Digi sees a future in linking machines

Digi International has made money for 39 straight quarters -- so, of course, it's reinventing itself.

The Minnetonka-based company sells electronic hardware used to connect machines. While that sounds a lot like the "DigiBoard" serial port products of the distant past, Digi today bills itself as "Your M2M Solutions Expert."

Unpack that tag line -- and Digi's use of "Solutions" tells you what has changed.

For years, Digi was a product company, in the business of selling products primarily through distributors and mostly to engineering managers at its customers. That's who made Digi products into a solution.

Now Digi is ramping up efforts to sell an end-to-end solution, working closely with end users to make the data coming from machines something they can actually use.

"M2M," the other part of that tag line, is shorthand for "machine to machine," and that is one big opportunity. It's the technology that takes data from something as commonplace as a convenience store air pump and then routes it through a network and into the hands of a business decisionmaker.

Last week General Electric Co. made a splash by releasing a white paper predicting massive productivity gains in the coming "Industrial Internet" of connecting to spinning jet engines or a GE freezer. GE's was just one of a number of recent papers to point to a booming potential market for M2M products and services to create this "Internet of things."

"Yes, it's a company in the middle of a transition, but a transition that began about a decade ago," said Tavis McCourt, an analyst with Raymond James & Associates. "It is a very slow and deliberate transition. They have not gotten rid of good cash flow businesses or overinvested in growth businesses."

Joe Dunsmore came to the company as CEO in October 1999, and the story he told was one of first stabilizing the company and then looking for growth within Digi's traditional distribution channels.

In the middle of the last decade, Digi began its move to wireless with a product approach called "drop in networking," devices used to connect where wires were impractical. This initiative was a bit of a test, Dunsmore said, as "we fundamentally did not know where the adoption [of this technology] would take."

But the emerging market of M2M was becoming clearer, and McCourt said this whole time Digi was generating cash flow from its core business to pay for the "very broad-based set of technology assets" needed for a broader M2M strategy, like buying a wireless technology design shop in 2008 with more than 30 engineers.

It also introduced iDigi cloud services to make it easy to bring data from machines to one accessible spot and to build applications to use the data.

That led to Digi recently acquiring Etherios Inc., a small Chicago reseller and consulting firm working with Salesforce.com. Buying a reseller may seem like a curious move even for a hardware producer in transition to solutions, but Salesforce.com has turned itself into a very large provider of cloud-based applications, including for customer service.

The Salesforce vision is of customers' employees all connected to a social network that includes suppliers and customers. And, apparently, machines like coin-operated convenience store air pumps.

That's the part that interests Dunsmore. Now preventive maintenance, adjustments to the pump's performance, firmware updates, coin pickups and a host of other things can be easily executed.

Dunsmore said "machines have feelings, too," meaning they will tell you how they are doing if you are set up to listen. So here is the future: A district store manager gets a Facebook-like status update from the compressor on one of his food freezers, something like "I am tired, I think I may fail in the next 48 hours."

Cost barriers to M2M deployments have fallen, Dunsmore said, but added that predicting the point at which the industry really blasts off has proven frustrating. Digi is itself only halfway through a transition, as just under half of its $190.6 million in sales in the September 2012 fiscal year were legacy products.

He once worked for high-flying U.S. Robotics in the computer modem business, and he sketched modem market history. Revenue peaked once technology reached a 56k transfer rate, and then declined into what he called "death valley" as prices dropped and new technologies emerged.

But lowering the price of an M2M solution doesn't take dollars out of the market, he said. In the early adoption phase only valuable assets get connected, he said, but once M2M products get cheap enough they can be justified for many far less expensive assets, or "extending the nerve endings within the assets themselves."

And that means, he said, "the beauty of what we're doing now is that there is no death valley."