers Neul.

Others, though, are moving in a radically different direction, converging on newly created and highly collaborative IoT platforms while retaining their independence.

The result is likely to be a degree of disruption and “creative destruction” sufficient to thrill the most devoted followers of Schumpeter.

The IoT certainly meets the criteria: it is undoubtedly a "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one."