What will create value in the Internet of Things ?

Explosive Growth: The Internet of Things or “IoT” is a red-hot topic. Business and tech pundits are citing predictions that some 30 billion objects may be connected to the Internet of Things by 2020.

Impressive numbers, but getting back to basics - what is the IoT and how will its growth create tangible economic value?

Let’s start with a simple definition: According to McKinsey & Company the Internet of Things refers to the networking of physical objects through the use of embedded sensors, actuators, and other devices that can collect or transmit information about the objects.

In 5 years - 30 billion objects may be connect to the IoT.

What’s good about all this? The data amassed from these devices can then be analyzed to optimize products, services, and operations, and this can lead to redefined and new business models.

An early success story for the IoT includes energy optimization: Sensors deployed across an electricity grid can help utility companies remotely monitor energy use and adjust generation and distribution flows to account for peak times and down times.

The US power grid is the largest interconnected machine on earth with 9200 electric generating units with over one million megawatts of generating capability. 

And it’s being rebuilt today using IoT technology. Check out the US Department of Energy’s “The Smart Grid” for a non-technical overview of this undertaking.

Redefined Business Models: Consumers are buying smart thermostats and smoke / carbon monoxide alarms from NEST – a start-up company acquired by Google in early 2014 for a staggering $ 3.2 billion in cash. Following the acquisition announcement, the jokes flew: “If your house is burning down you’ll now get G Mail ads for fire extinguishers,” Valleywag’s Sam Biddle tweeted.

Wired has observed that this deal sets the stage for an for an entire world populated with Google-powered smart devices. And Google got Nest CEO Tony Fadell, a real product master – best known for designing the iPod. Nest will also help evolve the Google business model to include the interconnectedness of hardware. As the devices talk to each other it helps build an aggregate picture of human behavior, anticipating what we want before we even know we want it.

Efficiency: Other IoT uses include “wearable” devices to track personal physical fitness and insurance companies installing sensors in cars so they can base premiums on actual driving behavior versus projections. Axeda is a leader in “vehicle tele-matics” that is empowering car insurance underwriters like Ensurance to use hard data on driving behaviors to help set their rates.

Physicians are using information collected from wireless sensors to improve their management of chronic diseases. McKinsey predicts that continuous monitoring versus periodic testing might reduce treatment costs by 10-20% saving billions in the care of congestive heart failure alone.

Joep van Beurden from CSR.

In an interview with McKinsey & Company – Joep van Beurden the CEO of semiconductor company CSR (that produces many wireless technologies) provided some fascinating insights on the IoT sector:

“A lot of analysts have evaluated the potential financial value that Internet of Things applications may create over the next five to ten years—it’s a $300 billion or $15 trillion opportunity, depending on whom you listen to.”

Connectivity: van Beurden continued “When you drill down, however, you see that about 10 percent of this value is created by the 'things,' while 90 percent comes from connecting these things to the Internet. The Internet of Things is not just about storing information in the cloud; the data only becomes interesting when you combine them with sensors and analytics.”

Van Beurden went on to qualify the factors that will impact IoT growth: “But a certain degree of alignment must happen for those connections to take place and for the Internet of Things to take off. The industry must adopt common standards and business models, and it must address issues relating to privacy and security.”

Economic Impact: The McKinsey Global Institute research estimates that the impact of the Internet of Things on the global economy might be as high as $6.2 trillion by 2025. At the same time, the corporate leaders polled admit they lack a clear perspective on the concrete business opportunities in the Internet of Things given the breadth of applications being developed, the potential markets affected—consumer, healthcare, and industrial segments, among others—and the fact that the trend is still nascent.

As Gartner recently observed: Connected things, such as automated teller machines and airline check-in machines, have previously existed. But, new and novel devices, and many ordinary objects, are also being reinvented with digital sensing, computing and communications capabilities.

 

The "digital voice" is comprised of data.

This functionality provides both new and previously passive objects with a "digital voice", and the ability to create and deliver an information stream reflecting their status and that of their surrounding environment. Such developments radically change the value proposition of many businesses, creating new services and usage scenarios and driving new business models.

“The digital shift instigated by the Nexus of Forces (cloud, mobile, social and information), and boosted by IoT, threatens many existing businesses. They have no choice but to pursue IoT, like they’ve done with the consumerization of IT,” said Jim Tully, an analyst at Gartner. 

Widespread Applications: Tully continued "This sudden expansion will boost the economic impact of the IoT as consumers, businesses, city authorities, hospitals and many other entities find new ways in which to exploit the technology." Gartner estimates that IoT will support total services spending of $69.5 billion in 2015 and $263 billion by 2020. 

Automotive sector will have fastest growth.

Consumer applications will drive the number of connected things, while enterprise will account for most of the revenue. Gartner estimates that 2.9 billion connected things will be in use in the consumer sector in 2015 and will reach over 13 billion in 2020, about half the McKinsey estimate. The automotive sector will show the highest growth rate at 96 percent in 2015. 

From an industry perspective, manufacturing, utilities and transportation will be the top three verticals using IoT in 2015 – all together they will have 736 million connected things in use.

Steve Prentice from Gartner.

“The number of connected intelligent devices will continue to grow exponentially, giving ’smart things’ the ability to sense, interpret, communicate and negotiate, and effectively have a digital ‘voice’," said Steve Prentice, vice president and Gartner Fellow. He continued, “CIOs must look for opportunities to create new services, usage scenarios and business models based on this growth.”

So the IoT sector is likely to see exponential growth the next ten years, and its ability to spawn new business models and create economic value is already evident. It may be time to listen carefully for the “digital voice” of the future, a chorus being created by technology, throwing off valuable “data exhaust” - one device at a time.