What’s all this buzz about IoT? Let’s find out.

In the past four years, the Internet of Things (IoT) has generated tremendous excitement among investors and become a frequently tossed around buzzword.  The space has seen a significant increase in investment by traditional and corporate venture capital.  But what is IoT and why is it generating so much buzz now? 

IoT, in a nutshell, is the connecting of physical objects (refrigerators, cars, clothing) to the internet and / or each other.  It’s a very broad term that covers many industry-specific use cases for interconnected devices (e.g. healthcare, industrial, transportation, auto, etc). Investment in the IoT industry has grown at a rapid pace.  VC investment has increased from $1.8 billion in 2013 to $2.9 billion in 2015 according to CBInsights. Q1 2016 investment was $846 million, a 24% increase over the same quarter last year.

a.  Analysts estimate that the current number of connected devices is in the range of 7 billion to 10 billion.  This is expected to grow at a 15 to 20% CAGR over the next few years, reaching 26 billion to 30 billion by 2020

b.  McKinsey also highlighted the nine most promising settings for IoT solutions:

• Human – wearables devices, mostly for healthcare purposes
• Homes – home controllers and security systems (smart homes)
• Retail environments – stores, banks, restaurants, arenas, etc
• Offices – energy management and security in office buildings
• Factories – optimize repetitive work routines from assembly lines to farms
• Worksites – mining, oil and gas, construction, construction, trucking, pipes
• Vehicles – trucking and transportation, aircraft, ships, personal automobiles
• Cities – public spaces and infrastructure in urban settings
• Outside – optimizing and automating transportation (logistics routing, self driving cars, navigation)

c.  Two subcategories of IoT that are of particular interest to investors include industrial and healthcare solutions

i.  According to CB Insights, VC funding on industrial IoT investments a $295 million during the 1st Quarter of 2016, with total IoT investments at $846 million

ii.  According to McKinsey, healthcare applications could have an economic impact of $1.1 trillion to $2.5 trillion per year by 2025

2. Semiconductor companies are set to benefit from IoT’s growth

a.  IoT could become an important source of new revenue for semiconductor companies as smart phone sales level off

b.  Semiconductor companies will look to provide comprehensive solutions involving security and systems-integration services to IoT makers.  Semiconductor companies will need to expand beyond silicon, as chips are only a small part of the IoT value chain.  Instead “full stack” solutions that involve security, software, and integration in addition to hardware will be a larger revenue opportunity

c.  According to Gartner, global semiconductor revenue totaled $333 billion in 2015, with an annual increase of 3 to 4 percent with the help of IoT

d.  According to McKinsey, the IoT market will help the semiconductor industry maintain or surpass the average annual revenue increase of 3 to 4 percent over the last 10 years

3.  Oil and gas companies are leveraging IoT to generate operational efficiency

a.  By leveraging the use of IoT applications within the oil and gas industry, companies will experience more operational efficiencies and have the ability to locate, monitor and manage assets in ways that were previously unavailable

b.  For instance, Precyse Tech leverages RFID and GPS to deliver machine-to-machine and cloud connectivity to increase operational efficiencies and improve safety in the oil and gas, mining and logistics industries

4.  Investment continues to flow into the space: in 2015, $3.6 billion was invested in more than 188 deals

a.  Investing in IoT startups continues to grow, surpassing $1.9 billion funding in 2014.  Notable investors include both corporate and traditional VC funds – Intel Capital, Qualcomm Ventures, and the Foundry Group

5.  Like most tech trends, adoption will be slower than the hype claims.  Most new connected products will not replace existing traditional, unconnected objects’ anytime soon

a.  Unlike tech enthusiasts and early adopters, normal consumers and enterprises will not rip out and replace their existing equipment overnight.  There are high frictional costs (installation, delivery, time spent) and existing equipment with remaining useful life

b.  Smartphones are replaced every year or two, however, kitchen appliances, cars and locks last a decade or more.  A mass upgrade to an IoT world will not be fully complete until connectivity is built into the next generation of homes, vehicles, or factories

6.  Worldwide wearable devices sales to grow 18.4% to 275 million units in 2016

a.  Sales are expected to generate $27.6 billion in revenue. Of that, $11.5 billion will come from smartwatches

7.  Internet of Things lacks consistent standards for all ranges of devices, throughout the technology stack

a.   According to McKinsey, some layers of the IoT technology stack have no standards at all, and others have many competing standards without an obvious leader.  One executive responding to a McKinsey survey stated, “What is critical is which standards will win and when this will happen.”

b.  The problem is a serious hindrance for the industry because lack of compatible connectivity standards hinder product creation and adoption.  Product makers may be reluctant to create, since they can’t be sure that their products will comply with future standards.  Similarly, users may not want to buy products that may not work with existing or future devices because of changing standards