Equipment as a Service: An emerging business model

published on 20 December 2024 | reading time approx. 3 minutes

Companies that use Equipment-as-a-Service (EaaS) business models are becoming an increasingly attractive investment opportunity. These companies' loyal customer base appreciates the advantages of highly scalable access to the latest technology without the need for large investments, thus generatin predictable and recurring revenue streams.Whilst the business model has been utilised in some form for decades, recent advances in Internet of Things (IoT), 5G, cloud computing, and big data analytics have made it easier to implement and manage. These technologies enable real-time monitoring, predictive maintenance, and efficient equipment management, significantly enhancing the value proposition of EaaS.

A Comparison with Operating Leases

EaaS and operating leases both replace large, infrequent capital expenditures with regular monthly payments. However, EaaS focuses more on service and flexibility, often bundling equipment with software for performance analytics, predictive maintenance, and remote monitoring. EaaS agreements also offer more adaptable terms to meet specific customer needs, making them more attractive to businesses looking for tailored solutions.

An age-old concept, only recently been unleashed

One of the earliest adoptions of companies using EaaS-like models was Rolls-Royce in the 1960s when they introduced the Power by the Hour model, allowing airlines to pay for jet engines based on the number of flight hours, rather than purchasing engines outright. This demonstrates the key benefit for customers – financial flexibility through reducing large one-off capital expenditure in place of predictable, regular, and less capital-intensive operational expenditure.

Adoption of the business model was limited until the turn of the century. The advent of telematics and the IoT enabled remote, real-time data collection, allowing service providers to improve service quality and reduce costs through performance optimisation and predictive maintenance schedules.

Performance optimisation and cost efficiencies continued to improve with the widespread adoption of cloud-based and data analytics solutions, democratising access to powerful, highly scalable processing power and thus more sophisticated machine learning algorithms and, more recently, AI-based solutions.

Technological advancements also led EaaS providers to combine their service offering with sophisticated software, allowing for more advanced applications, such as next-generation robotics, and broadening the range of applicable sectors from manufacturing and agriculture through to medical imaging and diagnostics and precision manufacturing.

Investment Thesis

The EaaS model ticks all the boxes that, in theory, make a compelling investment opportunity.

The EaaS market is projected to grow substantially, 10-15% per annum through to 2030, driven by demand for low up-front cost access to the latest technology and advances in technology and engineering broadening the scope of addressable sectors.

Recurring subscription-based revenue streams and healthy margins provide a stable growth platform and certainty over short-term future cash generation. Value-added services like maintenance and upgrades boost customer loyalty and retention.

Many EaaS providers offer value-added services such as maintenance, upgrades, and improved data analytics functionality. These value-added services represent potential opportunities to generate incremental revenue growth and support the development of strong customer loyalty and retention rates.

Frequently, the limiting growth factor for owner-managed EaaS businesses is access to sufficient capital to invest in equipment manufacturing and sales and marketing personnel. Appropriate investment, therefore, represents an opportunity to unlock the growth potential of such businesses that would otherwise be unrealised.

Factors to consider

EaaS providers often face significant initial expenses, including research and development to create the initial intellectual property during the start-up phase, ongoing product development, and the continuous manufacturing costs of the equipment supplied to customers.

Despite these challenges, strategic debt arrangements from a potential acquirer can cover these costs until the revenue stream becomes self-sustaining. Adopting a circular economy model by recycling equipment at the end of a customer contract can further reduce costs. This approach not only lowers ongoing manufacturing expenses but also enhances the provider’s and end-customer’s ESG credentials.

Other considerations include ongoing maintenance and service duties, technological dependence, customer retention issues, and market competition. However, these are also faced by the traditional leasing industry. A tech-enabled EaaS model is better positioned to address these than the traditional leasing model as it can offer remote monitoring and upgrades which also enhances customer satisfaction through more efficient predictive maintenance and the ability to maintain a state-of-the-art offering.

EaaS: Conclusion

The Equipment-as-a-Service (EaaS) business model presents a compelling investment opportunity, combining the benefits of recurring revenue streams, technological advancements, and enhanced customer satisfaction. While it shares some risks with traditional leasing models, EaaS offers unique advantages through its focus on service provision, flexibility, and the integration of advanced technologies. By addressing initial cost challenges with strategic debt structures and embracing circular economy practices, EaaS providers can achieve sustainable growth and strengthen their ESG credentials.

As the market continues to expand, driven by increasing demand for cost-effective and cutting-edge solutions, EaaS stands poised to revolutionise various industries and deliver significant value to providers, customers and investors.