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The internet of things: Taking the technology and communication space by storm
- 2. 2 The Internet of Things: Taking the Technology and Communication Space by Storm The Internet of Things (IoT) is an ever-growing platform in the technological space spanning various industries globally. The IoT is a network of interconnected devices that enables them to collect and exchange data. Moreover, Gartner states that the number of connected devices was estimated to be about 1.2 per person in 2016 and is forecast to be well over 3 per person by 2020E. Nevertheless, for IoT to reach its maximum potential, many more technological developments must evolve further (e.g. complex cloud services, broadband/internet platforms – 5G, and stringent regulatory security implementations). Potential across Parts of the Value Chain; Platform and Application Solution Providers to be Highest Gainers According to forecasts by Statista, IoT revenue could nearly double between 2014 and 2017E (reaching USD 1 trillion by 2017E) and also reach USD 2 trillion by 2019E. Estimates by McKinsey suggest this figure could approach USD 4 trillion by 2025E. Platform and application solution providers are estimated to have the highest potential (over 50% of total value creation), benefitting from a variety of industries. Interoperability among Systems a Key Success Factor The full realisation of IoT’s potential depends largely on interoperability among IoT systems. According to studies by McKinsey, circumstances in which two or more IoT systems must work together could account for about 40% of the total IoT value to be gained. The main benefits of interoperability are said to be realised in worksite settings, where the percentage of total value requiring interoperability approaches 60%, as per McKinsey. Without the necessary interoperability among systems, IoT value would be about 30% lower than its highest potential in 2025E. Developed Economies to Gain Initial Benefits owing to Higher Spend compared with Developing Economies’ Industry experts state that developed economies will benefit at first from IoT, compared with developing economies, due to developed economies’ higher spending in healthcare, home, and retail settings. However, the potential number of IoT uses is likely to be higher in developing economies. According to McKinsey, 62% of the potential annual economic impact of IoT 2025E should stem from advanced economies and the remainder from developing economies. Security Risks a Potential Headwind Given IoT’s growth potential, the biggest challenge in the industry involves security. The risk of data security and privacy breaches with IoT is significant, as almost every connected object and appliance used is linked to each other and in turn to a cloud or database platform. Cyber criminals see IoT’s exponential growth as an opportunity, especially as consumer-ready hardware is in most cases relatively easy to hack. Moreover, global antivirus solutions giant Norton Antivirus states that millions of internet-connected devices are vulnerable to attacks from cybercriminals: common devices such as TVs and home security systems can be exploited as botnets, for the circulation of ransomware, and for other types of fraud. US Market Maturity and Government Support Should Ease IoT Transition In relation to the US market (third-largest IoT installed base of 3 billion units in 2013, increasing to 7.5 billion units by 2020E, as per IDC), where the penetration of connected devices is high, industry experts suggest it would be comparatively easy for the USA to transition into the IoT boom than for developing countries, given the USA’s lower incremental costs than developing countries’. Moreover, in the USA, the industry is supported by continuous government spending on IoT development, especially in the defence and military industry. Current regulations in several industries could benefit players along the value chain. Further benefits could arise via bills that promote IoT usage through provisions that encourage lawmakers to nurture connected technology.
- 3. 3 The Internet of Things: Taking the Technology and Communication Space by Storm Understanding IoT: Sound Ecosystems and Applications Lay Foundation for Strong Growth over the Medium to Long Term According to Ernst and Young (E&Y), the ‘Internet of Things’ (IoT) is described as the connection of devices to the internet, using embedded software and sensors to communicate, collect, and exchange data with one another at home, work, or play. Various devices and appliances, including thermostats, cars, lights, and refrigerators, can be connected to the IoT. The IoT ecosystem enables an entity to connect to and control a device that has a ‘remote’ by sending a command or a request for information over a network to that device (e.g. a user could check the weather or traffic conditions through a smartphone, tablet, smart fridge etc.). The device responds to the command or sends information back over the network to be analysed and displayed on the remote. The data generated by the IoT device can be analysed and stored in multiple locations, including the cloud, a local database, the remote, or locally on the IoT itself. IoT Ecosystem Sources: Business Insider; UZABASE The Building Blocks of IoT Sources: Ernst & Young; UZABASE
- 7. 7 The Internet of Things: Taking the Technology and Communication Space by Storm Many Different Views on the potential Size of IoT Diverse Mix of Industry Players Involved across IoT Value Chain; Application and Platform Providers to Benefit the Most IoT has a highly complex value chain due to its impact on multiple processes. For instance, it could involve IoT chip manufacturers such as Intel as well as device manufactures such as Samsung. It could also involve network providers such as AT&T and Vodafone as well as cloud service companies such as Microsoft. IoT Value Chain – Diverse Range, from Technological Companies to Sports Equipment Companies Source: UZABASE Note: List of players is indicative and not exhaustive
- 8. 8 The Internet of Things: Taking the Technology and Communication Space by Storm According to Telecom Circle, an open networking organisation for communications, media, and advertising, platform, connectivity and application providers are projected to be well positioned to capture most of the IoT boom, estimated to be over 50% of the value. According to Telecom Circle, Connectivity, Platform, and Applications Carry the Greatest Value Sources: Telecom Circle; UZABASE Applications/Platform Component to Contribute Largest Share of Revenue; Share Should Reach 61% by 2025E Globally, as per Industry Experts Sources: Analysis Mason; UZABASE Note: Does not include value for smart modules, objects, software, and customer elements Furthermore, according to Analysis Mason, a telecoms, media, and technology management consulting and research firm, global revenue from the value chain for mobile IoT and low power wide area (LPWA) connections are estimated to have a healthy share of the revenue potential of the value chain. Mobile IoT connections are projected to reach 1.3 billion in 2025E (4x higher compared with 317 million in 2016) and LPWA connections 3.4 billion in 2025E (50x higher compared with 64 million in 2016). Mobile operators and other players in the value chain are seeking additional incremental value by offering other components of the value chain, including hardware, devices and applications, given that average connectivity revenue per connection is low.
- 10. 10 The Internet of Things: Taking the Technology and Communication Space by Storm Industries to Potentially Benefit from the IoT Revolution and Company Initiatives Source: UZABASE Interoperability a Key Success Factor; Developing Nations and B2B Industries to Benefit First via Higher Spend and Large Number of Processes Involved Interoperability a Critical Source of Value in IoT Systems A central finding from the IoT industry is the importance of interoperability in generating maximum value from IoT applications. According to McKinsey, situations in which two or more IoT systems work together could account for about 40% of the total value to be gained from IoT. According to McKinsey’s estimation of IoT’s maximum potential, without the benefit of interoperability, the maximum value of the applications would be only about USD 7 trillion per year in 2025E, approximately 30% lower than the potential of USD 11.1 trillion if the benefit of interoperability is included. Some of the biggest benefits of interoperability might be realised in the worksites setting, where the percentage of total value requiring interoperability approaches 60%, as per McKinsey reports. This high potential reflects the complexity and interconnectedness of equipment in the worksites setting. For example, there can be 30,000 sensors on an offshore oil rig, where data collected is used for monitoring machines or systems. This data is collected by individual equipment manufacturers’ own machines, for use in schedule maintenance. Interoperability should therefore significantly improve performance: sensor data can be combined from different machines and systems to assist in decision-making, with an integrated view of performance across an entire factory or an oil rig. According to a survey conducted by McKinsey, oil and gas experts estimate that interoperability could improve the effectiveness of equipment maintenance in their industry by 100-200%.
- 12. 12 The Internet of Things: Taking the Technology and Communication Space by Storm Developed Nations to Benefit More in Healthcare, Home, and Retail, Owing to Higher Spend, While Value Share is More Balanced in Worksites Sources: McKinsey; UZABASE Korea One of the Earliest Adopters of IoT Source: Statista B2B Applications to Have Higher Potential than Consumer Applications Consumer use of IoT technology has garnered significant attention, thanks to media coverage of its application, for example in fitness monitors and home automation. While these applications do have significant potential for creating value, industry experts suggest there is even higher value potential from IoT use in business-to-business (B2B) applications. B2B transactions are defined as the exchange of products, services, or information between businesses, rather than between businesses and consumers (B2C). In many instances of worksite applications in industries such as mining, oil and gas, healthcare, and construction, there is no direct impact for consumers.
- 13. 13 The Internet of Things: Taking the Technology and Communication Space by Storm Considerable additional value can be created by linking consumer IoT systems to B2B systems, for example by linking connected consumer healthcare products to services provided by healthcare providers and insurance providers. For example, if healthcare providers could access data from consumer healthcare monitors (e.g. weight, blood pressure, blood sugar), value can be created through its use in making informed decisions about patient therapies. Similarly, more value can be created if IoT data from sensors purchased by consumers for use in their homes or cars could be used to provide personalised insurance, based on actual usage data. There is also potential in linking consumer IoT devices at home to utility company systems in order to improve energy management. Globally, the overall volume of B2B transactions is much higher than the volume of B2C transactions, since a typical supply chain involves several B2B transactions. For instance, raw materials are used to manufacture components, which are then combined into finished products that are eventually purchased by a consumer or another business. In order to gauge the impact of IoT on B2B versus B2C activities, the respective applications can be considered in three ways, as follows: 1. Based on the user: 69% of IoT’s potential value is where the primary user or beneficiary is a B2B organisation. 2. Based on the buyer: 79% of IoT’s potential value is where a business is the purchaser of the IoT technology or service. 3. Based on setting owners: According to McKinsey, over two-thirds of the value of IoT applications in 2025E is to be generated in settings owned by businesses (B2B), such as worksites, factories, and offices. B2B Settings such as Offices, Factories, and Worksites Estimated to Carry Higher Value Source: McKinsey
- 14. 14 The Internet of Things: Taking the Technology and Communication Space by Storm Value of IoT in a Wide Array of Industries Source: McKinsey Security and Private Data Protectivity a Major Concern; Security Service Providers Could Benefit from Demand for Stronger Security Platforms While connected technology provides a variety of new and exciting possibilities, it also brings challenges. The biggest challenge involves security. Any internet-enabled device is vulnerable to hacking. The risk of data security and privacy in relation to IoT is significant, with virtually every connected object and appliance in use linked to each other. The IoT industry’s exponential expansion, combined with the relative ease of hacking consumer-ready hardware (in most cases), poses an opportunity for cyber criminals. According to Norton Antivirus, millions of internet-connected devices are vulnerable to cybercrime. The company stated that common devices such as smart TVs, home security systems, and baby cameras are all hackable and can be exploited as botnets, for the circulation of ransomware, and for other forms of fraud. For instance, in October 2016, it was reported that hackers could hack into FitBit devices through Bluetooth, risking potential malware injections once the devices sync back to computers and mobile devices. Moreover, a Samsung SmartFridge failed to validate SSL (security socket layer) credentials, potentially exposing sensitive information such as Gmail login information to hackers and other systemic vulnerabilities, as discovered by researchers at the University of Michigan.
- 16. 16 The Internet of Things: Taking the Technology and Communication Space by Storm US Synopsis: Significant Market Potential Underpinned by Government Support; Regulatory Framework Soft for Now The penetration of electronic devices in the USA is significantly high and has matured over the years (although less than in Europe and the Asia-Pacific region). Against this backdrop, many industry experts suggest it would be easier for the USA to transition into the IoT boom, with lower incremental costs compared with developing nations’. High Penetration Levels in the USA will Assist in Transitioning to the IoT Landscape Source: Statista The USA had the Fifth Largest Number of Connected Devices per Person Behind the Likes of Netherlands and the UK (2014) Source: Statista As reported by IDC, by 2020E, North America is projected to have an IoT installed base of about 7.5 billion units (compared with 3.1 billion in 2013), the third-largest after the Asia-Pacific region (10.1 billion) and Western Europe (8.3 billion). Moreover, IDC stated that a significant portion of the installed base in North America would originate from the USA (>55-60%).
- 18. 18 The Internet of Things: Taking the Technology and Communication Space by Storm Government’s IoT Investments by Category Source: International Trade Commission, USA The category with the most rapid investment growth was sensors, which grew to USD 1.6 billion in FY2015 from USD 578 million in FY2011 (CAGR of 28.9%). This was due largely to military investment in biosensors that gather health and medical information from soldiers in the field, as well as sensors that can collect data about soldiers' surroundings to determine threats. Device-based applications attracted the highest investment: USD 10.7 billion during 2011-15 (about 25% of total investments over the period). Defence-related agencies represented 88% of all government spending on sensors, and most of that spending went to major military contractors such as Raytheon, Lockheed Martin, Northrop Grumman, and BAE Systems. Government spending on IoT solutions should continue to rise and move towards civilian use, such as sensors and connected cars for smart cities. In terms of the USA’s regulatory stand on IoT, the U S Federal Trade Commission is holding off regulating the IoT industry on a large scale until there is an event which “harms consumers right now”. The commission stated that current regulations on technology used in the energy, pharmaceutical, and F&B industries suffice. However, a group of senators re-introduced a bill that would promote the IoT industry in the USA — the Developing and Growing the Internet of Things (DIGIT) Act — which includes several provisions that would encourage lawmakers to nurture connected technology instead of stifling their development. Key Regulatory Requirements in Many Industries Could Drive Need for IoT-Related Devices