OORT among 'private companies to watch' via Goldman Sachs

June 25, 2014
Internet of Things – Volume 1
Making S-E-N-S-E of the
next mega-trend
Equity Research
Framing the IoT opportunity for CommTech and Semiconductors
The Internet of Things takes shape as the next mega-trend
The Internet of Things (IoT) is emerging as a third, and likely bigger, wave
in the development of the Internet, following the rise of the fixed Internet in
the 1990s and the mobile Internet in the 2000s. While the fixed Internet
connected 1 billion users via PCs, and the mobile Internet connected 2
billion users via smartphones (on its way to 6 billion), the IoT is expected to
connect 28 billion “things” to the Internet by 2020. We are launching a
series of reports in which we examine the implications of the IoT wave
across multiple sectors within the Tech industry and beyond, with this first
installment focused on the CommTech and Semiconductor sectors.
Making S-E-N-S-E of the IoT
Given the incredible breadth and depth of technologies, applications, and
verticals related to the IoT, understandably there is some confusion on how
to define it and what makes it different than the “regular” Internet. We
address that question with the S-E-N-S-E framework, which captures what
we view as the key attributes of the IoT: Sensing, Efficient, Networked,
Specialized, Everywhere. The key verticals of adoption include Wearables,
Cars, Homes, Cities, and Industrials; we cover the first four in this report.
CommTech: (1) Wi-Fi, (2) Cellular, (3) “Fog” computing
We see three important implications for CommTech: (1) Wi-Fi becomes the
dominant access technology, with IoT adding 50% to the Wi-Fi market by
2020; (2) New cellular connections could expand the baseband market by
over 15%; and (3) Network intelligence shifts to the edge, as fog computing
supplants the cloud in crunching data closer to the devices in the network’s
edge. We see Cisco, Garmin, Gemalto, Qualcomm, Ruckus, Silver
Spring, and Wistron NeWeb as best positioned in our coverage.
Semiconductors: (1) Sensors, (2) Connectivity, (3) ARM/MCU
We expect the rise of the IoT to drive the most incremental growth in the
following segments of semis and components: (1) Sensors, (2) Connectivity,
including Wi-Fi, Bluetooth, ZigBee, and a number of other standards we detail
in this report, and (3) ARM-based processors and microcontrollers (MCU),
which we expect to have an edge over x86 given lower power. We see ARM,
Atmel, Broadcom, Freescale, InvenSense, Maxim, Microchip, Murata,
Samsung, and TE Connectivity as best positioned in our coverage.
Simona Jankowski, CFA
(415) 249-7437 simona.jankowski@gs.com
Goldman, Sachs & Co.
James Covello
(212) 902-1918 james.covello@gs.com
Heather Bellini, CFA
(212) 357-7710 heather.bellini@gs.com
Michael Bang
+82(2)3788-1655 michael.bang@gs.com
Goldman Sachs (Asia) L.L.C., Seoul Branch
Ikuo Matsuhashi, CMA
+81(3)6437-9860 ikuo.matsuhashi@gs.com
Goldman Sachs Japan Co., Ltd.
Bill Shope, CFA
(212) 902-6834 bill.shope@gs.com
Daiki Takayama
+81(3)6437-9870 daiki.takayama@gs.com
Goldman Sachs Japan Co., Ltd.
Mark Delaney, CFA
(212) 357-0535 mark.delaney@gs.com
Donald Lu, Ph.D
+86(10)6627-3123 donald.lu@ghsl.cn
Beijing Gao Hua Securities Company Limited
Robert Yen
+886(2)2730-4196 rob.yen@gs.com
Goldman Sachs (Asia) L.L.C., Taipei Branch
Gabriela Borges
(212) 357-2692 gabriela.borges@gs.com
Alexander Duval
+44(20)7552-2995 alexander.duval@gs.com
Goldman Sachs International
Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors
should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors
should consider this report as only a single factor in making their investment decision. For Reg AC certification and other
important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by
non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.
The Goldman Sachs Group, Inc. Global Investment Research

June 25, 2014 Global: Technology
Goldman Sachs Global Investment Research 2
North America Asia
Simona Jankowski, CFA Daiki Takayama
simona.jankowski@gs.com daiki.takayama@gs.com
(415) 249-7437 +81(3)6437-9870
Goldman, Sachs & Co. Goldman Sachs Japan Co., Ltd.
James Covello Michael Bang
(212) 902-1918 michael.bang@gs.com
james.covello@gs.com +82(2)3788-1655
Goldman, Sachs & Co. Goldman Sachs (Asia) L.L.C., Seoul Branch
Heather Bellini, CFA Ikuo Matsuhashi, CMA
heather.bellini@gs.com ikuo.matsuhashi@gs.com
(212) 357-7710 +81(3)6437-9860
Goldman, Sachs & Co. Goldman Sachs Japan Co., Ltd.
Bill Shope, CFA Donald Lu, Ph.D
bill.shope@gs.com donald.lu@ghsl.cn
(212) 902-6834 +86(10)6627-3123
Goldman, Sachs & Co. Beijing Gao Hua Securities Company Limited
Mark Delaney, CFA Robert Yen
mark.delaney@gs.com rob.yen@gs.com
(212) 357-0535 +886(2)2730-4196
Goldman, Sachs & Co. Goldman Sachs (Asia) L.L.C., Taipei Branch
Kent Schofield
kent.schofield@gs.com
(415) 249-7489
Europe
Gabriela Borges Alexander Duval
gabriela.borges@gs.com alexander.duval@gs.com
(212) 357-2692 +44(20)7552-2995
Goldman, Sachs & Co. Goldman Sachs International
Doug Clark, CFA
doug.clark@gs.com
(415) 249-7453
Balaji Krishnamurthy, CFA
balaji.krishnamurthy@gs.com
(212) 934-6451
Goldman Sachs India SPL

Contents
Portfolio manager summary 4
The Internet of Things takes shape as the next mega-trend 6
Making S-E-N-S-E of the Internet of Things 6
The IoT value proposition 8
Why now? Enablers of IoT 9
Barriers to adoption 10
The IoT stack: Vertical vs. horizontal solutions 11
Key verticals of adoption 13
Connected Wearable Devices 13
Connected Cars 15
Connected Homes 17
Connected Cities 18
Network infrastructure for the IoT 20
Sizing the incremental networking opportunity 21
IoT communication standards 22
Semiconductors for the IoT 26
Sizing the semiconductor content opportunity 27
Cores, architectures and power efficiency 28
Company profiles: Infrastructure enablers for the IoT 31
Aerohive (HIVE, Buy): Benefiting from the next generation of connected students 32
Amphenol (APH, Neutral): Broad connector exposure with increasing sensor business 32
Apple (AAPL, Buy): Extending the iOS ecosystem to IoT 32
ARM (ARM.L, Buy): Significant potential to capitalize upon the IoT based on ARM’s low power designs 34
Aruba Networks (ARUN, Neutral): Capitalizing on IoT through Wi-Fi connectivity and the BYOD trend 35
BlackBerry (BBRY, Neutral): Leveraging QNX and BlackBerry’s secure network infrastructure for IoT 35
Broadcom (BRCM, Neutral): Well positioned with connectivity and broadband portfolio plus developer support 36
Cisco Systems (CSCO, Buy): IoT thought leader benefiting through Wi-Fi and “fog” computing 37
Delta (2308.TW, Buy): Big Data trends driven by IoT could benefit Delta 38
Garmin (GRMN, Neutral): Expanding portfolio of wearables and growing content in connected cars 38
Gemalto (GTO.AS, Buy): Digital security expertise to monetize IoT in the Machine-to-Machine segment 39
Google (GOOGL, Neutral): Gathering more data, offering more services 40
InvenSense (INVN, Buy): Early design wins on wearables although still small part of total sales 41
Marvell (MRVL, Neutral): Baseband and connectivity products should allow Marvell to benefit 41
Mediatek (2454.TW, Neutral): Tapping into the IoT market 42
Microcontrollers, microprocessors, and analog: Content gains in auto, industrial and infrastructure 43
Murata Mfg. (6981.T, Buy): Positioned to benefit most from IoT in the technology upstream supply chain in Japan 43
Netgear (NTGR, Sell): The gateway in the home to the IoT 44
Nokia (NOK1V.HE, Not Rated): Leveraged to the Automotive vertical with the HERE mapping platform 45
Qualcomm (QCOM, CL-Buy): Extending cellular and connectivity leadership from smartphones into the IoT 46
Quanta (2382.TW, Neutral): Rising data flows create growth opportunity in cloud computing 47
Ruckus Wireless (RKUS, Buy): Pure-play Wi-Fi vendor in the sweet spot of IoT 47
Samsung Electronics (005930.KS, Buy): Widest hardware reach in IoT 48
Silver Spring Networks (SSNI, Buy): Connected city pure play – smart meters, street lighting, and beyond 49
TE Connectivity (TEL, Buy): Auto and industrial connector exposure with increasing focus on sensors 50
Wistron NeWeb (6285.TW, Neutral): Expert in wireless solution embracing IoT trends 51
Emerging Technology Research: Private Companies to Watch 53
Disclosure Appendix 54

Portfolio manager summary
We expect the Internet of Things (IoT) to be a mega-trend, following the major shifts to
mobility and cloud computing that shaped the last decade in technology. By its very nature,
IoT’s implications will reach far beyond the Tech sector into many other industries, creating
new winners and losers based on companies’ abilities to adapt to a world where things are
connected. With this report – our first in a series – we attempt to take an overly broad topic
and help investors narrow their focus to the verticals and technologies that matter most.
We have the following key takeaways.
1. IoT will rearrange the tech landscape, again – IoT has key attributes that distinguish
it from the “regular” Internet, as captured by our S-E-N-S-E framework: Sensing,
Efficient, Networked, Specialized, Everywhere. These attributes may tilt the direction of
technology development and adoption, with significant implications for Tech
companies – much like the transition from the fixed to the mobile Internet shifted the
center of gravity from Intel to Qualcomm or from Dell to Apple.
2. Five verticals get the most focus – While IoT will be found virtually everywhere, we
focus on five verticals that are early in the adoption curve and offer a large market
opportunity and the possibility for significant profits: Connected Wearable Devices,
Connected Cars, Connected Homes, Connected Cities, and the Industrial Internet.
3. CommTech impact: Wi-Fi, Cellular, “Fog” computing – IoT will require primarily
wireless communications; thus, we expect Wi-Fi to be the key communications
standard for IoT, much like DSL/Ethernet was for the fixed Internet and 3G/4G for the
mobile internet. Secondarily, cellular connections will grow for hard to reach or mobile
objects (e.g., cars). In terms of infrastructure, we expect more network intelligence to
reside in the edge, giving rise to “fog” computing architectures, as most data will be
too noisy or latency-sensitive or expensive to be carried all the way back to the cloud.
4. Semiconductor impact: Sensors, Connectivity, and ARM/MCU – Sensors have
outgrown other semiconductor units by five percentage points over the last two years,
and we expect that trend to continue as they proliferate. Connectivity will also grow
above-average, driven by Wi-Fi, Bluetooth, ZigBee, NFC, and other IoT standards. More
devices will use ARM-based processors and microcontrollers given their lower price
points and power requirements relative to the x86 microarchitecture.
Exhibit 1: The IoT heat map: Where to focus
Source: Goldman Sachs Global Investment Research.
Wearables Home City Auto Industrial
Timing Scale
Market size ($) More Significant
Profitability
Semiconductor
content
Less Significant
Networking content

Exhibit 2: The CommTech IoT Matrix
Company focus by technology and vertical
Source: Company data, Goldman Sachs Global Investment Research.
Exhibit 3: The Semis and components IoT Matrix
Company focus by technology and vertical
WiFi
Fog
Computing
Connected
Devices
Security Wearables Auto
Connected
Home
Connected
Cities
Industrial
Internet
Aerohive
Aruba
BlackBerry
Cisco
Garmin
Gemalto
Netgear
Nokia
Ruckus
Silver Spring
Wistron NeWeb
Product focus Vertical focus
Connectivity
MCUs/
Processor
Sensors Wearables Automotive
Connected
Home
Connected
Cities
Industrial
internet
Amphenol
ARM Holdings
Atmel
AMD
Broadcom
Freescale
Intel
InvenSense
Marvell
Maxim
Mediatek
Microchip
Murata
Nvidia
NXPI
ON Semiconductor
Qualcomm
Renesas
STMicroelectronics
TE Connectivity
Texas Instruments
Product exposure Vertical exposure

The Internet of Things takes shape as the next mega-trend
The Internet of Things (IoT) is starting to take shape as the next mega-trend, following the
major shifts to mobility and cloud computing that shaped the last decade in technology.
While those two mega-trends had profound and industry-changing implications for the
technology industry, the implications of the IoT will likely prove even more far-reaching, as
by its very nature it is a trend that will reach beyond tech to touch every industry, from
healthcare to retail to oil and gas exploration.
What is IoT? The Internet of Things connects devices such as every day consumer
objects and industrial equipment onto the network, enabling information gathering
and management of these devices via software in order to increase efficiency,
enable new services, or achieve other health, safety, or environmental benefits.
The term was first proposed by Kevin Ashton, a British technologist, in 1999, when
he was Executive Director at MIT’s Auto-ID Center, an RFID research consortium.
Exhibit 4: IoT emerging as the next mega-trend
Internet subscribers over time
Note: y-axis is on a logarithmic scale
Source: IDC, Ericsson, Goldman Sachs Global Investment Research.
Making S-E-N-S-E of the Internet of Things
Given the incredible breadth and depth of technologies, applications, and verticals related
to the IOT, understandably there is some confusion around exactly how to define it and
what makes it different than the “regular” Internet. We attempt to answer that question in
Exhibit 5 below using the S-E-N-S-E framework, which captures what we view as the key
attributes of the IoT: Sensing, Efficient, Networked, Specialized, Everywhere. In the
sections below, we discuss how these attributes translate to changes in the underlying
enabling network infrastructure and drive incremental semiconductor demand, and where
they create the most opportunities for vendors in the infrastructure supply chain.
200mn
1bn
100mn
2bn
6bn6bn
28bn
32
64
128
256
512
1,024
2,048
4,096
8,192
16,384
32,768
1996 2000 2004 2008 2012 2016 2020
Installedbase(mn)
PC Smartphones IoT

June 25, 2014
Goldman Sachs Global Investment Research
Exhibit 5: M
Key attribute
Source: Goldma
The infle
As we wrote
inflection ye
of connecte
from 9bn in
today. Whil
different no
aspects of b
enabling co
communica
now make c
Making S-E-N-S-E of the Internet of Things
es of the IoT and how it differs from the “regular” Interne
an Sachs Global Investment Research.
ection is upon us
e in our 2014 outlook report for CommTech, we expect
ear in the hype, if not actual deployments, of IoT. IDC f
ed devices (excluding PC, smartphone, and tablet) will
n 2013, which dwarfs the 3bn of connected PCs (includi
e such headline-grabbing projections have been aroun
ow is that major companies have come out with real pr
both the IoT infrastructure and the end points (Exhibit 7
omponents and semiconductors including sensors, mic
ations chips (e.g., Bluetooth, Wi-Fi, ZigBee) have seen s
connected end points affordable at price points less th
Global: Technology
7
t
t 2014 to be a significant
forecasts that the number
reach over 28bn in 2020
ing tablets) and handsets
nd for some time, what is
roducts that enable
7). Additionally, the
crocontrollers and
steep price declines that
an $100.

Exhibit 6: Search activity for “Internet of Things” has
shot up according to Google Trends
Exhibit 7: Major IoT milestones point to an inflection
Notable IoT announcements
Source: Google Trends. Source: Company data.
The IoT value proposition
From a business perspective, the value proposition of IoT can be summarized in two
categories that we list below, along with illustrative examples.
 Revenue generation – Companies are focused on the IoT as a driver of
incremental revenue streams based on new products and services. For example,
since the beginning of the year AT&T has introduced a Connected Car service in
partnership with a number of automobile manufacturers, including Audi, GM,
Telstra, and Volvo, which offer high-speed 3G or 4G connections for a monthly
subscription fee of $10. By the end of 2014, 30 of GM’s 2015 vehicle models will
have LTE support, enabling vehicles to act as a Wi-Fi hotspot with connectivity for
up to 7 devices, as well access to OnStar for remote vehicle access, diagnostics,
and emergency service.
 Productivity and cost savings – Businesses are also embracing the IoT to
improve productivity and save costs, such as capex, labor, and energy. For
example, Verizon is saving more than 55mn kWH annually across 24 data centers
by deploying hundreds of sensors and control points throughout the data center,
connected wirelessly. This results in a reduction of 66mn pounds of greenhouse
gases per year.
As shown in Exhibit 8, a recent survey by Infonetics point to both revenues and costs as
being the top drivers of IoT adoption by enterprises.
0
20
40
60
80
100
120
Relativelevelofinterest(Googlesearches)
Product/Platform launch Detail
Cisco NCS
Enables a fabric (mesh) network
that is better suited for IoT
Qualcomm Low-power Wi-Fi platform
Connect major home appliances
to the network
GE Industrial Internet
Product porfolio includes industrial equipment,
Internet-linked sensors and software to
monitor performance and analyze big streams of data
Intel Quark
SoCs that are smaller and lower power
than Atom to support IoT
Nest Protect (Acquired by Google)
Thermostats and smoke detectors that
can be managed through smartphone
Apple iBeacon
Low power, Bluetooth device that can send push
notifications to devices in close proximity
Apple HomeKit
HomeKit provides a common communication protocol
for home related devices to work seamlessly with iOS.
Apple HealthKit
Allows apps to gather information and control devices
from a centralized point.
AT&T Mobile Share Value update
AT&T now allows Mobile Share Value plan subscribers
to add select cars to their plans for $10/month.

Exhibit 8: Top drivers of M2M and IoT adoption
Infonetics Survey: M2M Service Adoption Drivers, % of respondents rating the factor “very
important” or “critical” (Sample size: 163)
Source: Infonetics, January 2014.
From a personal and societal standpoint, there are several other important drivers of IoT
adoption.
 Health and wellness – Consumers are embracing wearable devices, such as
fitness bands, to keep track of and improve their health. Some fitness bands are
even being subsidized by insurance companies, who can offer more attractive
rates to employees who wear them.
 Environment – There is a rising number of IoT applications that result in energy
savings. For example, smart meters, connected street lighting, and smart
thermostats such as the Nest all result in lower power usage.
 Safety – IoT devices also enhance safety, such as connected smoke alarms,
surveillance video cameras, smart rail sensors, and oil rig temperature sensors.
Why now? Enablers of IoT
A number of significant technology changes have come together to enable the rise of the
IoT. These include the following.
 Low-cost sensors – According to the SIA, the average cost of a sensor now costs
$0.60 vs. $1.30 10 years ago. As detailed below on page 28, sensors vary widely in
price, but in general they are now cheap enough and small enough to justify new
business cases.
 Smartphones – Ubiquitous smartphones are now becoming the personal gateway
to the IoT, serving as a remote control or hub for the connected home, connected
car, or for the health and fitness devices consumers are increasingly starting to
wear.
 Cheap bandwidth – The cost of bandwidth has also declined precipitously, by a
factor of nearly 40X over the past 10 years.
 Cheap processing – Similarly, processing costs have declined by nearly 60X over
the past 10 years, enabling more devices to be not just connected, but smart
enough to know what to do with all the new data they are generating or receiving.
0% 20% 40% 60% 80%
Business Agility
Improve quality of our
product/services
Improve customer satisfaction
Generate new revenue
Improve workflow
Lower cost
Improve employee satisfaction
Drivers

 Ubiquitous wireless coverage – With Wi-Fi coverage now ubiquitous, wireless
connectivity is available for free or at a very low cost, given Wi-Fi utilizes
unlicensed spectrum and thus does not require monthly access fees to a carrier.
 Big data – As the IoT will by definition generate voluminous amounts of
unstructured data, the availability of big data analytics is a key enabler.
 IPv6 – Most networking equipment now supports IPv6, the newest version of the
Internet Protocol (IP) standard that is intended to replace IPv4. IPv4 supports 32-bit
addresses, which translates to about 4.3 billion addresses – a number that has
become largely exhausted by all the connected devices globally. In contrast, IPv6
can support 128-bit addresses, translating to approximately 3.4 x 1038
addresses –
an almost limitless number that can amply handle all conceivable IoT devices.
Exhibit 9: Cost of compute is a fraction of its 1990’s level Exhibit 10: …so is cost of bandwidth
Source: John Hagel, Deloitte, 5/14, Mary Meeker, KPCB.
Source: John Hagel, Deloitte, 5/14, Mary Meeker, KPCB.
Barriers to adoption
Our industry research points to four key hurdles that may influence the pace of IoT
adoption.
 Security concerns – Security concerns escalate to a whole new level with the IoT,
given the potential for privacy violations or safety issues as a result of the ability to
remotely manipulate physical assets. For example, in a highly publicized case in 2013,
the FTC took legal action against TRENDnet, the maker of IP video cameras that were
sold to consumers to monitor “babies at home, patients in the hospitals, offices and
banks, and more.” In a major security breach, hackers realized that they could access
the live streams of any camera over the Internet, bypassing the login requirement,
which resulted in over 700 cameras’ live video feeds being streamed over the Internet,
including footage of babies, young children, and people engaging in daily life activities
in their homes. This is just one early example of the vulnerabilities associated with the
IoT. Security breaches could be far ranging, such as remote shut-off of industrial
equipment, theft or sabotage of power delivery, etc.
 Regulation or compliance – Another key concern is compliance with regulations, as
many IoT implementations are being mandated by the government, such as the eCall
connected car requirement in Europe, the rail safety act in the US, or smart grid
mandates around the world.
$527.00
$0.05
$0.01
$0.10
$1.00
$10.00
$100.00
$1,000.00
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
$per1MMtransistors
$1,245.00
$16.00
$1
$10
$100
$1,000
$10,000
1999 2001 2003 2005 2007 2009 2011 2013
$per1000Mbps

 Standards – Standardization is critical for IoT adoption, as businesses are hesitant to
invest in connecting assets that may become “stranded” if the communications
standards change. For example, smart meters are very expensive to deploy, as they
number in the tens of millions and have a useful life in the field of over 10 years, and it
would be prohibitive to have to replace them before their useful life is over.
 Ease of use – Some of the early success stories in IoT have benefited from their ease
of use, such as the Nest thermostat (acquired by Google). Conversely, complex IoT
solutions are taking longer to deploy, such as eHealth initiatives.
Exhibit 11: Top barriers to M2M and IoT adoption
Infonetics Survey: M2M Service Adoption Barriers, % of respondents rating the factor “very
important” or “critical” (Sample size: 163)
Source: Infonetics, January 2014.
The IoT stack: Vertical vs. horizontal solutions
At a high level, the IoT stack is not too dissimilar to that in the fixed or mobile Internet, and
can be visualized as enabling networking infrastructure at the bottom, connected devices in
the middle, and applications and services on top (Exhibit 12). Outside the level of maturity,
the main difference is that the IoT is significantly more fragmented, with multiple
specialized solutions by vertical, such as wearable devices, homes, cars, cities,
transportation or industrial applications. In this report, our focus is on the hardware layers
of the stack, including networking and semiconductors; the applications and services will
be addressed in a subsequent report.
More vertically integrated than the traditional Internet – In any technology market, we
typically see both vertically integrated (e.g., Apple) and horizontal (e.g., Android)
approaches. For example, Apple’s vertical integration spans across the semiconductors,
hardware, operating system, platform, applications and services; by contrast, those
elements exist in a largely disaggregated fashion in the Android ecosystem. Vertically
integrated solutions typically ramp faster in the early days of a new market, as it takes
longer for effective horizontal solutions to develop given the need for standardization and
other coordination. We expect that dynamic to be even more pronounced in the IoT, given
the inherent specialization by vertical (e.g., very different solutions are required for a
fitness band vs. a connected car vs. an oil rig). Thus, we expect to see a proliferation of
successful vertically integrated business models, such as PG&E’s smart grid deployment,
where the hardware and services are provided by the same vendors, rather than by third
0% 20% 40% 60%
Security
Regulation or compliance issues
Complexity of solutions
Cost of M2M services
Cost of M2M devices
Lack of information about available
services and solutions
Lack of information about the
benefits of M2M services
Barriers

June 25, 2014
Goldman Sachs Global Investment Research
parties. Ove
solutions to
Exhibit 12: The IoT value stack: infrastru
While secu
security an
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ucture, devices, applications & services
rity is already of paramount importance with the In
nd privacy will escalate to a whole new level with th
may give hackers access to important physical assets su
ains, cars, or homes. As a result, security will need to b
ing encrypting the data on the device itself (“data at re
transit over the wired or wireless network. However, w
ational power required for encryption (e.g., if they only
ollers, due to cost considerations), they may remain vu
xpect many of the early IoT implementations will be c
e, IoT start-up Ayla Networks uses device keys that are
y modules at the factory and multi-layer authentication
t manages Ayla-enabled devices through the Ayla clou
Global: Technology
12
we expect horizontal
he key platforms.
nternet, concerns around
he IoT, given that security
uch as oil rigs, power
be implemented end to
est”), as well as encrypting
with many devices lacking
y include low-end
ulnerable to attacks. As a
losed end-to-end systems.
e burned into the
n as part of its end-to-end
d.

Key verticals of adoption
By definition, the Internet of Things has enormous breadth that can be difficult to get one’s
arms around. In our view, it can be broken up into five key verticals of adoption: Connected
Wearable Devices, Connected Cars, Connected Homes, Connected Cities, and the Industrial
Internet. We dig deeper into the first four in this section, while the Industrial Internet is
addressed in a companion report.
Exhibit 13: The IoT landscape
Connected Wearable Devices
In this section, we define the major categories in the wearables segment and assess its size
and growth potential in the coming years. Broadly, the wearables segment can be
classified into the following categories.
(1) Fitness Bands, primarily fitness trackers typically in a wrist band form factor,
including Fitbit Force, Jawbone Up, Nike+ Fuelband, and Garmin Vivofit, among
others. These devices can track the distance walked, calories burned, set goals,
Wearables
Connected
Cars
Connected
Homes
Connected
Cities
Industrial
Internet
Transportation
Oil & Gas
Healthcare

and compete with friends on social networks. These are targeted towards casual
users trying to maintain an active lifestyle.
(2) Smart watches, comprising smart devices having a watch-like form factor, such as
Samsung Galaxy Gear, Sony SmartWatch, Pebble Steel, among others, which can
be paired with and used as an extension to smartphones to read e-mails, texts,
receive calendar alerts, take calls, and get contextual information without taking
the phone out of pocket. Additionally, these can also serve as fitness trackers.
Smart watches target users trying to get and act on information in a more efficient
way, especially in situations where operating the phone may be infeasible, such as
during bus journeys, or while playing a sport.
(3) Smart glasses, comprising light-weight glasses that can be worn on a regular
basis, such as Google Glass. These glasses provide context-specific information,
turn-by-turn directions, or any general information such as alerts and texts. They
also enable the user to capture photos and record videos on the move. Smart
glasses offer an “always-on” experience for users who want to be connected at all
times to receive context-specific information.
(4) Action cameras, or compact, light-weight Point-of-view (PoV) camcorders, such as
GoPro Hero 3+ and Garmin VIRB Elite, can be attached to helmets or cars to record
extreme outdoor activities such as sky-diving, dirt-biking, etc. Action cameras can
also upload videos real-time and provide GPS data. They currently target
experience sports activities, while daily use and casual video recording represent
expansion opportunities.
Exhibit 14: Snapshot of wearables in the IoT market
Operating Systems (OS) market remains highly fragmented for now: Most smart wearable
devices use proprietary OS, based on the Real-Time Operating System (RTOS), designed
Category Use Cases Key Vendors Features
Communication
Protocols
Operating
Systems
Fitness Bands
• Monitor fitness by tracking distance run, calorie burn, heartbeat,
sleeping patterns and so on (primarily as a fitness assistant )
• Share fitness statistics and compete with others on social networks
• Convey mobile alerts
• Basis B1
• Fitbit
• Garmin Vivofit
• Jawbone UP24
• Jaybird Reign
• Larklife
• Misfit Shine
• Nike+ Fuelband
• Activity tracker worn as a band
• Needs to be paired with IP enabled
devices, eg. Smartphone
• Links fitness statistics to social
networking apps
• Displays notifications and alerts
• ANT+
• Bluetooth
No specific OS
running on the
device itself.
However, there
is support for
linking to IP
enabled devices
running Android,
iOS etc.
Smart Watches
• Remotely control smartphones (lock/unlock, play/stop music etc.) as
well as use it as a handsfree to attend calls
• Get turn-by-turn directions through GPS navigation as well as
context specific information like restaurants, hotels etc.
• Use it as a fitness assistant and track activity levels and sleeping
pattern
• LG G Watch
• Moto 360
• Pebble Smartwatch
• Qualcomm Toq
• Samsung Gear 2
• Sony Smartwatch
• Pair with IP enabled devices
• Install third-party applications to boost
features and functions
• Touchscreen
• In-built Camera
• Voice control
• Vibration based alerts
• Parental controls (track children)
• Control smartphones remotely
• Bluetooth/Bluetooth
Low Energy (BLE)
• Android Wear
• Micrium
(MicroC/OS-II)
• Pebble OS
• Qualcomm OS
• Tizen (Linux)
Smart Glasses
• Visually enrich ones view with relevant information, such as
translating road signs, turn-by-turn directions, user reviews, etc.
• Capture photos and videos and stream on a real-time basis
• Enhance vision as well as improve gaming experience
• Google Glass
• Innovega’s iOptik
• Kopin Corp’s Golden-I
• Light-weight, head mounted display
(HMD)
• Does not need smartphone to function
• Touchpad to slide through screens
• Communicate using natural language
based voice commands
•Third-party apps can be used via
Android app-store
• WiFi
• Bluetooth/BLE
• Android
• Gi-OS
Action Cameras
• Record high-definition videos in extreme outdoor situations (such as
climbing a mountain, racing etc.) by attaching to helmets, cars, bikes
etc.
• Capture details such as altitude, geographical location, speed and
upload on a real-time basis
• GoPro Hero
• Garmin VIRB elite
• Ghost Drift S
• Ion Air Pro 3
• Looxcie
• Pivothead
• Sony Action Cam 2
• Light-weight, compact
• Real-time video streaming and sharing
• GPS
• Accelerometer
• Barometric altimeter
• ANT+
• NFC
• WiFi

for embedded devices. For instance, Pebble smart watches run on Pebble OS while
Qualcomm Toq runs on Qualcomm OS. Consequently, the underlying OS market in the
wearables segment remains fragmented. Google launched a modified version of Android
for smart devices, Android Wear, with Moto 360 and LG G Watch as the first devices to
utilize this. Given the large base of third-party application developers and Google’s support,
Android Wear is likely to gain considerable traction in this space. Samsung uses the Linux-
based open source Tizen OS for its Gear 2 and Gear 2 Neo smart watches, with potential as
an emerging competitor to Android. In addition, upcoming introductions from Apple and
Microsoft are likely to leverage their own OSs.
Exhibit 15: Wearables to reach about $20bn by 2017, growing at over 60% CAGR
IDC segments wearables as Complex Accessories, Smart Accessories, and Smart Wearables,
largely overlapping Fitness Bands, Smart Watches, and Smart Glasses, respectively
Source: IDC, Goldman Sachs Global Investment Research.
IDC forecasts the overall wearables segment to increase from over $2.5bn in 2013 to nearly
$20bn in 2017, representing a CAGR of over 60%. Smart Watches and Smart Glasses
(broadly categorized as Smart Accessories and Smart Wearables by IDC) are likely to grow
the most, at a CAGR of close to 100% and 200%, respectively. As a result, IDC estimates
Smart Watches to grow to over 35% of the wearables market by 2017, up from 15% in 2013
(Exhibit 15).
Connected Cars
Connected car refers to any vehicle that is connected to the internet typically using a
cellular technology (3G/4G), and may also feature 802.11 connections for communication
with other vehicles and infrastructure (such as traffic lights). The trend towards connected
cars is well under way; 802.11p has already been standardized for vehicle communications
and Qualcomm has already designed an LTE chipset specifically for the auto industry
(602A). Connected Cars penetration is being driven by applications in the following
categories.
(1) Safety, by providing features such as active cruise control, lane and vehicle proximity
assistance, and traffic assistance. Also, these cars can contact emergency services and
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
2013A 2014E 2015E 2016E 2017E
Revenue($mn)
Complex Accessories Smart Accessories Smart Wearables Action cameras

send vital information such as speed and location automatically in case of an accident,
thereby improving response time. Road and driver safety is one of the prime reasons
for introducing connectivity in cars, stimulated by various regulatory mandates in
different countries.
(2) Vehicle Diagnostics, through which the vehicle can be monitored on a real-time basis,
potential issues can be detected and fixed, thereby providing an efficient overall
driving experience.
(3) Infotainment and Navigation, which provide entertainment features such as video
streaming, access to social media, and internet radio along with GPS-based navigation
and location services.
(4) Fleet Management, which provides features such as real-time vehicle tracking, driver
profiling, and fuel management. This can help organizations manage their fleet more
effectively and improve productivity, thereby reducing overall costs.
According to GSMA, safety related services will be supported by over 41mn vehicles,
vehicle diagnostics by close to 15mn vehicles, in-car infotainment by over 32mn, and
navigation related services by over 28mn vehicles globally by 2018, compared to a global
auto market of about 80mn in 2013.
Regulatory mandates expected to improve car connectivity
Countries have begun to implement regulatory mandates for car manufacturers aimed at
improving road safety for vehicles and pedestrians. eCall (in Europe) and ERA-GLONASS (in
Russia) focus on providing connectivity to cars for faster response in case of emergencies,
while SIMRAV (in Brazil) focuses on tracking stolen vehicles. Other countries like China and
India are also likely to follow suit and have similar mandates. We expect more traction in V2V
(Vehicle-to-Vehicle) communication technology through which cars could prevent collisions
and V2I (Vehicle-to-Infrastructure) communication technology through which cars can
communicate with the traffic signals and suggest adequate speeds to avoid red-lights. Other
mandates include UBI (Usage Based Insurance) which can be used to provide differential
insurance based on the total distance driven, average speed, and car type.
Exhibit 16: Global penetration to reach 60% by 2020 (at 77% CAGR 2013-2020E)
Source: Gartner (March 2014), Company data, Goldman Sachs Global Investment Research.
-
20
40
60
80
100
120
2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E
No.ofcars(mnunits)
Connected Cars Non-connected Cars

The total automobile market is expected to increase from over 80mn units in 2013 to 100
mn units by 2020, a 3% CAGR. While we expect the penetration of connected cars to
increase gradually in the near future from 2% in 2014 to less than 20% in 2017, we expect it
to increase at a much higher rate from 2017 to 2020 and reach close to 60% globally by the
end of 2020, with support from developing countries (including Brazil, China, and India
among others).
Connected Homes
The Connected Home segment focuses on connecting household appliances to the network,
with resulting advantages including improved security, remote management of devices,
and energy management. The following key categories compose the Connected Home.
(1) Security Cameras such as DropCam Pro, Foscam, and Netgear VueZone can be
connected to the Internet. Depending on the product, variants may have night vision
capabilities, stream live feed, and may also be controlled remotely through
smartphones, enabling round the clock surveillance. Some devices also include motion
detection capability that triggers alerts to the home owner in case of unexpected
movements. This could be one of the earliest opportunities in the Connected Home
segment, with the revenue from worldwide home surveillance expected (Source: IDC)
to grow from over $5.5bn in 2013 to $7bn in 2016 at a CAGR of 8%.
(2) Smart Thermostats by Ecobee, Honeywell, and Nest (acquired by Google) can learn
from usage patterns and adjust temperature settings automatically.
(3) Smart Appliances include ovens, refrigerators, washing machines, etc., which can be
monitored as well as operated remotely. Key vendors include Bosch, GE, LG and
Samsung.
(4) HVAC Systems ensure adequate airflow and temperature throughout the house, and
prevent sections from over-heating/cooling. EcoNet, Keen Vents, and others
manufacture smart vents and Honeywell’s Total Connect Comfort Services is one
example of a control solution.
(5) Smart Locks, such as those offered by Goji, KwikSet, and Lockitron, offer keyless entry,
time-based access to select individuals, and remote access via eKeys. Benefits include
convenience and increased security.
(6) Smart Lighting introduces remote control access and typically leverages LED upgrades
to improve energy efficiency. Key vendors include GE, Leedarson, Philips, and
Samsung, as well as a number of start-ups (Exhibit 39).
(7) Entertainment Systems, or home theater and whole house audio systems from Bose
Soundtouch, NuVo, and Sonos, can be integrated with other home systems such as
lighting, climate control, etc. and be controlled via smartphones or tablets to get a
richer entertainment experience.
We believe this segment could be a meaningful revenue opportunity in the near term.
Samsung expects the global Smart Home Device market to reach $15bn in 2015, nearly
doubling over 2013 levels of $7.8bn. Samsung expects the bulk of this opportunity to be
driven by the US, UK, Australia, and China. More recently, Google acquired Smart
Thermostat maker Nest for $3.2bn (January 2014) and Apple launched HomeKit software at
WWDC 2014 (June 2014).

Exhibit 17: Connected Home landscape
Exhibit 18: Worldwide smart thermostat revenues
expected to increase 16X by 2020
Worldwide smart thermostat market revenues
Exhibit 19: North America and Europe home automation
systems revenues expected to increase 6X by 2017
North America and Europe home automation systems
Source: Navigant Research. Source: Berg Insight.
Connected Cities
The initial foray into connected cities was catalyzed by over $3bn in stimulus funding and
support for smart grid technology adoption as part of the United States’ 2009 American
Communication
Protocols
Security Cameras
• Ensure safety by recording activities around a home
• Monitor a child or an elderly person in another room to
see if they require any attention
• Ensure safety of your vacation home throughout the
year by keeping a remote watch
• DropCam Pro
• Foscam
• Honeywell
• Logitech Alert 750n
• Netgear VueZone
• Samsung SNH-1011
• High Quality video and audio
• Two-way talk; Night Vision
• Live-streaming remotely
• Motion detector - mobile and email alerts
• Cloud recording via encrypted channels
• Customizable recording and alert schedules
• Ethernet
• WiFi
Smart Thermostats
• Prevent a home from overheating or overcooling
• Remotely adjust the temperature to appropriate levels
• Set the appropriate temperature automatically based
on previous manual adjustments
• Aros
• Ecobee
• Honeywell
• Nest (Google)
• Smartphone/Tablet based control
• Personalized insights on energy savings via reports
• Setup alerts and reminders
• Setup vacation schedule
• Remote programming via web portal
• WiFi
• ZigBee
Smart Appliances
• Save time on tasks and remotely control various
appliances
• Bosch
• GE Brillion
• LG
• Samsung
• Whirlpool
• Monitor progress remotely
• Set timers and Start/Stop remotely
• Control temperature settings remotely
• Job completion alerts
• Bluetooth
• Insteon
• ZigBee
HVAC Systems
• Adjust room temperature and airflow automatically
based on lifestyle
• Prevent overheating or overcooling sections of the
house and save energy
• EcoNet Controls Z-Vent
• Honeywell's Total
Connect Comfort Services
• Keen Vents
• Monitor and control HVAC over internet
• Access multiple locations from one place (if connected)
• Receive e-mail alerts
• Open/close/redirect vents for most efficient energy usage
• WiFi
• ZigBee
• Z-Wave
Smart Locks
• Answer doorbells and grant access even when not
present in the house
• Receive alerts based on any suspicious activity
around the doors/gates
• Record the entry/exit details for security purposes
• August
• Baldwin Locks
• Goji
• Kwikset Kevo
• Lockitron
• OkiDokeys
• Skybell
• Yale Locks
• Keyless entry
• eKeys - Individual keys for all family members
• Time based access control
• Answer doorbells from anywhere using smartphones
• IR & Motion sensors - sends alerts in case of movement
• 24x7 customer support - in case of smartphone theft
• Logging entry/exit details
• Bluetooth
• WiFi
Smart Lighting
• Automatically dim or switch off the lights when it is
empty in order to save energy
• GE lighting
• GreenWave Reality
• Leedarson Lighting
• LIFX
• Philips Hue
• LED based lighting - energy saver
• Control via smartphone/tablet
• Mood lighting
• Assess daylight levels and control brightness automatically
• Insteon
• WiFi
Entertainment
Systems
• Play music in any of the rooms
• Setup a separate home-theater to watch movies in a
theater like environment
• Bose Soundtouch
• HTD
• NuVo
• Sonos
• Samsung Shape M7
• Whole House Audio/Video
• Wireless mesh network (separate from home's WiFi)
• Can integrated in existing home systems
• Control via smartphone/tablet
• WiFi
0
200
400
600
800
1000
1200
1400
1600
2013 2020E
0
5
10
15
20
25
30
35
Revenue($mn)
mnunits
Revenue ($mn) Installed Base (mn)
$2 bn
$13 bn
0
10
20
30
40
50
60
$0
$2
$4
$6
$8
$10
$12
$14
2012 2017E
Installedbase(mnunits)
Revenue(US$bn)
Revenue Installed base

Recovery and Restoration Act. The United States has emerged as a leading adopter of
smart meter technology, approaching 50% penetration of 150mn total endpoints. The
total addressable market for smart meter upgrades is about 1.5bn home and business
endpoints globally. Navigant Research estimates smart meter penetration was about 20%
in 2013 (an installed base of slightly over 300mn), expected to reach nearly 1.1bn in 2022,
implying a 15% CAGR. Much of the smart meter penetration is being driven by government
initiatives, for example in Europe (where there is a target for 80% of households to have
smart meters by 2020) and Latin America. Smart meters enhance traditional gas, electric,
and water meters by adding two-way communications, or networking capabilities. As a
result, utilities and consumers are able to collect and analyze energy consumption data,
resulting in cost savings (less truck rolls, meter reading, etc.), improved grid efficiency and
reliability, and lower energy usage.
Exhibit 20: Navigant Research expects the smart meter
installed base to grow to over 830mn by 2020
Smart meter shipments by region, units 000s
Exhibit 21: Smart meters represent a 1.5bn global
endpoint opportunity
Approximate estimate of smart meter opportunity by
geography, in million
Source: Navigant Research, 2014. Source: Company data, Goldman Sachs Global Investment Research.
By extension, smart meters and the grid network architecture lay the foundation for further
connectivity throughout cities, including smart street lighting, parking meters, traffic
lights, electric vehicle charging, and others. Silver Spring estimates the TAM for smart
public street lights is about 300mn endpoints. Similar to smart meters, street lighting
offers improved efficiency and better network control/visibility. In conjunction with lighting
connectivity, LED light replacements materially improve energy efficiency. According to
The Climate Group, LED lamps combined with smart controls can reduce CO2 emissions by
50-70%. In addition to the benefits of energy savings, smart street lighting can also
improve public safety. In a similar vein, networked or smart traffic lights offer traffic
reduction benefits and better safety. The Institute of Transportation Engineers estimates
there are more than 300k traffic signals in the United States. Another example is
connected parking meters. While estimates range widely, the Intelligent Transportation
Society of America (2011) estimates there are approximately 20-40mn permit or metered
parking spaces in the US, representing less than 10% of all parking spaces (or roughly
500mn), and the Commercial Investment Real Estate (2004) estimates about 5mn actual
parking meters. As with all connected city applications, outage or technology malfunctions
can be detected more quickly. We detail other potential connected city use cases in Exhibit
22 below.
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
SmartMeters(000s)
Middle East Latin America Asia Pac Europe North America
US
150
UK
25
Japan
70
Brazil
62
India
270
Australia/New
Zealand
10
Rest of Europe
260
Middle East
60
Rest of LatAm
60
China
300
Rest of APAC
240

Smart meters are deployed by utilities, which are generally large, regulated institutions;
thus, technology decisions and deployments take place slowly, typically over several years.
By contrast, street lights, traffic lights, or parking meters procurement is far more
fragmented, with the decision made by cities or municipalities. As a result, deployments
can be far more rapid compared to smart meters. Even though these deployments are in
early stages, we believe the ramp could be more rapid and less lumpy than smart meters.
As an illustrative example, we note that within a year after introducing its solution in mid-
2013, Silver Spring has already begun connecting street lights and traffic controls in cities
such as Copenhagen, Dublin, Miami, Oslo and Paris, and Dongguan and Foshan in China.
Exhibit 22: Snapshot of Connected City space in the IoT market
Network infrastructure for the IoT
The unique attributes of the IoT, as presented above in our S-E-N-S-E framework, imply
three important inflections in network infrastructure.
1. Wi-Fi becomes pervasive: “access for the IoT” – We expect the majority of IoT
devices will access the network wirelessly, given wireless access is more pervasive,
cheaper, and easier to deploy than wireline. Further, we expect Wi-Fi to be the
dominant wireless access technology for IoT, given that unlike cellular, it uses
unlicensed spectrum and thus does not require monthly access fees. This is also
consistent with the results of a survey of by VDC Research, where about 70% of
respondents expect the IoT to use Wi-Fi (Exhibit 25). Put another way, just like wired
access (copper and fiber) laid the foundation for the fixed Internet and cellular access
(3G and 4G) enabled the mobile Internet, we expect Wi-Fi to be the enabler of the
Internet of Things. To put these markets in context, the size of wired access market was
$7.0bn in 2013, while the cellular basestation market was $43.0bn, implying significant
headroom for the Wi-Fi access point market, which was $7.8bn.
Communication
Protocols
Smart Grid
• Save time and cost associated with meter reading, by doing it remotely
instead of visiting the premises
• Provide notification of any failures or outages instantaneously, thereby
enabling more timely corrective response
• Protect meters from being tampered with
• Echelon
• Elster
• Itron
• Sensus
• Silver Spring Networks
• Toshiba
• Remote monitoring of electricity and gas usage
• Outage alerts
• Real-time load control
• Remote disconnect switch
• More accurate pricing to reflect peak/off-peak usage
• Power Line
Communication (PLC)
• WiFi
• ZigBee
• Cellular
Smart Street
Lighting
• Reduce energy consumption by switching to LED street lighting
• Detect failrue and expedite replacements
• Improve the safety of pedestrians by illuminating the crossings with
appropriate color to indicate whether it is safe to cross or not
• Echelon
• Philips GreenLine
• Sensus
• Silver Spring Networks
• Tvilight
• LED based lighting
• Automatic dimming
• Energy savings in the long run
• Faster failure detection
• Color coded pedestrian crossing
• PLC
• Cellular
• WiFi
• Cellular
Smart Mobility
• Reduce congestion by providing real-time information about available
parking spots to the drivers
• Control the frequency of traffic signal changes depending on traffic and
pedestrians, and thereby easing traffic flow
• Cisco
• Deteq
• IBM
• Libellium
• Schneider Electric
• Streetline
• Detection of free parking spots
• Vehicle and pedestrian detection
• Pollution, icy roads detection
• Crack monitoring - bridges, tunnels
• Automated tolling systems
• Real-time traveler information
• Bluetooth
• WiFi
• Cellular
Smart Buildings
• Integrate different systems such as HVAC, lighting, elevator, access
controls, and fire alarms for more efficient response in case of an
emergency as well as lead to savings in daily energy requirements
• Monitor equipment performance in real time, identify past trends and
potential points of failure for optimization of operations
• BuildingIQ
• Cisco EnergyWise
• Echelon
• Hitachi
• IBM
• Mitsubishi Electric
• Control HVAC, lighting systems, elevator systems,
access management and the safety of the entire building
• Demand Response
• Reduced energy consumption
• BACnet
• KNX
• LonWorks
• Modbus
Smart Water
• Monitor water quality to ensure quality for general consumption
• Monitor industrial discharge into rivers/seas to avoid contamination
beyond acceptable limits
• Detect and manage floods more effectively to reduce life/property
damage
• Geosyntec
• ioBridge
• Libelium
• Monitor water quality (pH, temperature, ammonia
content etc.) on a real-time basis
• Detect water leakages in pipes
• Integrated water cycle management
• Detect floods
• Cellular
• ZigBee

2. Cellular baseband market could expand by over 15% – We view the IoT as an
incremental growth opportunity for the cellular baseband market, which is otherwise
maturing given already high handset penetration globally. The cellular baseband
market in 2013 was $17.3bn (+13% yoy) based on handset market shipments of over
1.8bn (handsets drive the majority of baseband units, though tablets and other devices
certainly contribute). Ultimately, we believe the IoT could add about 2 percentage
points to cellular baseband market growth through 2020, assuming cellular attach rates
for IoT devices of about 5%, which implies 250-300mn IoT cellular baseband shipments
in 2020. The automobile vertical is likely to be the biggest driver of IoT cellular
baseband demand within that timeframe, as cars are mobile and thus will need cellular
connections as opposed to Wi-Fi. As discussed above, the annual volume of cars
shipped is around 80mn, most of which could be connected by 2020. In addition, tough
to reach locations such as smart meters or street lighting in rural areas could also be
connected via cellular connections if fixed line Internet and Wi-Fi are not available.
3. The network edge gains intelligence: “fog computing” – The traffic patterns of the
IoT will be different than those of the traditional Internet, driving more of the network’s
intelligence to the edge. The differences stem from the fact that IoT devices will be an
order of magnitude greater in number than PCs and smartphones, but the bandwidth
usage per device can be orders of magnitude lesser (think of the data rate of a parking
meter compared to streaming an HD video to a smartphone). This implies there will be
a lot more signaling traffic relative to data traffic, as well as a greater need for
subscriber management. In addition, a greater percentage of the data generated may
be noise (e.g., an IP surveillance camera or a smoke detector in the absence of any
events), with only occasional needs for action to be taken (e.g., sound an alarm if there
is an event). Therefore, more of the intelligence will need to shift to the “edge” of the
network (i.e. servers, routers, or gateways that are near the end devices), for two
reasons: (a) so that decisions can be made with low latency (e.g., apply the brakes to a
train if there is an issue with the tracks), and (b) so that bandwidth is not wasted by
hauling a lot of useless data or background noise to the cloud. This architecture is
sometimes referred to as “fog computing,” a term coined by Cisco, a reference to the
fact that some of the data will be collected and be processed near the devices, just like
fog is near the ground, rather than in a far-away “cloud” data center.
Sizing the incremental networking opportunity
We estimate that the IoT offers the largest incremental networking opportunity for
(1) connectivity chips, (2) Wi-Fi access points, and (3) cellular basebands. Based on
IDC’s IoT forecast of 28bn devices by 2020, we estimate that IoT devices could drive an
incremental $4.6bn of annual connectivity chip revenue (Wi-Fi, Bluetooth, etc.) by 2020,
compared to 2013 market size of $7.1bn. In other words, the IoT could add more about 65%
to the market size by 2020, implying a 7% CAGR from 2013-2020, based on our assumption
that 85% of connected IoT devices will have some type of connectivity, such as Wi-Fi or
Bluetooth. Similarly, we estimate that the IoT could expand the cellular baseband market
by about 16% relative to its size of $17.3bn in 2013, based on an assumption that 5% of IoT
devices will have a cellular connection at an ASP of $10 per baseband.
From a network infrastructure standpoint, we believe Wi-Fi access points are most
leveraged to the IoT due to high attach of Wi-Fi and low cost of deployment, leading to a
50% incremental market opportunity or a 6% CAGR through 2020. Conversely, we do not
expect the impact to Optical or Routing markets to be as material, with an incremental
contribution of 8-9% by 2020 or a 1% CAGR, reflecting the lower bandwidth usage of IoT
devices relative to the wired and mobile Internet.

Exhibit 23: We estimate the IoT adds the most growth to the Wi-Fi market, with limited
impact to Optical and Routing markets
Incremental revenue opportunity by segment in 2020, compared to market size in 2013 ($mn)
Source: Gartner, Dell Oro, IDC, Cisco VNI, Infonetics, Goldman Sachs Global Investment Research.
IoT communication standards
There are a host of communications mediums that will be employed in the broad IoT
landscape (Exhibit 26). As described above, we expect Wi-Fi to be the cornerstone wireless
technology for IoT. As part of its VNI forecast, Cisco forecasts 61% of all global internet
traffic will be Wi-Fi based. Similarly, survey results from VDC Research imply Wi-Fi will be
used in a majority of IoT devices.
Exhibit 24: Global Internet Traffic, Wired and Wireless
Exabytes per Month
Exhibit 25: Wireless Technologies in M2M/IoT projects
Survey respondents on type of wireless technology
Source: Cisco VNI 2014 : The Zettabyte Era. Source: VDC Research.
Below we address some of the key attributes as well as benefits and limitations of the
primary IoT communication technologies.
65% growth
52% growth
16% growth
9% growth
8% growth
-
5,000
10,000
15,000
20,000
25,000
Connectivity
chips (Wi-Fi,
Bluetooth, etc)
Wi-Fi APs Cellular
baseband chips
Optical (Metro) Routers (Service
Provider Edge)
Marketrevenues($mn)
2013 Market Size IoT opportunity (2020)
55%
61%
41%
24%
4%
15%
0
60
120
2013 2014 2015 2016 2017 2018
ExabytesperMonth
Fixed / Wi-Fi Fixed / Wired Mobile Data 0% 10% 20% 30% 40% 50% 60% 70%
Other
ANT
AM or FM radio
315/433 MHz
Infrared
Proprietary wireless
900 MHz
Unlicensed 2.4GHz band
Cellular 2G
Wi-Fi Direct
Cellular 4G
NFC
Bluetooth Classic
Zigbee
Cellular (3G)
Bluetooth LE/Smart
Cellular (any)
Bluetooth (any)
Wi-Fi

Exhibit 26: IoT Wireless Technologies characteristics
Not a complete list
Source: Gartner, Goldman Sachs Global Investment Research.
 Cellular – Provides always-on connectivity to the macro network. Similar to mobile
phones, cellular data can transmit over 2G, 3G, or 4G networks. Benefits include broad
coverage leveraging existing base station infrastructure as well as mobility (e.g., cars).
Potential drawbacks include power consumption, fees associated with data transfer
over licensed spectrum owned by carriers, and potential gaps in coverage. Cellular
chipsets range from the mid-$20 range for high-end LTE to the mid-single digits for
legacy connections (like 2G and 3G).
 Wi-Fi – Offers low power consumption and low cost relative to cellular. Unlike cellular,
Wi-Fi operates in unlicensed spectrum, resulting also in lower data transmission costs.
Range is limited by proximity to a wireless router or relays and the quality of
connection can be diminished by network congestion. Wi-Fi chips are typically priced
in the mid- to low-single-digit dollar range. There are several different Wi-Fi standards
and IoT applications, such as the following.
o Wi-Fi Direct enables two or more devices to connect directly in the absence of
a traditional Wi-Fi hotspot.
o With the recent availability of the 802.11ac Wi-Fi standard, Wi-Fi operates in
the 5GHz band with wider channels (note 11n could also operate in 5GHz but
in smaller channels), thus enabling more capacity. Theoretical throughput of
11ac can exceed 1 Gbps.
o Also known as Low-Power Wi-Fi, 802.11ah operates in the sub 1GHz band.
Qualcomm views 802.11ah as central to IoT, given support for extended range
Wi-Fi and efficient power profile. 11ah extends Wi-Fi beyond 2.4 and 5GHz,
enabling coverage in challenging environments such as in building,
basements, etc. It also supports low cost sensors without a power amplifier,
and minimum data rates result in short-term data bursts. 11ah draft 2.0 is
expected to be standardized in mid-2014, though final standards may not
arrive until early 2016.
o 802.11p is an approved standard for vehicle to vehicle communications. It
uses dedicated short range communications (DSRC) for applications such as
toll collection, interaction between cars, and safety and roadside
communications.
 Bluetooth – Bluetooth provides a short distance wireless connection with low power
consumption, even compared to Wi-Fi. Bluetooth Low Energy (also known as
Bluetooth Smart or BLE) further reduces the power consumption profile of traditional
Bluetooth. For example, Bluetooth devices can sustain battery life for weeks or months,
while Wi-Fi can be hours or days. Data transfer rates are somewhat limited at about
1Mbps (though theoretical throughput is up to 24Mbps), though the range extends up
to about 100 meters (300+ feet). Similar to Wi-Fi, Bluetooth can be used for machine to
machine connections and device pairing. Bluetooth 4.1 was introduced in December
Wireless Communications
Technology
Key Applications Range Max Throughput Power
Consumption
Cellular (2G, 3G, LTE) Always connected, high data rates, mobility 30km 1Gbps High
NFC Mobile marketing, mobile payments, wearables 10cm 20Kbps Low
Wi-Fi Automotive, connected home, consumer electronics, mobile marketing, appliances, wearables 100-300m 300Mbps High*
Bluetooth Mobile marketing, mobile payments, connected home, personal productivity 10-100m 1Mbps Low
ZigBee Connected home, consumer electronics, appliances, industrial 10-100m 20Kbps-250Kbps Low
Z-Wave Connected home, appliances Variable (+/-100m) 40Kbps Low
* Low power Wi-Fi option

2013, which enables devices to communicate with each other before feeding that data
back to a host, and interoperates with LTE.
 ZigBee – Standardized by the IEEE, ZigBee is a low power communication protocol
that operates in the industrial, scientific, and medical (ISM) radio bands (900MHz or
2.4GHz). As a result, data transmission rates can vary from 20Kbps to 250Kbps. ZigBee
is often deployed in a mesh network format (such as with smart meters), whereby
endpoints can interconnect and create a reliable network with extended range. ZigBee
enables devices to join a network very quickly.
 Z-Wave – Z-Wave is a wireless protocol designed for home automation. It uses low-
power RF radio for household devices such as lighting, entertainment systems, and
appliances. It is a low-latency communication method with data rates up to 100Kbps
and operates in sub-gigahertz frequencies.
In reality, many IoT endpoints will employ multiple communications technologies based on
cost, improved flexibility, and interoperability. A primary example is Google’s Nest, which
incorporates both Wi-Fi and ZigBee. In addition, Silver Spring Networks’ smart meters
support cellular, ZigBee, RF mesh, and Wi-Fi capabilities. A key advantage of Wi-Fi and
Bluetooth is that they are already embedded in essentially all smartphones.
Higher-level standards under way – The IEEE has already standardized dozens of use-
cases and applications for IoT protocols. In addition to the basic communications standards
discussed above (layer 2 in the OSI stack), which handle the underlying communications,
there is a need for standardization at higher layers of the stack. While the ecosystem
remains fragmented, we highlight two key organizations that have emerged to drive
operating system standardization and coordination efforts across industries: the AllSeen
Alliance, whose focus is more broadly directed at the consumer side of the IoT, and the
Industrial Internet Consortium, which addresses industrial applications.
 AllSeen Alliance – The AllSeen Alliance was established in December 2013 and
comprises about 40 organizations, including many of the major consumer brands such
as Haier, LG, Panasonic, and Sharp (Exhibit 27). The alliance is working on the
emerging AllJoyn operating system for IoT, an open-source framework started by
Qualcomm which has been contributed to the AllSeen Alliance and is in the process of
being standardized under the Linux Foundation. AllJoyn is an application-level
protocol (layer 7 in the OSI stack) that enables security, discovery, and interoperability.
Currently, the core framework includes device information and configuration,
onboarding, notifications (enable devices to broadcast and receive basic
communications), control panel (enable a device to control another product via a
graphical interface), and audio. The idea is that any two devices that support AllJoyn
can communicate to each other, without regard for which manufacturer made them or
which communications technology they use. To use an analogy, AllJoyn is to the IoT
what HTTP (Hypertext Transfer Protocol) is to the Internet. Other open-sourced
operating systems designed for the IoT including Contiki, LiteOS, RIOT, Sapphire,
Nimbits, Thingspeak, OpenAlerts, IoT Toolkit, The Thing System, and Nitrogen.

Exhibit 27: Members of the AllSeen Alliance
Source: Allseenalliance.org
 Industrial Internet Consortium – The IIC was started in March 2014 by five founding
members - AT&T, Cisco, GE, Intel and IBM. IIC has nearly 50 members that include
many industrial companies (Exhibit 28). The IIC is focused on IoT use cases, reference
architecture framework, and testbed prioritization. While it is not a standard-setting
body, it has established relationships with standards organizations to influence the
standard-making process as an enabler of IoT.
Exhibit 28: Members of the Industrial Internet Consortium
Source: IIConsortium.org
Premier
Haier 2lemetry Fon Musaic
LG Electronics AT&T Digital Life GOWEX Muzzley
Panasonic Affinegy Harman Patavina Technologies
Qualcomm Audio Partnership HTC Sears Brand Management Corp
Sharp Beechword Software iControl Networks Sprotuling
Silicon Image Beijing Winner Micro Electronics Imagination Technologies The Sprosty Network
Technicolor Canary Kii Tuxera
TP-Link CA Engineering Letv Two Buls
Cisco LIFX Vestel Group
D-Link Lite-on Weaved
doubleTwist Moxtreme Wilocity
Community
Accenture Intel-GE Care Innovations SevOne, Inc.
AT&T* MachineShop, Inc. SpaceCurve
Bayshore Networks, Inc. MDSL Symantec
BlackBerry Micron Technology Synapse Wireless
Bosch MITRE Corporation System Insights
Cisco Systems Inc.* Mobily TE Connectivity
Cubicon Corporation Open Group The Charles Stark Draper Laboratory
Dan Hussain Moxa Inc. ThingWorx
Datawatch Parker Hannifin Toshiba
Eclipse Foundation People Power Toyota Motor Sales
Elecsys Corporation Pitney Bowes Tyco
ENT Foundation PrismTech V2COM
General Electric* PTC Inc Vanderbilt University
Grid Connect Inc. Purfresh Inc. Water & Process Group (WPG)
Huawei Technologies Co., Ltd. Real-Time Innovations Wyconn
IBM* RhoData Corporation Xcaliber Technologies, LLC
Intel* LAAS-CNRS
* Founding Member
Members

Semiconductors for the IoT
IoT presents a secular growth opportunity within microcontrollers, analog and
sensors; although we see the opportunity as a driver of incremental growth, rather
than an inflection point. We believe the internet-of-things describes a trend toward higher
semi content that has already been taking place for some time. We believe this is illustrated
by the higher growth rates in microcontrollers and sensors in recent years, especially in the
context of overall semi industry growth slowing.
 Microcontrollers: Microcontroller units grew at an 8% CAGR between 1998 and 2005,
but at an 11% CAGR between 2006 and 2013 (Exhibit 29). This compares to IC units ex.
memory growing at a 7% and 3% CAGR respectively over these time frames (We
choose 2006 as an inflection point because this is when growth rates vs. IC units begin
to noticeably diverge).
Exhibit 29: Microcontroller growth has significantly outpaced the semiconductor market
Market size and unit CAGR
Source: SIA, Goldman Sachs Global Investment Research.
 Sensors: Sensors grew at a 6% CAGR from 2004 to 2008, compared to IC units ex.
memory also growing at 6% (Exhibits 30 and 31). However, from 2011 to 2013, sensors
grew at a 5% CAGR vs. IC units ex. memory being flat (we choose 2011 as an inflection
point due to reclassification in the SIA data in 2010, although historical data suggests
sensor growth rates may have inflected higher as early as 2009).
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Jan-98
Aug-98
Mar-99
Oct-99
May-00
Dec-00
Jul-01
Feb-02
Sep-02
Apr-03
Nov-03
Jun-04
Jan-05
Aug-05
Mar-06
Oct-06
May-07
Dec-07
Jul-08
Feb-09
Sep-09
Apr-10
Nov-10
Jun-11
Jan-12
Aug-12
Mar-13
Oct-13
MCU&semiunits(indexedto1998)
MCU IC units
1998 - 2005
MCUs: 8% CAGR
IC units: 7% CAGR
2006 - 2013
MCUs: 11% CAGR
IC units: 3% CAGR

Exhibit 30: Sensors grew in-line with the overall semi
market from 2004-2008…
Indexed IC units and sensor units to January 2004
Exhibit 31: ..but sensor growth has outstripped semis
from 2011-2013 (5% CAGR vs. semis at 0%)
Indexed IC units and sensor units to January 2011
Source: SIA, Goldman Sachs Global Investment Research. Source: SIA, Goldman Sachs Global Investment Research.
Sizing the semiconductor content opportunity
Higher ASPs and higher performance; or lower ASPs and higher volumes. Upgrading
an IoT device or system to include real-time data monitoring and analytics requires
additional microcontroller and sensor content. For microcontrollers specifically, we believe
the incremental opportunity lies in either (1) upselling a customer to microcontrollers with
higher processing power (e.g., from 8-bit to 32-bit) or (2) developing lower-cost and lower-
power chips that can be sold in meaningfully higher volumes. Examples include the
following.
 In the industrial market, the trend toward “distributed” controllers vs. one centralized
controller. Controllers are installed at more stages in a production process to allow for
more precise monitoring, analysis and correction. Although each distributed controller
is sold at a lower ASP than a centralized controller, the volume opportunity is more
significant.
 In automotive, applications include advanced driver assist, safety features, and
infotainment. We estimate that semi content gains in automotive have averaged 6%
per year over the past 10 years.
 In the wearables and smartphone markets, devices increasingly include sensor hubs.
Sensor hubs are microcontrollers which offload power and processing requirements
from a core processor and hence offer longer battery life (we believe in the order of
10%-20%) and greater power efficiency at a small incremental cost.
We summarize ASPs across processors and sensors in Exhibits 32 and 33, and provide a
snapshot of key semi content in Internet-of-Things device teardowns in Exhibit 34.
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
Jan-04
Mar-04
May-04
Jul-04
Sep-04
Nov-04
Jan-05
Mar-05
May-05
Jul-05
Sep-05
Nov-05
Jan-06
Mar-06
May-06
Jul-06
Sep-06
Nov-06
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Indexedunitgrowth,2004-2010
Sensors IC units ex. memory Linear (Sensors) Linear (IC units ex. memory)
Sensors: 6% CAGR 2004 - 2008
IC units: 6% CAGR 2004 - 2008
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
Indexedunitgrowth,2011-2014
Sensors IC units ex. memory Linear (Sensors) Linear (IC units ex. memory)
IC units: 0% CAGR 2011 - 2013
Sensors: 5% CAGR 2011 - 2013

Exhibit 32: Processor ASPs vary by performance
Estimated range of sensor ASPs
Exhibit 33: Sensor ASPs vary by application
Estimated range of sensor ASPs
Source: Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research.
Exhibit 34: Teardowns of existing IoT devices reveal substantial semiconductor content
Chips across IoT devices
Source: iFixit, Company data, Goldman Sachs Global Investment Research.
Cores, architectures and power efficiency
Key architectures for IoT:
X86: Intel launched Quark, its new product family specifically for IoT applications, in
September 2013 and it is currently shipping 32nm SoCs at about $10 per chip. Quark is
designed for low power applications, with Intel claiming Quark chips are one-fifth the size
and one-tenth the power of its existing low-power Atom line of products. Intel plans to
increase investment in IoT applications by 20% this year and now reports a new “Internet
of Things” business segment quarterly. In 2013, this segment comprised $1.8 bn in
revenue (3% of sales) vs. $1.6 bn in 2012, including contributions from software. AMD is
$0
$5
$10
$15
$20
$25
8-bit 16-bit 32-bit ARM apps
processor
Intel Quark Low-end
x86 MPU
ASP(US$perpiece)
$0
$5
$10
$15
ASP(US$perpiece)
Industry
sensor
ASP: $0.58
Semi content Nike Fuelband FitBit One Nest Smart Meter Gear Watch Google Glass
MPU/APU
Integrated SoC
MCU
MCU (2)
ASIC
Bluetooth
WiFi module
Zigbee SoC
Power SoC
Protection circuit module
Battery management
Amplifier
USB controller
Audio codec
Accelorometer
Gyroscope
Activity sensor
Altimeter
Camera
Heat sensor
Humidity sensor
Proximity sensor
Smoke sensor
Retail price $99 $100 $129 $50 - 200 $199 $1,500
Processing
Connectivity
Analog
Sensors

pursuing similar IoT opportunities with its Eagle Steppe product family. A key part of the
company’s strategy is diversifying beyond its traditional PC and server market with new
embedded applications.
ARM: ARM Holdings targets IoT applications with its Cortex M series of microcontrollers,
which have been introduced at progressively lower price points and power envelopes
(Exhibit 35). Microcontrollers represent the highest share of royalty revenues for ARM in its
Embedded Systems segment, and are one of ARM’s highest unit opportunities in our view.
ARM has Cortex M partnerships with over 40 microcontroller companies.
MIPS: Imagination acquired MIPS in 1Q13 and, in the following weeks, articulated a goal of
25% share of the CPU IP market (compared to 6% in 2012, based on data from The Linley
Group). Since that time, the company has announced partnerships with Qualcomm,
Broadcom, and others to create an open-source foundation promoting the MIPS
architecture for improved portability from “datacenter to device,” In addition, Imagination
is working with Java to improve the performance of Java-based applications on its
proprietary 32-bit and 64-bit graphics cores.
Exhibit 35: ARM continues to develop smaller, lower power MCUs
ARM MCUs over time
We believe that ARM-based microprocessors and microcontrollers will have a distinct
advantage over x-86 chips in the IoT market for the following reasons.
1. Power efficiency: Our view continues to be that x-86 chips are best positioned in
applications that require high performance, and that ARM chips are best
positioned in applications that require low power. Although apples-to-apples
benchmarking statistics comparing Intel’s Quark to ARM’s Cortex M products have
yet to become available, we expect ARM will continue to hold a power efficiency
advantage in embedded applications over the medium term.
2. Existing customer relationships and channel breadth: Although Intel and AMD
have strong relationships through the PC supply chain, we believe ARM’s
microcontroller partners have considerably more breadth in the handset,
consumer, auto, and industrial markets.
3. Adjacency to analog content: We believe companies with broad portfolios of
microcontroller and analog content are best positioned to benefit from IoT, as
0
20
40
60
80
100
120
140
160
180
Cortex M4 Cortex M3 Cortex M0 Cortex M0+
2010 2004 2009 2012
Dynamicpower(µW/MHz)
1.8V 1.2V 0.9V

these companies can sell customers a complete analog-processing solution. These
types of integrated solutions likely lower costs and improve time to market. All of
the microcontroller companies in our universe have supporting analog portfolios,
whereas customers sourcing processors from Intel/AMD must source their analog
content separately.
We refer readers to the ARM company profile on page 34 for more detail.

Company profiles: Infrastructure enablers for the IoT

Aerohive (HIVE, Buy): Benefiting from the next generation of
connected students
Company profile
Aerohive is a provider of cloud-based enterprise wireless local area networking (WLAN)
solutions. Aerohive’s “controller-less” approach manages the WLAN network through its
Cloud Services Platform, which can sit in Aerohive’s data centers, private clouds, or partner
clouds. Aerohive sells WLAN access points (AP), campus/branch routers and switches,
cloud services, and software to enterprises. The majority of Aerohive’s revenue comes
from education (40-50% of revenue), retail, and healthcare.
Exposure to IoT
IoT for the next generation of connected students – Three out of five schools in the US
do not have needed Wi-Fi connections, according to the Federal Communications
Commission (FCC). As the next generation of connected students incorporates its mobile
devices into classrooms, Wi-Fi for the education vertical, especially K-12, becomes a
spotlight, evidenced by the FCC’s recent proposal to allocate $2bn in E-rate funds for Wi-Fi
in schools through 2015 and 2016. We believe that Aerohive, with its heavy exposure to the
education vertical, is in a strong position to benefit from this initiative. Longer term, as
students adopt wearables and shoppers, patients, educators, and employees expect a more
connected experience, we expect Aerohive will be a key enabler.
Amphenol (APH, Neutral): Broad connector exposure with
increasing sensor business
Company profile
Amphenol is a diversified supplier of connectors and related components including
antennas, cable, and sensors. The company has a history of using tuck-in M&A to add new
capabilities and maintain balanced end-market exposure, and this has translated into
above average organic growth. Amphenol is the second largest supplier in the roughly $50
bn connector market based on revenue. Its key end markets are mobile devices, A&D,
datacom, industrial, auto, and mobile networks.
Exposure to IoT
We believe that Amphenol will benefit from increasing connector content in industrial and
auto applications, which we view as a continuation of the long-term trend in the market. In
addition, we believe that Amphenol’s recent acquisition of GE’s Advanced Sensor business
will help the company to benefit from increased measurement requirements for IoT
applications. We estimate that sensors are a low to mid-single digit percent of total sales
for Amphenol. Finally, Amphenol’s antenna business could pick-up for IoT connectivity,
and we believe this is more likely to occur in larger form factor devices given that its sales
are currently tied primarily to tablets and ultrabooks for WiFi (rather than for handsets).
Apple (AAPL, Buy): Extending the iOS ecosystem to IoT
Company profile
Apple is a leading provider of smartphones, tablets, and PCs with proprietary operating
systems across mobile devices (iOS) and general purpose computers (Mac OS). The
company sells its products directly through their more than 400 retail stores as well as
through carrier partners and third-party retailers. Apple’s platforms attract a robust user
Covered by Kent
Schofield, US Smid-
cap CommTech
analyst
Covered by Mark
Delaney, US IT Supply
Chain and Semi
analyst
Covered by Bill
Shope, US IT
Hardware analyst

base with nearly 800 million iTunes accounts and a Mac installed base of 80 million.
iPhones represent the largest revenue generator for Apple with 150.3 million units in
FY2013 totaling $91.3 billion in sales (53% of total company revenue). iPads generated 19%
of FY2013 revenue as the company sold 32.0 million units. The Mac segment accounted for
$21.5 billion of revenue in FY13, which equates to 13% of the company total. Apple also
has a robust services stream with the iTunes/Software/Services segment generating $16.0
billion of revenue in FY13 (9% of total). Platform enhancements continue to be critical for
Apple as they increase stickiness and create a virtuous cycle by which user growth attracts
content and developers which attracts further user growth.
Exposure to IoT
Hardware focus primarily through wearables and iBeacon ecosystem – To date, Apple
does not manufacture any IoT-centric hardware, though they do provide an interface to
communicate with iOS devices through iBeacon. iBeacon is a Bluetooth-enabled
technology that enables location-based awareness. As far as hardware is concerned, we
continue to believe that the company will launch an iWatch in the coming months and
wouldn’t rule out Apple expanding into further wearables categories over time.
Extending the iOS platform into the IoT – The biggest opportunity for Apple within the
IoT exists in extending the iOS platform beyond traditional mobile use cases (smartphones
and tablets) into the IoT. As the near-term potential for substantial hardware differentiation
in Apple’s traditional markets is narrowing, iOS platform differentiation is becoming
increasingly critical. Apple’s innovation focus is likely to skew more towards software-
related enhancements than in the past as the company attempts to both increase platform
stickiness and attract new users. Pushing outward into the IoT is a logical extension of that
strategy as the more aspects of a user’s day-to-day life Apple touches, the more likely that
user is to remain within the Apple ecosystem.
Primary monetization through incremental iOS device volume – Monetization through
additional iOS device volume (namely iPhones and iPads) greatly outweighs the impact of
incremental revenue and profit from IoT-related sensors. As discussed in our May 29, 2014,
note Apple: The “Next Big Thing” isn’t Hardware, a 1% revenue share in the smartphone
market yields 7x the EPS contribution of a 1% share in the watch market. Additionally, in
building out an IoT platform, the opportunity remains for Apple to begin selling more
robust services into its installed base.
HealthKit and HomeKit illustrate development of “sub-platforms” – Within the IoT, the
landscape is likely to split into multiple “sub-platforms” given the vertical-specific needs of
different categories of devices. Apple’s recent announcement at WWDC 2014 of the launch
of HealthKit and HomeKit address this specific need, providing APIs for third-party
developers to link into. While historically IoT device data lived in app silos on iOS, these
sub-platforms will provide a central hub for multiple devices to co-exist and share data.
One home-related example of how this could play out in practice would be a user telling
Siri to “get ready for bed”, which triggers the garage doors to close, the doors to lock, and
the lights to shut off. Within health, there are both consumer-oriented use cases and health
provider benefits. A benefit to consumers would be Nike’s Nike+ app pulling together
sensor data from multiple apps into one place to measure progress towards fitness goals.
With respect to data for medical professionals, the Mayo Clinic app was used as an
example to illustrate how a user's blood pressure reading can be compared with “normal”
levels and automatically notify a care provider if the metric falls outside of normal metrics.

ARM (ARM.L, Buy): Significant potential to capitalize upon the IoT
based on ARM’s low power designs
Company profile
ARM is a leader in processor architecture design for chip manufacturers, which it
monetizes via its royalty model. While ARM has a dominant market position in the handset
and tablet verticals, we expect a rapid acceleration in royalties from non-mobile, including
areas such as Networking, Enterprise and Embedded Systems, to drive almost 50% of
group incremental revenue growth out to 2018. ARM’s licensing and royalty model is
extremely scalable (95% incremental EBIT margins for royalties) and we see the licensing
base as a key platform for continued market share dominance in mobile and share gains in
non-mobile. We estimate a path towards 65% underlying operating margins by 2018, with
a five-year EPS CAGR of more than 20%.
Exposure to IoT
Power efficiency advantages support IoT market share – We see ARM’s IP architecture
as a key enabler for the Internet of Things, with the Cortex M (Cortex-MO, M1, MO+, M3,
M4) series of MPU designs positioning ARM well, in our view, to capitalize upon this
opportunity. We analyze ARM’s IoT exposure in the context of four separate components of
the IoT ecosystem, all of which sit within ARM’s Embedded Systems segment: (1)
Microcontrollers, which conduct local processing and constitute a tool for information
discovery, (these form the greater part of Embedded Systems revenues for ARM); (2)
Embedded connectivity devices (i.e., Bluetooth and Wi-Fi chips), which allow for machine-
to-machine communication; (3) Connectivity hubs, which perform a routing function in the
transmission of information between machines; and (4) Wearable devices, which allow for
wider ubiquitous computing.
We view the power efficiency advantages of ARM’s Cortex-M designs as supportive of
ARM’s market share across designs relating to these four areas, and we see ARM’s blended
share in such areas rising from roughly 30% in 2015 to more than 50% by 2020, driving
30% unit growth in these areas for ARM in 2015-2020 (five-year CAGR).
Large opportunity for Microcontrollers – Microcontrollers, which represent the highest
share of royalty revenues for ARM in its Embedded Systems segment, are one of ARM’s
highest unit opportunities in our view, given licensing momentum and end-market
potential. Historically, MCU producers’ architectures have been based on proprietary
designs; however, over the last few years producers in possession of more than 50% of the
MCU market have announced that they have licensed ARM’s architecture for MCU
production as opposed to internally developed designs. ARM has now signed more than
198 Cortex-M licenses with 40 companies, making the Cortex M0 ARM's fastest licensing
processor design.
Growth of Embedded Systems – We estimate that Embedded Systems were 29% of
ARM’s royalty units in 2013, which in light of rapid market share gains and end-application
growth will increase to 52% in 2018. We forecast ARM’s architecture will feature in 45% of
total MCUs in 2018 (vs. 17% estimated share in 2012). We assume such scope for share
gains despite our assumption that market leader Renesas Electronics is unlikely to utilize
ARM’s technology for the majority of its MCUs (although we noted its recent
announcement of an ARM-based high-performance processing MPU of 300 MHz and
higher).
While the large-scale proliferation of MCUs will have a deflationary impact on ARM’s
average royalty rate (ARR) based on mix, given that they represent low-value chips (vs
ARM’s other end-devices), the MCU unit opportunity remains significant, and we expect
this to translate into a 36% royalty revenue CAGR for ARM in Embedded chips (2013-2018),
driving 19% of group incremental royalty revenues over the period.
Covered by Alexander
Duval, European Tech
Hardware analyst

Aruba Networks (ARUN, Neutral): Capitalizing on IoT through Wi-Fi
connectivity and the BYOD trend
Company profile
Aruba is the largest stand-alone enterprise WLAN vendor (with the number-two market
share position, 11% in 2013), offering access points, controllers, and WLAN enhancement
products such as intrusion protection, network management, and layer 4-7 services. Aruba
primarily focuses on being a “best of breed” provider of WLAN products to large
enterprises, but entered the middle market and “distributed enterprise” in 2011 with its
Aruba Instant offering.
Exposure to IoT
Capitalize a more connected generation of workers – As the bring your own device
(“BYOD”) trend, ”), which we expect to include more than the typical computing devices
seen today, is becoming increasingly important, Aruba is in a key position to capture such
demand as the largest standalone Wi-Fi equipment vendor. With the wave of personal
devices, wearable technology, and connected “things” increasing, enterprises continue to
implement and upgrade Wi-Fi technology (including the ongoing transition to802.11ac
standard) to keep up with speed requirements and demand for connectivity. We have
already seen the early effect of this trend as Aruba’s ClearPass (managed software for
BYOD) has been growing double digits and Aruba Instant (controller-less WLAN) bookings
have been growing more than 100% yoy. In addition, Aruba acquired indoor location
company Meridian in May 2013, which could help position the company in retail,
industrials, and public spaces (e.g., stadiums).
BlackBerry (BBRY, Neutral): Leveraging QNX and BlackBerry’s
secure network infrastructure for IoT
Company profile
BlackBerry designs and sells smartphones for consumers and enterprises, with an
increasing focus on providing and expanding set of related enterprise services. BlackBerry
historically differentiated its offerings through their best in class security as a result of the
end-to-end encryption of its architecture. However, its share of the smartphone market has
fallen to under 1% compared to a peak of almost 20% in 2009, as it missed the transition to
touchscreen smartphones and lost share to Apple and Android-based devices. The
company is undergoing a significant strategic and operational restructuring under CEO
John Chen, who joined in November 2013. As part of that shift, BlackBerry is increasing its
focus and investment in its QNX business, which provides an operating system for
automotive and other IoT applications. In addition, BlackBerry is looking for ways to
leverage its network operating centers (NOC) for new services such as BlackBerry
Messenger (BBM), secure enterprise mobility management (EMM), and mobile payments.
Exposure to IoT
QNX secure operating system – In 2010, BlackBerry purchased QNX Software Systems.
QNX is a micro-kernel operating system (OS), which the company used as a foundation for
its revamped BB10 OS. QNX was originally founded in 1982 and has become the
embedded operating system for a host of industries. QNX has experienced particular
success in the auto industry for infotainment systems, where it has been used in over 200
models of cars by about 40 OEMs, including Acura, Audi, BMW, Chrysler, General Motors,
Land Rover, Porsche, and others. More recently, Apple announced CarPlay, which is
essentially iOS for the car and utilizes QNX. Competitive operating systems for autos
include those from Microsoft and Google. Though BlackBerry has not quantified the
revenue contribution of QNX (suggesting it is currently fairly minimal), its leadership in
Covered by Kent
Schofield, US Smid-
cap CommTech
analyst
Covered by Simona
Jankowski, US
CommTech analyst

gaining a multitude of automotive design wins suggests that revenues will ramp
significantly over the next few years as the new car models ramp. In addition, the company
believes it can leverage QNX in a broader set of machine-to-machine applications, such as
medical, manufacturing, and consumer verticals, and plans to launch its QNX Cloud
platform in December. We expect that in addition to licensing QNX, BlackBerry can
monetize it through upselling its own as well as third party applications and services (e.g.
safety features, tire pressure, infotainment, etc.).
Project Ion – In May 2014, BlackBerry announced Project Ion, a platform to securely
manage data from millions of endpoints, representing a cloud back-end for sensor data
and analytics. The software will leverage QNX, and Blackberry will open-source parts of
QNX to allow other devices to connect to the QNX cloud. BlackBerry is a member of the
Industrial Internet Consortium (IIC; members include Intel, GE, Cisco, AT&T, and IBM) and a
founding member of the Application Developer Alliance (ADA), an “association that
focuses on advancing application development while helping to solver current challenges
such as security and privacy.” Project Ion is currently in beta, with expected formal launch
by early 2015. Given BlackBerry’s expertise in end-to-end security, its global network of
NOCs, its robust QNX OS, and its direct connectivity to the networks of hundreds of
carriers, we believe the company is uniquely positioned to participate in the IoT.
Broadcom (BRCM, Neutral): Well positioned with connectivity and
broadband portfolio plus developer support
Company profile
Broadcom is a leading provider of semiconductors for wireless and wired communication,
including mobile devices, broadband, and communications infrastructure. Pro forma for its
planned exit from cellular basebands, we estimate that about 35% of revenue is from
connectivity, 35% from infrastructure, and 30% from broadband.
Broadcom has strong market share in several key product categories including connectivity
chips such as Wi-Fi (60-65% share in combo chips), switching (we believe 60-70% merchant
share), and cable broadband (we believe about 45-55% share).
Exposure to IoT
Connected wearables and devices – We believe that Broadcom, as a leader in combo
chips and technologies such as 802.11ac Wi-Fi and Bluetooth, will benefit from growth in
wearables. Some of Broadcom’s connectivity chips for the wearables market have
processing capabilities included, which helps to reduce power. In addition, Broadcom has
introduced related chips for new applications such as wireless charging to complement its
connectivity solutions.
Broadcom is also working to support the ecosystem, and it offers a software development
kit and technical support for the wearables and embedded markets. Broadcom noted in
December 2013 that as part of its WICED (Wireless Internet Connectivity for Embedded
Devices) initiative that it was engaged with about 400 companies (including 14 fitness
companies, 8 home appliance companies, and 7 thermostat companies).
While Broadcom will not directly participate in the cellular baseband market and this will
likely limit its ability to sell connectivity in some devices (as some chips could be integrated
or bundled), Broadcom does plan to partner with baseband providers such as Spreadtrum
to help maintain some of its connectivity sales in lower-cost devices.
Connected home – We believe Broadcom has a broad set of offerings for applications
such residential gateways, set top boxes, and modems and these include Wi-Fi, high
efficiency encoding (which saves on bandwidth), and home networking (such as MoCa).
Covered by Mark
Delaney, US IT Supply
Chain and Semi
analyst

OORT among 'private companies to watch' via Goldman Sachs

OORT among 'private companies to watch' via Goldman Sachs

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