The Internet of Things

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1 Published by Raymond James & Associates Technology & Communications January 24, 2014 Industry Report Tavis C. McCourt, CFA, (615) , Simon Leopold, (212) , Frank G. Louthan IV, (404) , Hans Mosesmann, (212) , J. Steven Smigie, (212) , Terry Tillman, (404) , Daniel Toomey, CFA, Sr. Res. Assoc., (615) , Georgios Kyriakopoulos, Sr. Res. Assoc., (212) , Eric Lemus, Sr. Res. Assoc., (404) , Brian Peterson, CFA, Sr. Res. Assoc., (727) , Alexander Sklar, CPA, Sr. Res. Assoc., (404) , The Internet of Things A Study in Hype, Reality, Disruption, and Growth Please read domestic and foreign disclosure/risk information beginning on page 55 and Analyst Certification on page 55. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

2 Communications Technology Contents Introduction... 1 The Internet of Things: History, Summary, Perspective... 2 The Internet of Things Value Chain... 5 A Study of the Diverse Vertical Market Solutions Enabled by IoT... 6 Connected Devices Disrupting and Creating Consumer Product Markets...31 Software and MVNO Opportunities Created by the IoT...34 Semiconductors: Sizing the IoT Opportunity...38 IoT, Networking Architecture, and Equipment Ramifications...47 What Does the IoT Mean for Wireless, Cable and Data Center Service Providers?...50 Conclusion...52 Cover illustration courtesy Jasper Wireless, Inc. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

3 Communications Technology Introduction The confluence of efficient wireless protocols, improved sensors, cheaper processors, and a bevy of startups and established companies developing the necessary management and application software has finally made the concept of the Internet of Things (IoT) mainstream. The number of Internet-connected devices surpassed the number of human beings on the planet in 2011, and by 2020, Internet-connected devices are expected to number between 26 billion and 50 billion. For every Internet-connected PC or handset there will be 5-10 other types of devices sold with native Internet connectivity. These will include all manner of consumer electronics, machine tools, industrial equipment, cars, appliances, and a number of devices likely not yet invented. In our view, the concept of the IoT will disrupt consumer and industrial product markets generating hundreds of billions of dollars in annual revenues, serve as a meaningful growth driver for semiconductor, networking equipment, and service provider end markets globally, and will create new application and product end markets that could generate billions of dollars annually. In the following report, we explore the history of the IoT, some early applications that are already disrupting existing markets, and some interesting applications that have the potential to go mainstream in the next several years. We also explain the value chain of companies that creates the IoT in various end markets and attempt to quantify its impact on specific semiconductor, software, device, and service provider end markets. Below are our summary findings. A Series of Verticals Rather Than One Market We do not believe an S curve of adoption for the IoT is likely, as the concept is broad and will have differing growth curves in different end markets. It is more helpful from an investment perspective to think of the IoT as a series of vertical market solutions that may witness growth at various rates over the next decade or more, all of which aggregates to 15-30% or so annual growth for the concept in totality. The vertical markets that have the most opportunity for accelerated growth in the next two to three years include home automation, connected car, and wearable devices. Semiconductors: IoT a Bigger PAN Than WAN Driver; Microcontroller/Sensor Growth Meaningful The vast majority (80%+) of IoT connections will occur on unlicensed wireless frequencies due to cost and battery life advantages. Whereas cellular IoT connections are expected to grow at a nearly 20% CAGR for the next several years, various personal area network (PAN) wireless connections (Wi-Fi, Bluetooth, Zigbee) into M2M (machine-to-machine) end markets should grow closer to 30%. Aside from significant growth in PAN-based chipsets, we view the microcontroller and sensor opportunities as meaningfully positive with industry forecasts of single-digit growth potentially being too pessimistic. Product Disruption in Consumer and Industrial Markets The addition of Internet connectivity to devices provides an opening for disrupting previously sleepy end markets dominated by sometimes slow moving consumer and industrial product companies. Nest Labs entry into the thermostat and smoke alarm markets and subsequent $3.2 billion purchase by Google is a high profile example, but we believe that this type of disruption is a potential in markets as diverse as home appliances, audio equipment, agriculture equipment, machine tools, construction equipment, clothing, and even toothbrushes, and Silicon Valley is gearing up to drive this disruption. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

4 Communications Technology Impact on Networking Equipment We view the IoT as yet another driver of network demand, contributing to an expected 23% CAGR in network traffic growth ( ). The IoT will impact network architecture and help drive a modest mix shift from core to metro and access equipment spending, which has implications for pricing, margins, and competitive dynamics in the $125 billion service provider market for WAN equipment. Impact on Wireless Service Providers The IoT is already generating ~$16 billion in annual service revenues for wireless providers in 2013, and this should double by However, even with this level of revenues, IoT-related revenue streams will represent less than 5% of wireless service provider revenues, making it more of an incremental than a transformational driver. However, we expect wireless providers to invest heavily to benefit from this growth as the rest of their traditional handset-related service revenues will likely be very mature. For a Select Few, the IoT Defines Their Business There are a number of software, service, and product companies whose primary product or service revolves around connecting devices beyond cell phones. Garmin, Trimble Navigation, Jasper Wireless, Sierra Wireless, Digi International, NETGEAR, Numerex, Kore Telematics, any number of fleet tracking software vendors, Telit, Gemalto, Nest Labs, Control4, Savant, and Roku are clearly in this category. Most are small today, but the successful ones will end up disrupting markets or creating markets, and generating meaningful shareholder returns along the way. The Internet of Things: History, Summary, Perspective The IoT is not new, and we would argue the Internet has always been an IoT. From its beginning, the Internet was a network of networks, connecting various government and academic computers together to share data. What has changed increasingly over the past two decades is the ability to connect remote and mobile things or machines or assets to the Internet or corporate Intranets through the use of wireless communications and low-cost sensors/computing/storage. In a sense, the Internet is expanding from a network of computers to a network of things. Or to reverse the order, almost every thing / asset/ object in the world is transitioning to become a computer that happens to be connected to a network using the IP protocol. The confluence of efficient wireless protocols, improved sensors, cheaper processors, and a number of startups and established companies developing the necessary management and application software has finally made the concept of the Internet of Things mainstream Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. 2 International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

5 Communications Technology Drivers of Internet of Things Growth Why Now? Source: Raymond James research. Based on data from Ericsson, in 2003, there were 6.3 billion humans on the face of the earth and about 500 million devices connected to the Internet (mostly PCs and a few smartphones.) By 2011 there were approximately 7 billion human beings on the face of the earth, and 12.5 billion devices connected to the Internet including nearly every PC in the world and well over a billion smartphones. This equates to nearly 2 connected devices for every human on the face of the earth. By 2020, Ericsson expects the human population to grow to 7.6 billion with 50 billion devices connected to the Internet. Although this forecast appears aggressive (Gartner estimates 26 billion), when one looks around a typical U.S. household of four today with two laptops, four smartphones, a gaming console, a Wi-Fi router, a connected stereo system, two ipads, and an Apple TV or other media player, it becomes easy to understand how the ratio of connected devices to human beings (3:1 ratio in the example above) will increase to ~7:1 by The added connectivity will not only come from consumer devices, but all kinds of industrial or company-owned assets as well, with connectivity becoming an expected feature on just about every physical asset in the world, much like it is becoming on consumer electronics devices today. To put this in perspective, today there are 80 things connecting for the first time to the Internet every second, and by 2020 this will expand to 250 every second. Human Beings vs, Internet Connected Devices (millions) Source: Cisco Systems, LM Ericsson, Raymond James research. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

6 Communications Technology The driver of all this connectivity is essentially the desire to add value to products or services. From a corporate perspective, this added value can come from increased revenues (e.g., a $100 handset turns into a $600 smartphone with the right connectivity and application software) or decreased costs (e.g., connecting one s trucking fleet can save on productivity, gas, maintenance, etc.). Cisco published a fascinating white paper outlining what it calls the Internet of Everything (IoE) index. It calculates that businesses are already generating $613 billion of additional profits annually due to the connection of devices to the Internet (mostly the impact of connecting computers/mobile devices). Cisco calculates that this represents only 50% of the potential of the Internet to drive profits, with $14.4 trillion of net profit likely to be generated by corporations over the next decade if the Internet of Things is embraced. In essence, it has taken 15 years or so for companies to harness about 50% of the productivity potential of the Internet, and the next 50% of productivity gains likely requires connecting things. These additional profits from connecting everything to the Internet are roughly equally distributed between increased asset utilization, increased employee productivity, better logistics management, better customer experiences, and increased R&D productivity. Cisco highlights future gains in manufacturing through the use of intelligent robots, asset tracking within facilities, shipment tracking, energy management, and employee collaboration. Cisco highlights similar gains to be had by retailers and utility companies, and although it is unclear if Cisco s numbers are conservative or aggressive, it is clear that all of a sudden something has changed to make connecting various devices or assets or things an increasing investment priority. At its beginning, connecting remote/mobile assets was expensive and largely based on connectivity through satellite-based systems, and as one would expect, with expensive inputs, use cases focused on high value assets where ROI was quick Omnitracs fleet tracking through satellite and GPS tracking of commercial aircraft, for instance. The advent of digital cellular in the late 1990s allowed wireless air time to become cheaper, enabled lower value use cases like wireless security alarm systems, cellular controlled door locks, and telematics applications for automobiles, all of which have flourished over the past 10 years. The third wave of IoT is being enabled by essentially free /unlicensed wireless spectrum, lower cost sensors and microcontrollers, and a bevy of software applications and devices designed for specific, vertically-focused use cases. The applications that appear to be prime for IoT disruption include home automation, appliances of all types, wearable computing devices, home health care, retail and warehousing inventory management, connected farms/agriculture equipment, and likely many more that have not yet been invented. Internet of Things Timeline Source: Raymond James research Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. 4 International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

7 Communications Technology The IoT expansion has already lasted 20+ years, and has been painfully slow due to the necessity of multiple inputs to come down meaningfully in price, and the need for companies and application vendors to create vertically-specific applications that make use of all these new connected devices. Having things connected is useless unless one can use the information gathered for a meaningful purpose, and this takes time. As far as we can tell, there is no magical horizontal software app that allows every industry to attach a cellular or Wi-Fi module to all of its assets and get immediate ROI (or if there is, please let us know as we d like to invest). Every industry and company has specific use cases that take time to perfect and productize into a usable software application or device format. This has happened most successfully in fleet tracking, but then again fleet tracking is a technology that is over 20 years old and still is less than 5% penetrated globally. Our expectation is that there is no S curve of adoption of IoT; it will happen at varying paces across different industries, and the inexorable march of connecting things will continue for many decades. As we move deeper into this report, we will often use the term M2M (machine-to-machine) as synonymous with IoT (Internet of Things). The concepts are similar, but generally, the industry reserves the M2M moniker for more industrial type applications where there is little human involvement, and includes most consumer applications under the broader umbrella term of The Internet of Things. The Internet of Things is a concept that will create opportunities and threats in just about every industry we can think of. The beneficiaries will include semiconductor companies, device and product companies, infrastructure software companies, application software companies, consulting companies, and telecom service providers. For some companies, everything they do will revolve around the IOT concept (, but for most it will be an incremental driver of their business. In aggregate, the IoT will create tens of billions of dollars of new revenues annually for telecom service providers, semiconductor vendors, software application vendors, and product vendors, and potentially create substantial market share shakeups, especially in end markets not used to the pace of technology-based competition. In the following report we attempt to quantify the opportunity created by the Internet of Things within various segments of technology, point out a few interesting vertically-focused use cases in practice today, and highlight how companies within our research universe are benefitting from IoT. The Internet of Things Value Chain From an investment perspective, the IoT can be confusing because it can be heard in presentations from semiconductor companies, software companies, product companies, etc. Additionally, in many vertical markets there are companies that provide many parts of the value chain rather than just software or just devices. The reason for this is a general lack of standardization within many areas of connected devices and very little commonality between application software and solutions between different verticals or end markets. This has forced many of the successful early players in the IoT to vertically integrate in order to develop a full solution of hardware, software, and services designed for a specific vertical market. One can view the various layers of the IoT value chain in at least nine distinct product or service categories. Radios/communications chips provide the underlying connectivity, sensors provide much of the data gathering, microcontrollers provide the processing of that data, modules combine the radio, sensor and microcontroller, combine it with storage, and make it insertable into a device. Platform software provides the underlying management and billing capabilities of an IoT network, while application software presents all the information gathered in a usable and analyzable format for end users. Finally, the underlying telecom infrastructure (usually wireless spectrum) provides the means of transporting the data while a services infrastructure needs to be created for the tasks of designing, installing, monitoring and servicing the IoT deployment. Some companies will compete at one layer of this value chain, while many will create solutions from multiple layers and functionally compete in a more vertically integrated fashion. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

8 Communications Technology Product Description Radios Chips that provide connectivity based on various radio protocols Sensors Chips that can measure various environmental/electrical variables Microcontrollers Processors/Storage that allow low-cost intelligence on a chip Modules Combine radios, sensors, microcontrollers in a single package Platform Software Software that activates, monitors, analyzes device network Application Software Presents information in usable/analyzable format for end user Device Integrates modules with app software into a usable form factor Airtime Use of licensed or unlicensed spectrum for communications Service Deploying/Managing/Supporting IoT solution Source: Raymond James research. A Study of the Diverse Vertical Market Solutions Enabled by IoT In the following section of the report, we highlight a few of the vertical market solutions that have been created through connecting devices to the Internet. Fleet Tracking Tracking commercial trucking fleets in order to save on fuel, downtime, maintenance, etc., is a 20+ year old industry that can probably fairly be thought of as one of the first IoT applications, although in its first iteration it did not use the IP protocol. In the 1980s this started out as a satellite-based solution, and has transitioned over the past decade to primarily a solution utilizing cellular networks. Additionally, fleet tracking has expanded in terms of its application set over the years. What started out as really just tracking the location of a truck has expanded greatly through the use of added sensors and analytics to measure driver behavior, route optimization, engine diagnostic, tire pressure, etc. A great example of an extreme deployment is UPS, which measures over 200 variables on each truck through the use of sensors and wireless connectivity Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. 6 International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

9 Communications Technology Fleets Vehicles Drivers Collect Key Attributes Transmit Process Information Location Vehicle Metrics Driver Behavior Hours & Miles Driven Secure data centers Web and mobile device accessible reports & analytics Source: Raymond James research. In all fleet tracking deployments, a truck or van is equipped with a device that manages the input from all the sensors on the truck and typically sends this data through the cellular or GPS network. Data is then kept in a secure database and analyzed in real time and presented in application software for the fleet manager/dispatcher. Through analytics the system can typically optimize routes, alert the system to subpar driver performance/behavior, and optimize maintenance schedules. Fleet Tracking Source: Raymond James research. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

10 Communications Technology As in most vertical applications in the IoT, the value chain is a little messy. There are chipset vendors, module vendors, device vendors, and software vendors, and in some cases these are all one in the same. The table below highlights the value chain of technology companies that need to come together to make a solution for a commercial fleet operator, and gives only a small subset of each player in specific areas of the value chain. Fleet Tracking Value Chain Airtime Providers AT&T, Verizon, Kore Telematics, ORBCOMM Software Applications Trimble, Omnitracs, MiX Telematics, TomTom Device Vendors Digi International, Trimble, TomTom Cellular Module Vendors Sierra Wireless, Gemalto, Telit Cellular Radio Vendor QUALCOMM, ST Ericsson, Intel Source: Raymond James research. Although the industry is over 20 years old and generates roughly $5 billion in annual recurring revenues for application software vendors, it is less than 5% penetrated of the commercial vehicle fleet globally, and we believe it should grow at a 25% CAGR for the next five years and still be just over 10% penetration. $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 Estimated Global Fleet Management Telematics Revenue Opportunity Estimated Global Fleet Management Telematics Revenue Opportunity (Assumes fleet vehicles (Assumes under fleet management vehicles under economics mgmt. Economics based on based $30/month $30/month subscription) subscription) ~$5 bil oppty: assumes 13 mil commercial vehicles ~$6 bil oppty: assumes 16 mil commercial vehicles ~$7 bil oppty: assumes 20 mil commercial vehicles ~$9 bil oppty: assumes 26 mil commercial vehicles ~$12 bil oppty: assumes 32 mil commercial vehicles ~$14 bil oppty: assumes 40 mil commercial vehicles $2,000 $ Source: Company reports reflecting ABI Research data, Raymond James research. Source: ABI Research, Raymond James estimates Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. 8 International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

11 Communications Technology Home Automation Home automation, or the smart home, is the concept of being able to monitor, manage, control, and automate just about every piece of electronics in your home, such as your TV, music system, lighting, thermostat, appliances, video surveillance, door locks, etc. Like fleet tracking, home automation has been around for decades, but it is transitioning from custom/high-cost solutions to more mainstream price points, driven by the use of lower-cost wireless networking standards and low-cost processing, storage, and sensing technologies. Also like fleet tracking, home automation is still relatively nascent, with less than 2% of U.S. households having any form of automation inside their homes. Home Automation System Shipments Forecast by Type (Units in Thousands) Source: ABI Research, Raymond James research. Based on data from ABI, there will be about 5 million home automation systems shipped this year globally, and this should grow to nearly 20 million by The mainstream home automation market (which excludes the high-end luxury market), the DIY market where consumers buy at retail, and the market for service provider offerings alone generated over $500 million in product revenue in 2012, growing to $2.6 billion in 2017 according to ABI, nearly a 40% CAGR, with most of the growth coming from managed service offerings of various telecom, cable, and security service providers. Mainstream Automation Market Revenue Growth If one includes revenues from installation services, DIY products, and service provider offerings, the home automation market is already generating $8 billion annually in revenues, growing 10-15% annually. Source: ABI Research, Raymond James research. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

12 Communications Technology The home automation market, like fleet tracking, is a relatively complex market, with a number of competitors with varying degrees of vertical integration and business models. At the high end of the market there are full home automation systems from the likes of Control4, Savant, Crestron, AMX, and others that sell for thousands of dollars and can control just about every electronic device in your home. Then there are point solutions from appliance vendors such as Nest Labs with its thermostat and smoke detector offerings, Logitech s Harmony remote controls, NETGEAR s video surveillance products, Lutron lighting products, Sonos music streaming systems, Kwikset s remote locks, etc. Finally, there are service providers such as AT&T, Comcast, ADT, and others that use cloud-based control software from vendors such as icontrol and alarm.com to offer home automation of security, lighting, and thermostats for a monthly fee. Additionally, each appliance connects to a control system or the Internet in its own unique way. For extreme low power needs, Zigbee modules are generally used, while for higher bandwidth applications Wi-Fi tends to be used, and HDMI and various audio Input/Output (I/O) networking standards are used for connecting TVs and audio systems. This means that there are a number of chip types and vendors that sell into the home automation market. Home Automation Value Chain Source: Raymond James research. As shown above, in the service provider channel, large telecom, cable, and security service providers have entered the home automation market utilizing control/automation software, typically from either alarm.com or icontrol, and devices from a number of vendors to develop a service with a recurring monthly fee attached. At retail, companies like Roku, Sonos, NETGEAR, and others have developed point product solutions that include a product and an application to remotely monitor and control that one product. In the dealer channel, full home automation vendors such as Control4, Savant, and Crestron provide complex full home automation solutions that integrate the control of just about everything electrical in your house through a single application sold primarily as a one-time sale Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. 10 International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

13 Communications Technology Home Automation Source: Raymond James research. Some of the more high-profile technology vendors in the home automation space (although by no means an exhaustive list) include the following. Control4 Control4 helped disrupt the home automation market over the last decade with a materially less expensive controller, interoperability with existing appliances, and easy, GUI-based programming tools that allow consumers get started with home automation for a few thousand dollars rather than the few hundreds of thousands of dollars historically. In the full home automation market, we estimate that the company is the market leader in terms of units, and we expect it will generate a bit more than $150 million in revenues in Savant Similar to Control4, Savant boasts a controller-based, full home automation system that is materially less expensive and easier to program than legacy systems from vendors such as Crestron and AMX. Its point of differentiation is a heavy emphasis on Apple products (its controller hardware is a Mac Mini) and a software user interface design that is quite Apple-esque. Savant sells into the commercial market as well, which is also a ripe opportunity for automation. Nest Labs Nest Labs reinvented the thermostat market with the Nest Thermostat and more recently added a smoke/carbon monoxide detector to its product portfolio. Nest not only makes connected devices that International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

14 Communications Technology allow users to control and monitor them remotely, but it also creates the products with an ability to learn from their surroundings through sophisticated sensors, taking automation essentially one step further into the realm of artificial intelligence. The company announced in early January that it would be acquired by Google for $3.2 billion. NETGEAR NETGEAR makes a series of home automation-related products sold at retail and through service providers. First and foremost, the company is the market leader in Wi-Fi routers and extenders, which form the connectivity foundation for most connected devices in the home. Additionally, the company s VueZone line of video surveillance cameras feature wireless connectivity and use standard batteries, and are sold online and at big box retailers. The company also makes panels and other connected devices for service providers. We expect NETGEAR to expand further into this category in the future, potentially into lighting, thermostats, etc. to round out their home automation product portfolio. Belkin Belkin is a consumer electronics manufacturer that has launched a complete range of connected home appliances under the brand WeMo. Its product line includes light switches, motion detectors, baby monitors, and surveillance cameras. The company also has developed an ecosystem of appliance manufacturers whose devices, such as slow cookers, coffee machines, etc. can be controlled remotely through the WeMo application. QUALCOMM AllJoyn AllJoyn is an application development framework developed by QUALCOMM to make it easier for products to connect in a standards-based way. DropCam DropCam revolutionized the consumer video surveillance market with an affordable and easy to install remotely monitored camera through an app on your smartphone. The company also offers a cloud storage solution for the video from $10-30/month. SmartThings SmartThings sells a hub that wirelessly connects to a number of connected devices in your home, and allows you to control and automate these devices with a single app on your smartphone. The company offers motion sensors, moisture sensors, lighting solutions, HVAC control, and many other solutions on a do-it-yourself basis. AT&T, Verizon, Comcast, ADT A number of service providers have entered the home automation space using a combination of in-house software platforms (AT&T) and outsourced management platforms from the likes of icontrol, Alarm.com, and Arris. Generally, these services wrap home automation around a home security monitoring service and allow remote monitoring of video cameras, lighting, thermostats, and a growing list of other appliances Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. 12 International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

15 Communications Technology Sonos Sonos makes a broad line of Internet-connected speakers that can be installed around your house and can stream music from the Internet, existing audio system, or your computer to any room in your house, even allowing one to stream different music simultaneously to different rooms. All of this is controlled through an app on your smartphone or tablet. Lutron Lutron makes automated and controllable shades and lighting that can be controlled through a home automation platform or an application on your smartphone or tablet. Revolv Revolv makes a controller sold directly to consumers that automatically recognizes certain connected devices (Nest thermostats, Kwikset door locks) and allows consumers to automate these disparate devices through a single application interface. Garage Doors LiftMaster makes an Internet gateway that allows customers to control their garage door remotely through an app on their smartphone, while companies like Chamberlain make a product called MyQ Garage, which allows consumers to Internet-enable just about any existing garage door. Door Locks Any number of manufacturers of door locks now enable them to be remotely activated through one s smartphone. Connected Car One could argue that the connected car has been around since the 1980s when many original analog cell phones were sold as embedded devices within automobiles. This advanced in the late 1990s and early 2000s with the advent of various telematics applications such as OnStar s suite of services including automatic crash notification, stolen vehicle assistance, diagnostics, and turn-by-turn directions. The automobile industry appears to be making a quantum leap forward as increasingly new models will be sold with embedded LTE connectivity and much higher end infotainment systems that will basically serve as a computing hub for the car. New applications include remote downloading of mapping/traffic information and streaming digital music and video. Over a five- to ten-year time frame, LTE connectivity enables driverless car concepts either fully or partially, although with fully automated driving scenarios requiring 50GB of data every hour, based on data from Infonetics, we doubt whether this will be a mass market application near term. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

16 Communications Technology Connected Car Source: Raymond James research. The automobile industry s term for the onboard computer that provides the interface for users to interact with applications is the infotainment console. Historically, these infotainment consoles replaced knobs and buttons with a touch screen featuring navigation and audio apps as well as Bluetooth connectivity to speak on your cell phone through the speakers in the car. Leading Infotainment vendor Harman estimates that the in-car infotainment market, or essentially the market for computers inside the car, is about $10 billion annually today, and growing ~8% annually as price points come down and attach rates increase. Current attach rates in the western world for infotainment are about 20%, with ASPs ranging from $1,000 to $2,000 wholesale ($2,000+ as an add-on at retail), but the industry expects the applications driven by always-connected infotainment systems to propel much higher adoption in the future. Since infotainment vendors are largely sourcing all the hardware components and much of the embedded software, gross margins and operating margins in the business tend to be relatively low (~20% gross, ~5-10% operating). It will be likely that connecting the car will happen even without infotainment systems in some cases as well. The European Commission is expected to have an ecall service, its nomenclature for automatic crash notification, throughout the EU by 2015, with the potential to require cellular connectivity in cars to enable such initiative. In terms of the value chain and players involved in the connected car market, one has to start with the automobile companies themselves. They typically outsource infotainment solutions to third-party suppliers such as Harman, Denso, Continental, Microsoft, and others, most of whom sell a broad range of auto parts. In most cases the infotainment suppliers source the underlying components (hard drives, processors, voice recognition, etc.) and write their own applications such as turn-by-turn directions, music apps, etc Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. 14 International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

17 Communications Technology However, increasingly we have seen a number of car companies turn to the more traditional mobile app developers to create applications for these infotainment players. Garmin recently won a contract with Mercedes to provide its branded turn-by-turn directions on Mercedes cars, while 12 different auto manufacturers intend to launch vehicles next year with Apple s ios embedded in the infotainment system so that consumers interface with ios apps such as mapping, mail, music, etc. Renault s R-Link infotainment operating system is based on Android OS. Traditional navigation/mapping application vendors TomTom and Garmin are attempting to build their own infotainment systems for auto manufacturers as well, although success so far has been fleeting. Companies such as OnStar are providing numerous automated and call center-based services that leverage cellular connectivity in the car. Another interesting quirk of the infotainment market is that many of the infotainment systems are built on an operating system kernel owned by BlackBerry called QNX, most of the underlying maps are supplied by Nokia s Here business unit, and most of the speech recognition interfaces/technology are provided by Nuance. Connected Car Value Chain Apps Vendors Infotainment Systems Vendors Automobile OEMs Chips Apple, Nokia, Garmin, Nuance, Microsoft, Google Harman, Continental, Denso, TomTom, Garmin Toyota, Ford, BMW, Audi, Honda Texas Instruments, NXP, Sierra Wireless, Gemalto, QUALCOMM, Broadcom Source: Raymond James research. Application development for automobiles could be one of the more exciting developments over the next decade for the connected car, and ultimately killer apps will need to be developed to get consumers to pay for the extra costs needed to build in connectivity. Initially, many of the apps currently available on infotainment systems usually revolve around audio (HD Radio enabled by Ibiquity Digital or Sirius satellite radio), navigation (turn-by-turn directions), or communications (Bluetooth enabling cell phones to speak through the speaker system). However, connectivity, and especially LTE connectivity, allows the streaming of Internet radio apps like Pandora and iradio, and potentially video as well for entertainment systems in the back seat. Additionally, turn-by-turn directions can be enhanced through the addition of real time traffic information and points of interest. About the most futuristic use of cellular connectivity for cars is the concept of the self-driving car, which requires a constant connection to the Internet to manage real time information gathering. The auto industry has always been a large end market for many chip players in the analog space, but the increasing complexity of adding connected computers in each car is only going to increase the semi content per vehicle. Most noteworthy will be the baseband modem opportunity, as we suspect within a few years nearly every vehicle manufactured in the U.S. and Western Europe will have an embedded modem for LTE or 3G connectivity. These modems will likely be sold by the same modem providers supporting the handset industry (QUALCOMM, Intel, Broadcom, ST Ericsson, etc.), but served up in module form typically by Sierra Wireless, Gemalto, or Telit. Below is the cellular module forecast for the automobile end market from Infonetics. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

18 Communications Technology Cellular modules shipped into automobiles are expected to climb from fewer than 15 million in 2013 to more than 25 million in 2017 (19% CAGR). In aggregate, approximately 30 million automobile s are expected to be sold across North America and Europe by the end of the forecast period, with two-thirds of the cellular modules being sold for these end markets. This would equate to an adoption rate of well over 50% of all cars sold in North America and Europe by Global Cellular Modules Shipped Into Autos Source: Infonetics. Health Care A number of connected devices have been developed to improve health care delivery. Over the past years, health care providers have increasingly become connected through the use of mobile computers, ipads, iphones, Wi-Fi phones, and communications badges. A number of companies are now working on developing further connectivity to improve not only communications between health care givers and patients, but real time monitoring of patient health as well. Below is an illustration of a solution allowing for remote monitoring of bedside diagnostics, which is just one application for the Internet of Things within the health care environment. Source: Digi.com Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. 16 International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

19 Communications Technology For a more holistic view, the illustration below from Sierra Wireless describes how a health care provider could theoretically use real time data collected from hospitals, wearable devices, home health monitoring devices, and elsewhere to provide better service. Source: SierraWireless.com. Philips Philips has a number of telehealth initiatives that it sells to health care providers globally. The company s TeleStation transmits vital sign data from the patient at home to the health care provider. It also offers a number of wireless monitoring devices, enabling the transmission of a number of vital data, such as weight, blood pressure, pulse, ECG data, blood glucose, etc., to health care providers. Another way that Phillips is adding value to solutions through connectivity is its eicu suite of solutions, which allows a centralized staffed center of doctors and nurses to monitor in real time remote intensive care units to help solve a chronic shortage of health care givers in ICU environments. Verizon Verizon offers a solution dubbed Converged Health Management, which remotely monitors patients glucose levels, weight, heart rate, and blood pressure at their homes, and sends the real time biometric information to health care givers onto PCs, tablets, and smartphones. The solution leverages wirelessly connected glucometers, scales, heart rate monitors, and blood pressure monitors. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

20 Communications Technology QUALCOMM QUALCOMM has developed a cloud-based platform dubbed the 2net Platform, which enables the wireless transfer, storage, and display of medical device data, and is natively interoperable with a number of existing medical devices and applications, and is HIPAA compliant. Interesting product developments based on the 2net Platform include wireless ultrasound monitoring and remote vital sign monitoring from hospital rooms. Fitness Bands As outlined in the consumer application section above, a number of companies including Jawbone, Garmin, Nike, and Fitbit have been selling connected fitness bands that aggregate varying degrees of health-related information from your body throughout the day and then wirelessly make this assessable on your tablet or smartphone. Although fitness bands are largely viewed as a consumer device today, ultimately they could be deployed by companies to lower their health insurance rates or by health care providers to improve monitoring of patients. Wearable Devices A number of health care systems are adopting the deployment of wearable wireless devices for at risk patients to wear at home. A simple push of the button gives them instant access to experts and emergency response if needed. Ideally, this cuts down on emergency room visits materially, and unlike many retail/commercial-based solutions, instead of automatically calling for emergency services, these more intelligent wearable devices allow a user to speak with an expert to assess the situation and give advice first. Telehealth Source: Raymond James research Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. 18 International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

21 Communications Technology Embedding Video in Health Care Devices As more and more devices and machines get connected to the Internet, video communications can be added to differentiate products, improve service, or both. A great example of a company driving this concept is Vidyo, a traditional competitor in the video conferencing end market that is now providing APIs into its video network architecture to device manufacturers and software vendors in numerous end markets. For instance, Vidyo s technology is currently being embedded into major medical device manufacturers, who are outfitting hospital beds with video for doctors and other health givers to monitor patients and bedside electronics in real time. Encrypted Privacy HTTPS, AES128 Every-day Devices Mobile, tablet, PC Natural Multi-point Low latency, high quality Every-day Networks Internet, WiFi, 4G Simple Self-Service Familiar, intuitive web UI Protects Investments Support existing devices Workflow Integration Carts, devices, applications Recording Billing & electronic records Software Infrastructure Affordable scalability Source: Vidyo, Inc. Source: Vidyo, Inc. As shown in the schematic above, Vidyo is actively marketing a concept to build in video to remote examination rooms or clinics, home offices, ambulances, at-home patient care, etc. We note other traditional video conferencing vendors such as Cisco, Polycom, and Lifesize are also targeting remote health opportunities connecting care givers to patients in remote locations. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

22 Communications Technology Agriculture: The Connected Farm In the world s second oldest profession, connectivity to the Internet has brought meaningful enhancements to productivity over the last several years. Trimble Navigation has been the technology leader in this vertical market, expanding its portfolio from GPS-connected tractors that improve yields to a full range of applications that measure a variety of factors that can improve agricultural productivity. Precipitation Monitoring Trimble sells what is in effect a high tech rain gauge, with more accurate measurements of rainfall. The RainWave solution sends the data to the Internet and illustrates the data in easy-to-read and informative charts available to the farmer. Irrigation Monitoring Through its subsidiary, IQ irrigation, Trimble effectively wireless connects irrigation systems, and allows farmers to control these systems remotely over the Internet or, through an algorithm, recommends the correct irrigation amounts based on crop, terrain, etc. Field Monitoring Trimble allows farmers to visualize real-time yields and field activity (fertilizing, seeding, etc.) to an online dashboard. Office to Field Data Exchange Trimble allows farmers to wirelessly change guidance lines, drainage designs, and other data from the farmer s office computer to devices in the field. Fleet Tracking for Tractors Just as it sounds, Trimble offers farmers the ability to track their fleet in real time and provides useful metrics such as fuel usage, battery voltage, movement, etc. Connected Tractors Trimble has offered a range of peripherals to make tractors connected to the GPS satellite system for over a decade, and not surprisingly its products have met with substantial market reception. At its most basic level, these solutions allow for a form of auto-pilot for tractors based on pre-set conditions that maximize yields and minimize fertilizer and other costs. The Connected Cow Trimble and other technology vendors sell technology that allows farmers to track and monitor their livestock. This includes RFID tags and sensors on the livestock as well as software to be able to make sense of the data Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. 20 International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

23 Communications Technology Connected Farm Source: Raymond James research. The Connected Construction Site Construction is another industry that is being radically altered by the Internet of Things, and also happens to be another vertical market where Trimble has pushed the boundaries of connectivity and productivity technology solutions. Starting with a dominant position in optical and laser-based surveying instruments, Trimble and others have moved into connecting everything within a construction site. Machine Control In its simplest form, Trimble connects bulldozers, compactors, piling systems, paving machines, and other machines to a wireless network, allowing for more efficient and accurate use of the asset. Trimble estimates that connected machines save as much as 43% of fuel costs. Machine Monitoring Sensors inside machines can monitor payload and diagnose maintenance issues, and wirelessly send this data to the construction office, allowing more efficient asset utilization. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

24 Communications Technology Fleet Tracking for Construction Construction sites have their own fleet tracking issues, and much like in the long-haul or short-haul trucking market, niche fleets such as cement mixers can generate a high ROI by connecting and monitoring their fleets. Connected Tools Connecting just about any tool on a worksite, combined with geofencing, can warn managers when tools leave the construction site and allow a better understanding of hours of operation and requisite maintenance needs. Connected Construction Site Source: Raymond James research. Industrial/Utility/Energy End Markets Connectivity, and especially wireless connectivity, is a growing part of the business processes in a number of applications within the broad industrial sector, including the utility and energy markets. Monitoring of Railcars/Toxic Materials There are numerous applications for connecting rail cars and rail networks, from remotely managing switches, collection of fares through handheld devices and kiosks, and monitoring engine performance. One interesting solution is for monitoring trains carrying Toxic Inhalation Hazard (TIH) chemicals. Through the use of a security camera and sensors, the solution can track the exact location of the toxic asset, and in the case of a leak, derailment, or any kind of impact, can stream visual evidence in real time to the rail car operator Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. 22 International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

25 Communications Technology Source: Digi.com. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

26 Communications Technology Waste Water Management OmniSite makes an M2M solution for waste water management at landfills. The solution allows managers to receive alarms wirelessly whenever an anomaly occurs at a facility, and allows for controlling waste water pumps and the ability to turn them off and on in real time. It also provides the ability to analyze a number of inputs from sensors throughout the landfill, giving the manager a real time holistic view of the landfill. At right is an illustration from Digi International, which offers a solution for managing water levels for numerous end markets. Source: Digi.com. Traffic Safety Signs All Traffic Solutions provides traffic safety signs around the world that are preconfigured with wireless connectivity. Municipalities use the data captured from these signs in real time to understand traffic patterns across their geographic area and to improve road safety. Source: Digi.com. Automated Teller Machines ATMs have been wirelessly enabled for many years now, and especially in the case of portability this brings big benefits to ATM providers and their bank customers. Wirelessly-enabled ATMs can now easily be brought in during conventions or festivals when a population is likely to swell materially, and information on remaining cash can make the restocking of ATMs more efficient. Source: Digi.com Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. 24 International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

27 Communications Technology Refrigerated Transport Locus Traxx provides a wireless system that monitors and tracks temperature and status of refrigerated trucks, providing instant alerts based on pre-set conditions, and allowing for temperature anomalies to be changed in real time, limiting the spoilage of perishable goods. Source: Digi.com. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

28 Communications Technology Intelligent Parking Lots Parking lots can be monitored actively with occupancy sensors to measure how many available parking spots exist, and where, and ventilation system sensors to measure air quality. Source: Digi.com Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. 26 International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

29 Communications Technology Industrial Tank Monitoring Digi International sells an M2M solution to monitor industrial tanks that can be filled with any liquid, solid, or gas. This solution allows for the monitoring of material levels, temperature, and other data from remote storage tanks in the oil/gas, agriculture, and environmental services industries, and for this data to be sent wirelessly to a centralized application for real time monitoring. The illustration below shows the example of a brewery utilizing remote monitoring. Source: Digi.com. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

30 Communications Technology Demand Response for Utilities The dream of demand response for electric utilities is made more real through M2M solutions. Either through the use of a smart meter from the likes of Silver Spring Networks that is deployed with native wireless connectivity, or various solutions that network-enable existing meters, a number of software and hardware providers are attempting to disrupt the utility market using wireless connectivity. Source: Digi.com Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. 28 International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

31 Communications Technology Monitoring Energy Infrastructure Aside from enabling demand response systems for consumers of energy, M2M connectivity is being deployed to better manage and monitor the infrastructure of energy utilities as well. As shown below in an illustration from Sierra Wireless, wireless connectivity can be used to monitor not only meters themselves, but substations, charging stations, and power generation stations of all types. Source: SierraWireless.com. Oil/Gas Industry A number of applications exist for monitoring and analyzing data from wells, pipelines, flow meters, pumps, tanks compressors, etc. Most of these utilize wireless connectivity to transmit real time information to a centralized location so that it can be analyzed with purpose-built application software. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

32 Communications Technology Source: Digi.com Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. 30 International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

33 Communications Technology Warehouse Applications The warehouse is a key ingredient to most companies supply chain, and it is becoming more and more automated and efficient. Increasingly, pallets and packages are wireless tracked from the time they enter the warehouse, are put into inventory, and then picked for the appropriate order to be shipped out. Historically, this was a very labor intensive process, which utilized bar codes and scanners with only modest automation. Increasingly, RFID tags and readers combined with Wi-Fi with location awareness are being adopted to limit the labor intensity of the warehouse and improve the efficiency of the picking process. Connected Devices Disrupting and Creating Consumer Product Markets Consumers are used to their smartphones, tablets, and computers being connected to the Internet. However, over the next decade we suspect just about every electrical device one buys will be expected to have this connectivity. This has already started in devices such as connected audio and media streaming (Sonos, Roku), thermostats (Nest), and to a small degree TVs (Samsung). However, the trend will become ubiquitous with washers/dryers shipping with Wi-Fi chips to connect to the Internet, refrigerators similarly, watches, lighting switches, security locks, garage door openers, etc. In most instances, the IoT will not create new markets for consumer electronics but lead to potential disruption of markets as new players attempt to out-innovate existing manufacturers. This has happened to a small degree with Nest Labs entering the sleepy thermostat market, and we expect more startups to take a similar strategic tact. However, the giants are not sleeping. Honeywell now has a consumer grade connected thermostat and Whirlpool has indicated it will ship all its appliances with embedded connectivity by Meanwhile LG and Samsung have been making significant investments at embedding connectivity into their appliance lineups for a number of years now. The nice thing about the consumer market is that it is enormous, allowing for multiple winners during a disruption phase. For instance the market for household appliances alone is over $120 billion globally; add to this a ~$30 billion market for luxury watches, a ~$100 billion market for televisions, the $13 billion annual market for home audio, etc. One gets the point: there are many markets that can be disrupted and products that can become more useful and valuable to consumers (i.e., higher price points and margins) as they become connected. Below are a few interesting connected consumer devices in the market today. Nike+ FuelBand This device is worn as a bracelet and tracks steps taken and calories burned over the course of the day, and awards its users NikeFuel as a way to measure one s activity. It comes with an app and synchs via Bluetooth so that you can visualize your daily movements on your iphone or Android screen. Fitbit Force This bracelet measures your steps/calories burned, monitors your sleep patterns, and comes with a clock as well, and is of course synched wirelessly so that you can visualize all of this data on your ios or Android device. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

34 Communications Technology Jawbone Up This bracelet similarly tracks your steps and calories burned, and it monitors your sleep. Additionally, the app allows you to track your caloric intake, thereby allowing one to track calories on the way in and on the way out. Garmin Forerunner Garmin s Forerunner series of fitness watches is over a decade old now, and can likely claim the title as the world s first smartwatch. These watches measure one s location, speed, altitude, heart rate, vertical oscillation, and many other movements during a run, bike, or swim. It then allows you to upload this data to the garminconnect.com website or app to analyze your performance. Source: Garmin, Inc. Garmin Virb Garmin has revolutionized the action camera market by adding connectivity. Along with being able to video oneself while doing something active, as made popular by the iconic GoPro Hero line of action cameras, Garmin has added wireless connectivity to Garmin sensors to add heart rate, speed, altitude, and other measurements to the video. Source: Garmin, Inc. Garmin Approach This line of watches for golfers adds GPS connectivity and an exhaustive database of golf courses to give the golfer distances to just about any shot on a golf course. Source: Garmin, Inc Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. 32 International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

35 Communications Technology Garmin Astra Garmin manufactures a line of dog collars that allow dog owners to track and train their dogs for either sporting or casual purposes. Source: Garmin, Inc. Razer Razer is a leading vendor of high end keyboards, mice, headphones, PCs, and tablets that are purpose-built for the hardcore gaming market. The company recently announced the launch of a smart band, which effectively looks like one of the many fitness bands on the market, but with a use case that integrates with video gaming. Source: Razer. GoPro GoPro invented the concept of the action camera, and part of its innovation has been through connecting the camera to your smartphone to allow users to control the camera and view video files through a smartphone app, thereby allowing users to share video through various social media outlets. Nest Protect/Thermostat Nest Labs has launched two products, a thermostat and a smoke detector, both of which are remotely manageable and monitorable through being wirelessly connected to the Internet. A great example of how connectivity can add value, Nest sells its thermostat for $249 vs. price points in the $20-50 range for unconnected thermostats for the home. Connected TVs Connected TVs are becoming mainstream now, with 50% of the TV market now shipping with an Internet connection (typically Wi-Fi). Additionally, tens of millions of media players have shipped, mostly from Apple (Apple TV) and Roku, to Internet-enable traditional TVs, while service providers such as cable companies will likely to start offering Internet-related content in conjunction with their current programs through platforms from companies like aiotv. Source: Roku, Inc. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

36 Communications Technology Connected Cameras Camera vendors such as Sony now create cameras with wireless connectivity to instantly share photos on social networks, and to control the camera through a smartphone app. Connected Coffee Machines Nespresso ships a coffee maker that comes with wireless connectivity to allow the company to know how many Nespresso-branded coffee pods are being consumed. Connected Clothing As one may have already guessed, consumers can expect a range of clothes decked out with sensors and connectivity. Athos, a startup in Waterloo, Canada, is expected to launch a line of exercise clothing that measures your muscle usage, heart rate, breathing, etc. Under Armour, a leading brand in fitness clothing and shoes, purchased app vendor MapMyFitness in 2013, and we suspect that likely is the precursor of making similarly connected clothing. The BBC even reported in December that Microsoft is developing a smart bra that would monitor heart rate and skin activity to indicate mood levels in order to prevent over-eating due to stress. Connected Appliances LG has introduced an app concept called homechat that allows consumers to control appliances remotely using speech recognition. LG appliances with the capability can text a user when a load of laundry is done, ovens can suggest and read aloud recipes for users, and users can control appliances from the homechat app. There are numerous products and even categories of consumer products that we don t mention above, but one gets the point. Connectivity is coming to everything imaginable, and for consumer product companies this is likely to bring disruption and opportunity, while for semiconductor vendors it should serve as an incremental growth catalyst in their consumer businesses, which up until now have typically been dominated by PCs and mobile handsets. Software and MVNO Opportunities Created by the IoT As devices connected to the network grow exponentially into the 10s of billions globally, telecom carriers and enterprises run into some issues with scaling that create interesting new end markets purpose-built for IoT management software. Additionally, enterprises that are geographically diverse likely have to interoperate with multiple carriers/networks, which has spawned the creation of MVNOs (mobile virtual network operators) who aggregate bandwidth across multiple networks, and simplify purchasing, billing, activation, and management for the software vendor or end customer Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. 34 International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

37 Communications Technology Device Cloud Software Source: Raymond James research. Wireless providers around the world have a relatively labor-intensive activation or on-boarding process for subscribers, which includes contracts, credit cards, cross selling, and other functions, which can create a $30 or more cost to activating a phone on a network. When that smartphone generates $100 in monthly ARPU ($2,400 over 24-month contract), the activation cost is very manageable. However, in the world of the Internet of Things, devices may generate less than $5/month in ARPU, so traditionally moribund back-end systems around activation, onboarding, and billing have to be massively streamlined to supports potentially billions of devices at very low incremental costs in order for the IoT to be profitable to telecom carriers. Additionally, large enterprises will likely end up managing potentially millions of remote assets across multiple carrier networks, and will run into the same issues as carriers in terms of their need to streamline onboarding and management functions in order to realize an ROI. IoT Software Value Chain Carrier Network AT&T Verizon Sprint T-Mobile MVNO Mobile Application Platforms KORE Telematics, Wyless, Aeris, RACO Wireless Jasper, Axeda, Digi/Etherios, Sierra Wireless, Telular End Market Applications Security Energy Management Consumer Products Fleet Tracking Source: Raymond James research. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

38 Communications Technology Although many companies in the management layer of the IoT classify themselves differently, broadly they can be separated into two distinct entities, MVNOs and mobile application platforms. MVNOs MVNOs that specialize in M2M or IoT essentially aggregate bandwidth across multiple wireless carriers and satellite providers, offer billing services, and generally add a management software layer to manage and control end devices. Imagine you are provisioning wireless alarm systems across the globe. You will likely need to interoperate with dozens of wireless companies. Instead of directly purchasing bandwidth from each, these MVNOs aggregate bandwidth from all of them, thus ensuring application providers do not have to worry about unused airtime or overage; they simply pay per Megabyte. Additionally, the MVNOs can buy in bulk, leading to lower pricing, and can manage the billing, activation, and monitoring across dozens of carriers globally. Although there are numerous MVNOs, some of the larger ones include Kore Telematics, Aeris, Raco Wireless, and Wyless. Mobile Application Platforms Within mobile application platforms there are those that aid in the back-end processes of integrating with wireless carriers for provisioning, billing, security, and diagnostics (with Jasper being the market leader), and those that focus on the application layer, providing application software for end users to analyze the data generated by an IoT deployment (fleet management software, for example). Some application platforms are built to broadly serve a number of diverse use cases/industries, while others are purposebuilt for certain end markets such as alarm monitoring, health care monitoring, and energy management. Certain industries like fleet tracking and alarm monitoring are well on their way to becoming mainstream with off-the-shelf software being readily available, but many of these mobile application platform providers are doing the hard work of helping create the next vertical market solutions or custom enterprise solutions for IoT deployments. Jasper Wireless Jasper Wireless was an early pioneer in developing software for enterprises to manage connected devices. The company has over 2,500 enterprise customers globally using its cloud-based software, dubbed Control Center, with millions of end devices under management. Jasper sells its software primarily through wireless carriers around the world and provides the provisioning, diagnostics, billing, and security functions, essentially allowing wireless carriers to simply sell the customer and outsource everything else to Jasper. We believe the company is the dominant mobile application platform for cellular carriers in the U.S. and globally. Jasper serves a market that naturally needs to be served by a non-carrier third party due to the nature of IoT deployments typically requiring many wireless carrier networks globally. Numerex Numerex, headquartered in Atlanta, Georgia, is a bit more vertically integrated than most as it both acts as an MVNO and offers mobile application platforms for numerous verticals including the security market, government, healthcare, and transportation. The company scaled its business through a joint venture with BellSouth, and subsequently made acquisitions that gave it access to satellite-based solutions and broader application expertise Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. 36 International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

39 Communications Technology Telular Telular is one of the original pioneers in the M2M market in both devices and services, and today focuses most heavily on vertically focused software solutions in the home security, fleet tracking, oil & gas, and tank monitoring markets through software management platforms using the Telguard, SkyBitz, and Tanklink brand names. GreenWave Reality GreenWave Reality developed a software platform dubbed Home2Cloud, which allows service providers to launch connected device-based services that are scalable and easily managed. The company also has vertically focused software applications for energy management, connected lighting, and home monitoring. Axeda Axeda provides a cloud-based software suite for enterprises to deploy and manage M2M services. It has developed applications expertise specifically in the health care, agriculture, banking, technology, retail, and other industries. Digi International Digi International launched its Device Cloud a few years ago as a way to make it easier for its device customers to build and manage applications around Digi s mobile devices. It has grown into a deviceagnostic cloud management platform for remote devices that enables enterprises to track, monitor, schedule upgrades, and perform analytics on their mobile devices in the field for as little as $0.50 per device per month or as much as $2 per device per month. Sierra Wireless Sierra Wireless is another traditional device company that has developed its own IoT cloud management software solution for carriers and enterprises. Dubbed AirVantage M2M Cloud, this software allows enterprises or carriers to onboard, manage, and analyze connected devices around the globe across multiple wireless carriers. Alarm.com Alarm.com provides cloud-based management software for service providers who want to launch home automation services to allow customers to monitor and manage security cameras, locks, thermostats, lighting, etc. over an Internet-based connection. The company bundles wireless airtime for the alarm monitoring function with the cloud-based software for home automation. The company has over 12,000 service providers (mostly small security dealers) globally, and is actively leveraging its platform to other verticals such as health care. icontrol Although icontrol does not bundle wireless airtime or broadband connectivity (it generally partners with broadband providers), its cloud-based software powers the connected devices in the home automation services for ADT, Comcast, and many other service providers. The company s software enables automation and control of thermostats, lighting, door locks, video surveillance cameras, and a growing list of other home electronics. Synchronoss Synchronoss is not a mobile application platform, but its software could have a big role to play as the IoT scales. The company has been a leader in automating device activation processes at wireless and cable companies since As carriers look to sell more consumer devices that are connected to their International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

40 Communications Technology network such as watches, fitness products, automobiles, etc., Synchronoss has launched an activation service for carriers called Integrated Life, which automates much of the activation process so that adding devices at very little incremental monthly ARPU can be profitable for the carriers. Ultimately, one can imagine just about any consumer device company monitoring consumer devices in the field across the world through a relatively small monthly fee with benefits related to improved/ proactive customer service. And even at very small unit economics (a few dollars a month), many of these software-centric businesses can scale to have very meaningful profit streams when one considers the many billions of connected devices that will ultimately have to be managed by enterprises globally. Semiconductors: Sizing the IoT Opportunity The semiconductor industry generates over $300 billion in annual revenue across a broad number of applications and end markets. In looking at the IoT opportunity for semis, the initial knee-jerk reaction is to focus on the billions of new nodes of connected devices. While these devices will offer higher content for semis (some in new end markets), it s also worth noting that billions of incremental devices will require additional server/networking semiconductor content on the back end (a true multiplier effect). For the purposes of this report, we will focus on what we view as the most direct beneficiaries of IoT adoption, primarily wireless communications chips, microcontrollers, and sensors. Essentially, these three components (sprinkled with a bit of storage) can transform any object into an intelligent and connected device. Every One Billion Connected Devices Adds at Least 1% to Industry Growth One of the key enablers of the IoT is that the connectivity of these devices offers increased functionality at a relatively minimal contribution to the bill of materials (BOM). As seen on the following page, most applicable semiconductors carry sub-$2 ASPs, which represents a rounding error in terms of impact to many products bill of materials (note that adding cellular 2G/3G/4G connectivity would more likely add $20-40 in content). Considering that connectivity provides significant functionality benefits to the overall system level, we believe the value proposition is clearly evident and remain confident in the growth trajectory for additional semiconductor content. In non-cellular devices, we believe the average semiconductor content to add connectivity is roughly in the $3 vicinity, although that can vary widely based on the application. Assuming our $3 estimate is reasonable, every incremental 1 billion devices drives ~$3 billion of semi sales and is ~1% additive to total industry revenue. If the IoT ever gets to 50 billion connected devices, obviously this can have a very material positive impact on the long-term health of semiconductor demand. In the meantime, IoT is adding a few percentage points to industry growth, but it remains just one of many end market drivers. What remains encouraging about IoT prospects is that devices often carry design cycles of multiple years, which is more consistent with the existing high-margin product markets like industrial, medical, defense, and aerospace. To the extent that IoT devices have similar design cycles as these end markets, we believe IoT adoption should drive more consistent revenue streams at higher margin levels for semi providers Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. 38 International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

41 Communications Technology Key IoT Semiconductor Components: ASP Projections Semiconductor ASPs Annual Price Decline Microcontroller $0.49 $ % Wi-Fi $1.30 $ % Bluetooth $0.75 $ % MEMS Sensor $1.30 $0.95-8% Camera (1.8 MP CMOS Sensor) $1.70 $ % GPS $1.15 $ % Source: Gartner, ARM Holdings, and Raymond James research. What Kind of Wireless Connections? Although the IoT should increase cellular connections (all else equal), the primary growth of the Internet of Things results from utilizing low cost wireless chips on unlicensed spectrum, thereby making it more and more economical to add connectivity to previously unconnected devices. For the purposes of this report, we call these connections PAN (personal area network) and include protocols such as Bluetooth, Zigbee, Wi-Fi, Zwave, Ant, and many others. As shown below, Infonetics expects M2M connections to grow from just over 1 billion in 2011 to over 4 billion in It is worth noting that this forecast excludes consumer devices such as smartphones, PCs, tablets, etc. M2M 4,500,000,000 Connections 4,000,000,000 3,500,000,000 3,000,000,000 2,500,000,000 2,000,000,000 1,500,000,000 Wireline/Backhaul PAN Wireless Cellular M2M 1,000,000, ,000,000 0 CY11 CY12 CY13 CY14 CY15 CY16 CY17 Source: Infonetics, Raymond James research. Based on data from Infonetics, there are over 1.5 billion worldwide M2M connections today (this excludes consumer devices), which should grow to over 4 billion by Although cellular-based connections will grow at a healthy rate, the vast majority of M2M/IoT connections will leverage unlicensed spectrum and low cost/low energy PAN connectivity such as Wi-Fi, Bluetooth, Zigbee, and others. These connections are expected to grow from a bit over 1.3 billion in 2013 to over 3.4 billion by 2017, which suggests a +27% unit CAGR. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

42 Communications Technology Essentially, over 80% of connected devices on the IoT will be connected using non-cellular technologies, with Wi-Fi, low energy Bluetooth, and Zigbee likely the most prevalent protocols in this category. Based on the data from Infonetics, the number of PAN chipsets shipped into this market will grow from 244 million in 2013 to nearly 800 million in 2017, a CAGR of 35%. This will serve as a nice incremental growth driver for semiconductor players in this market including QUALCOMM, Broadcom, and Marvell in Wi-Fi, Broadcom and Samsung in Bluetooth, and Texas Instruments and Atmel in Zigbee. Some of these PAN chipset markets will grow extremely rapidly off of a low base. For instance, the ~30 million Zigbee chipsets sold in 2011 is expected to grow to 300 million by 2015, with various home automation products being the primary end market. Some PAN chipset markets are already large and will continue to grow thanks to the Internet of Things. For instance, shipments of Bluetooth chips, which have largely been placed in cell phones, PCs, and peripherals, are expected to grow from 1.6 billion units in 2011 to 3.1 billion in 2017 according to IHS. According to the Wi-Fi alliance, Wi-Fi chipset shipments surpassed 1 billion in 2011 and will double to over 2 billion by It s worth noting that Bluetooth 4.0 or Bluetooth Low Energy has started to gain meaningful traction as a low power consumption chipset solution, as it has materially improved power consumption vs. older Bluetooth generations to a level comparable to existing low power solutions such as Zigbee and Ant. Currently, market momentum appears to be pushing more and more connected devices that require low power consumptive communications towards Bluetooth 4.0. Future lower power versions of Wi-Fi may also improve Wi-Fi s ability to compete for low power applications in the future. Wireless Communication Protocol Comparison Source: Raymond James research. The graph above illustrates the give and take between choices of wireless connectivity. The x-axis represents best power efficiency, while the y-axis represents greatest range. The size of the circle represents the data throughput. As shown, low energy protocols such as Bluetooth, Zigbee, and Ant provide great battery life but limited range and throughput. Satellite provides great range, but requires substantial power. Cellular provides greater range than Wi-Fi, but generally less throughput, and is more power consumptive Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. 40 International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

43 Communications Technology Unfortunately, there is no perfect wireless protocol/network for every application so a heterogeneous use of chipsets/connectivity will likely be a long-term feature of the Internet of Things. M2M cellular modules are basically modules that include a cellular radio (2G, 3G, or 4G) and a modest amount of storage and processing power in order to process modest applications. Cellular modules are designed into products for WAN connectivity, where a portion or all of the use case limits the ability to use an unlicensed wireless protocol (Bluetooth, RFID, Wi-Fi, etc.). Examples include cellular modules that are built into vending machines, home security systems, automobiles, remote oil wells/pipelines, or any use case in which a cellular network is required. M2M Cellular Modules (units) Source: Infonetics, Raymond James research. As shown above, based on data from Infonetics, a bit more than 50 million cellular modules were shipped in 2013, with automotive being the largest vertical market, followed by smart grid applications (connected utility meters). The market for cellular modules is expected to grow at a CAGR of 19% over the next several years, as cellular connectivity is baked into an increasing number of machines and devices. The vast majority of the cost structure of a cellular module is from the cellular radio, which is generally sourced from the world s leading baseband processor vendors, including QUALCOMM, ST Ericsson, MediaTek, Intel/Infineon, etc. These larger chip companies generally do not compete in the market for modules as it tends to require support for a large number of smaller scale customers. This compares to a baseband chip vendor s existing organization structure, which is designed to service a few very large customers. However, the baseband modem vendor captures much of the economics of the module itself. An additional large part of the cost component of a cellular module is the standard IP royalties paid to large patent holders such as QUALCOMM, Nokia, Ericsson, etc. for the right to sell 2G/3G/4G-based devices. The module vendors themselves include Sierra Wireless, Gemalto, Telit and Novatell, who make up the vast majority of the global module market, and generate 30-40% gross margins on their module product lines, with ASPs ranging $20-40 depending on radio technology, use case, and processing power. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

44 Communications Technology M2M Cellular Modules (units) Source: Infonetics, Raymond James research. As shown above, the majority of M2M connections on cellular networks today are 2G as bandwidth requirements for M2M are generally low. However, 3G and 4G modules will likely grow meaningfully over the next several years as more bandwidth-intensive applications are developed (e.g., connected infotainment services in automobiles). M2M Module Revenue Source: Infonetics, Raymond James research. Microcontroller Growth Forecasts Likely Conservative Connectivity aside, we expect microcontrollers will be one of the largest beneficiaries of IoT adoption. Note that microcontrollers (MCUs) offer a processing core, memory, and I/O all on a single integrated circuit, which allows for lower costs and smaller size relative to designs that use separate microprocessors. Based on existing use cases for IoT applications, we believe MCUs will be the most predominantly used processing vehicle vs. standalone processors (which are likely excessive from a performance, power, and cost perspective). Given the wide variety of use cases for IoT, it s unclear on the incremental unit opportunity for MCUs. That said, with a total IoT opportunity of ~4 billion units annually vs. an existing MCU market of ~9 billion units annually, we suspect that mid-single-digit growth CAGRs from third-party forecasters are overly conservative Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. 42 International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

45 Revenue ($MIL) Communications Technology The main beneficiary of this dynamic will be ARM Holdings, who has seen its market share in microcontrollers rise to 18% in 2012 vs. 0% just a few years ago. What s been interesting in this ascent is that the largely fragmented MCU market (only Renesas has 10%+ market share) has seen a massive adoption of ARM s Cortex-M MCU architecture vs. predominantly fragmented and proprietary architectures previously. We believe the ARM ecosystem and low power architecture puts at the forefront of MCU adoption for IoT devices, especially given its strength at 32-bit (which we expect to be in most IoT applications). In our coverage universe, we believe Atmel is also well positioned from an MCU vendor perspective. Note that Atmel has a strong ARM (and proprietary) 32-bit MCU portfolio and has been proactive in addressing IoT needs through the acquisition of low-power Wi-Fi provider Ozmo. This is complementary to the company s existing Zigbee solutions, and we expect Atmel will be a key player in low power unlicensed IoT devices going forward. One key wildcard for IoT is Intel, who announced its Quark product line at IDF late last year to address IoT applications. While we understand the strategic intent to play in all areas of compute, the question remains how Intel will drive price points for its Atom product lines to low-single-digit (or below) price points. Pricing aside, x86 power performance vs. ARM in other end markets has also shown a preference for ARM (especially in consumer devices, where raw compute power is less of a differentiator). Thus we believe Intel will be fighting an uphill battle with Quark, but we would not discount its intentions here especially given a higher sense of urgency under new CEO Brian Krzanich. Another wild card is QUALCOMM, who recently announced its Internet processor, which appears to combine an ARM-based processor with a Wi-Fi radio. Given QUALCOMM s position in the Bluetooth market as well, it could also be a new entrant in the heretofore sleepy world of microcontrollers and find a way to benefit from the IoT in ways beyond cellular modems. Microcontroller Growth Forecast $18,000 $17,000 $16,000 Microcontroller Growth Forecast 8% 6% 4% $15,000 $14,000 $13,000 $12,000 $11,000 $10, % 0% -2% -4% -6% -8% Source: Gartner, Inc. MCU Revenue Growth Rate As shown above, Gartner estimates the Microcontroller market at roughly $15 billion annually, with generally low- to mid-single-digit growth expected for the next several years. However, we believe this forecast is likely conservative given the substantial momentum we are seeing for connected devices across both consumer and industrial end markets. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

46 Communications Technology Sensors: The True Magic of the IoT In our view, sensors are the magic of the IoT. The sensor market is enormous, with Analog Devices estimating it to approach $100 billion annually, much of which is not related to semiconductors at all. The sensor market applicable to semiconductor vendors includes micro-electromechanical systems (MEMS) - based sensors, optical sensors, ambient light sensors, gesture sensors, proximity sensors, touch sensors, fingerprint sensors and more. These chips effectively detect changes in the environment, creating the information that is ultimately transmitted via a wireless chip and interpreted through application software to create an IoT solution. Sensors or sensor networks (Smart Dust, Mesh Networks, etc.) can provide feedback about numerous physical phenomena including inertia, gravity, light, pressure, temperature, humidity, chemical composition, time, heart rate, glucose, distance traveled, etc. One of the more interesting sensor categories is MEMS-based sensors, which are creating new applications and taking share from more legacy sensor technologies. MEMS sensors have come down in price from $10 to $1 for many devices and in size down to 2mm x 2mm squared or smaller, which has dramatically improved MEMS adoption over the last several years. MEMS devices can be manufactured in CMOS processes, allowing them to become increasingly cost efficient and smaller going forward as well. Another critical factor driving MEMS adoption is that MEMS devices can easily be incorporated into electronic systems. All sensors ultimately need to be attached to analog-to-digital converters (and other analog devices) so that the information they have collected can be turned into a signal that can be digitally processed. MEMS sensors, given their small size and manufacturing, can be easily packaged with or integrated with an analog-to-digital converter, leading to lower overall module cost. Source: Analog Devices. In September 2013 Gartner forecasted that the MEMS market will grow at a 13.5% CAGR between 2011 and 2017, growing from $3.1 billion to $6.8 billion. The largest market for MEMS is the automotive market, estimated at $1.8 billion or 44% of the MEMS market in The major application for automotive MEMS is for sensing when to deploy airbags. In this market MEMS sensors are replacing sensors such as fiber optic gyroscopes and ring-laser gyroscopes. Additional applications are in electronics stability control, tire pressure measurement and, going forward, using the sensor to track location while in a structure such as a parking garage where a GPS signal cannot reach. Of course air deployment is not really something that can be categorized as part of the Internet of Things. However, the connected car seems to be a reality that is approaching rapidly. Once the car is connected to the Internet via one of the wireless technologies mentioned here or one that is coming specifically for automobiles, and software like ios or Android gets installed, we expect the car to see a significant increase in the use of the sensor information. For example, the MEMS sensor could indicate 2014 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. 44 International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

47 Communications Technology that a tire is flat and then with location-based services, a nearby garage could be suggested. Similarly, the adoption of MEMS into the car to determine position while satellites cannot reach the GPS can also be used to tie into location-based services. Also, airbag deployment and associated g-force readings from the MEMS accelerometer taken during a car crash could send a signal to local emergency services to send police and an ambulance. The six-year CAGR forecast for MEMS sensors in the automotive market is 8%, which is still reasonably good considering penetration of the auto for MEMS started in Table 1. Revenue for MEMS Semiconductor Sensors, by Application, Worldwide, (Millions of Revenue Dollars) for MEMS Semiconductor Sensors, by Application, Worldwide, (millions of dollars) Market Sector CAGR ( ) Compute % Storage % Wireless ,266 1,660 2,011 2,372 2, % Wired NA Consumer % Automotive 1,772 1,767 1,814 2,041 2,249 2,428 2, % Industrial % Military % Total Market 3,145 3,623 4,078 4,829 5,530 6,211 6, % Source: Gartner, Raymond Raymond James James research. & Associates, Inc. Between 2011 and 2017 Gartner forecasts computing and wireless applications to be the two fastest growing areas for MEMS sensors at 24% and 23% CAGR, respectively. Given the number of connected devices that are being launched both in consumer and industrial end markets, most of which require sensors to capture valuable information, we believe this forecast could prove somewhat conservative as it relates to categories outside of compute and wireless. As far as competition in the MEMS sensor space, STMicroelectronics is the current market leader with 22% share, followed by Robert Bosch at 21%. Bosch had been the leader due to its exposure to the original markets in automotive, but ST gained ground based on its exposure to the fast growing market of handsets and tablets. Source: Gartner, Raymond James research. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

48 Communications Technology As we mentioned, mobile applications have been growing the fastest and the following players are leaders in that market. Table 1. Manufacturers' Market Shares for MEMS Motion Sensors in Mobile Phones, 2012 Manufacturers' Market Shares for MEMS Motion Sensors in Mobile Phones, Rank Manufacturer 2011 Revenue ($M)* 2012 Revenue ($M)* Percentage Change 2012 Share 1 STMicroelectronics % 60% 2 Robert Bosch % 12% 3 Kionix/Rohm % 8% 4 InvenSense % 8% 5 Analog Devices % 7% 6 Memsic % 2% 7 8 Hokuriku Electric Industry Murata Manufacturing % 1% 0 5 NA 1% NA VTI Technologies % 0% Total Market % 100% Source: Gartner, Raymond James research. Source: Gartner and Raymond James & Associates. Other capable firms that we expect to enter the market soon include Maxim Integrated, likely in 2015 and Fairchild Semiconductor. Another major semiconductor sensor category is ambient light/proximity/gesture sensors. IHS forecasts this market to grow from $545 million in 2012 to $1.3 billion+ in 2017, or 11% CAGR. This market included players such AMS, Maxim, Intersil, and many others. Some solutions are being done in-house as well. For example, Apple purchased PrimeSense, which offers a 3D sensor that combines ambient light sensor and a CMOS sensor. These products have shown up on applications such as Internet-capable TVs from Samsung that have gesture and voice recognition. Additionally, fingerprint sensors, CMOS camera sensors, touch sensors, and sound-based gesture sensors may have a place in various IoT applications. While we expect the use cases to largely remain in existing devices in the near term, we note that some companies such as OmniVision (with its OmniGlass offering) have developed reference design platforms for certain use cases (wearables, in this case). We see additional reference designs as a method to enter these markets from various sensor players, which can help OEMs integrate additional functionality over the next several years. Overall, the IoT will be a modest driver of global semiconductor growth, with each 1 billion devices connected each year adding about 1% to global growth. However, for PAN-based communications chips, microcontrollers, and certain sensor categories, we believe the IoT could drive double-digit growth for many years, benefitting vendors that are well positioned Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. 46 International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

49 Communications Technology IoT, Networking Architecture, and Equipment Ramifications In general, we view the IoT as one of many drivers of network equipment spending over the next several years, and a meaningful contributor to what Cisco predicts will be a 23% CAGR in network traffic growth through Networking equipment, specifically in the Wide Area Network (WAN), is agnostic to the ultimate traffic source. The IoT represents yet another source of network traffic, which is likely to grow meaningfully. In this sense, the IoT is a driver for network equipment deployment, but just one of many trends driving increased network traffic. In general, equipment sales do not depend on any particular element of IoT (e.g., connected car) but certainly require mainstream success of some IoT applications to gain traction to fuel the 23% global traffic CAGR forecasted by Cisco. 120,000 Global Traffic Growth (Petabytes/Month) Global Traffic Growth 100,000 Mobile Data Petabytes /Month 80,000 60,000 Managed IP Fixed Internet CAGR 23% 40,000 20, E 2014E 2015E 2016E 2017E Source: Cisco, Raymond Source: James Cisco, Research Raymond James research. We expect both the number of connected IoT devices and the bandwidth consumed per device to stimulate demand for networking equipment. Many of today s most demanding traffic sources involve human beings (cell phone, tablets, PCs), while M2M applications are less intensive (in fact, well over half of global cellular modules sold into M2M applications today are still 2G). However, a number of the developing applications envisioned by the IoT trend could feature devices that consume significant bandwidth such as LTE connected cars, video security monitoring, and medical device monitoring. Infonetics sizes the market for service provider equipment spending growing from $125 billion in 2013 to $150 billion by 2017, exhibiting a CAGR of 5%, and we believe IoT is one of the drivers of this growth. The $125 billion service provider equipment market reflects contributions from a range of segments, according to data from Infonetics. Wireless infrastructure makes the largest contribution at $58 billion or 46% of total spending in 2013, growing to $62 billion, but just 42% of spending by Switching and International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

50 Communications Technology $160,000,000,000 routing contributes significantly in 2013 at $16 billion or 13% of spending, growing to $23 billion or 15% of spending by Optical transport also contributes significantly at $13 billion or 10% of spending in 2013 growing to $17 billion or 11% by Global Service Provider Equipment Spending Global Service Provider Equipment Spending $140,000,000,000 $120,000,000,000 $100,000,000,000 $80,000,000,000 $60,000,000,000 $40,000,000,000 $20,000,000,000 Service enablement and subscriber intelligence Service provider mobile/wireless infrastructure Service provider VoIP and IMS equipment Service enablement and subscriber intelligence Carrier routing, switching, and Ethernet Service provider VoIP and IMS equipment Optical network hardware Pay TV Broadband CPE Broadband aggregation hardware $0 CY12 CY13E CY14E CY15E CY16E CY17E Source: Source: Infonetics, Infonetics, Raymond Raymond James James Research research. The IoT will affect networks in several ways, and perhaps architectural changes represent one of the more significant factors. Cisco predicts that metro traffic will exceed long-haul traffic in 2014 and account for 58% of total IP traffic by 2017, and suggests this change is influenced by increased use of more localized data centers and Content Delivery Networks (CDNs), which in effect bypass long-haul links to deliver traffic within metro and regional markets. As traffic growth from IoT applications increases, we expect data center deployments associated with IoT applications to become more localized as well, and therefore play into this transition from long-haul to metro traffic. This architectural shift may affect the market in several ways: Increased bandwidth demands. Today s state of the art commercial interfaces are 100 Mbps, and this could grow to 1 Tbps by 2017 in long-haul applications. End point bandwidth will also rise, with the typical fixed broadband connection in the U.S. near 7 Mbps today. We expect 100 Mbps connections to become commonplace with the trend towards 1 Gbps connects already underway. Wireless connections will increase as well with the evolution of 5G in cellular and advances in Wireless LAN technology. Today s 3G mobile technology typically operates at <1 Mbps with 4G networks typically supporting 5-10 Mbps and often as much as 20 Mbps, whereas 5G technology is not yet defined and unlikely available before Deeper fiber deployment. Fiber optics offer greater traffic carrying capacity than radio or metallic media, and therefore we expect continued proliferation of optics closer to the end users. Network densification. The deployment of small cells represents a simple example of network densification Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. 48 International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

51 Communications Technology Greater percentage of edge/access sales = margin pressure. Edge/access equipment generally has lower gross margin than long-haul gear, and generally more competitors and lower barriers to entry. Catalyze software defined networking (SDN). The increased volume of network equipment will create greater operational challenges that can only be addressed with greater automation of networks via software. Vendor competition may increase. Historically, metro/access applications/equipment have had lower barriers to entry and more participants making these segments more competitive than the long-haul counterparts in applications such as routing and optical transport. In general, from a network perspective, the IoT is simply another driver of network traffic, on top of other drivers such as smartphone proliferation, streaming audio/video, etc. These increased traffic loads are all part of the industry s ~5% revenue growth forecast, and within our coverage specifically, we focus on players in optics, access, wireless infrastructure, and routing/switching as being positively impacted by the traffic driven by the IoT. Optics: We highlight Ciena and Alcatel-Lucent on the systems side and note that the private Chinese vendor Huawei leads the market. Finisar, JDS Uniphase, and NeoPhotonics offer exposure for optical components. All should see increased demand for their products as the IoT drives more traffic on networks globally. Fixed access: We highlight ADTRAN, Alcatel-Lucent, ARRIS, NETGEAR, and Calix as well as component supplier Applied Optoelectronics. As traffic in the home and office increases to support various IoT applications, we believe access equipment may increase as a percentage of the overall telecommunications capital spending mix, which should have a demand benefit for successful vendors. Wireless infrastructure: Although PAN connections will see more benefit than WAN, the mobile network will certainly witness increased demand from IoT applications, especially the connected car. Ericsson and Huawei lead this market, but Nokia, Alcatel-Lucent, and Cisco could increasingly benefit from the evolution of mobile networks including small cells. We also highlight CommScope as a supplier of cell site apparatus (e.g., antennas). Routing and switching: More traffic growth certainly requires more routing and switching. Cisco, Alcatel-Lucent, Juniper, and Huawei lead the market for routing. Historically, core routing has been a duopoly between Cisco and Juniper, whereas the edge routing market has featured more competitors. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

52 Communications Technology What Does the IoT Mean for Wireless, Cable and Data Center Service Providers? Wireless Service Provider Impact Based on data from Infonetics, global wireless service providers generate roughly $800 billion in annual revenues, with a low-single-digit growth outlook as voice revenues are declining and data revenues are maturing along with the multi-year smartphone transition. The IoT is the next logical driver of wireless service provider growth, and therefore we are witnessing material increases in resources committed to increased adoption and revenues from the IoT. As shown below, M2M global service revenues were $16.2 billion in 2013, according to Infonetics, and are expected to grow to $31.1 billion in 2017, a 16% CAGR, well above the overall growth rate of wireless services. M2M Global Service Revenues Source: Infonetics, Raymond James research. However, it is important to recognize that the IoT/M2M revenue contribution to wireless carriers globally will be small for some time, and that by the end of the forecast period, it is expected to still represent less than 5% of global service provider revenue. However, we expect the percentage will be higher in the developed world, where most IoT applications are being adopted. Although small in revenues, connected devices and machines that can talk to each other and the network represent large, very high margin revenue opportunities for the likes of AT&T, Sprint, Verizon, and T- Mobile. In general, IoT applications use very little data, and traffic is generally not as time sensitive as voice, resulting in a margin-rich service opportunity that in effect can make use of excess network capacity and provide a recurring revenue stream for 5-10 years given the long life of many IoT assets in the field. As discussed previously, most IoT devices will connect through unlicensed wireless spectrum, creating limited opportunity for carriers, but devices that are inherently mobile or deployed in areas where a PAN solution is not relevant (e.g., cars, trucks, smart grid, etc.) will likely require a national cellular-based platform, and typical multiple platforms. This has even created an opportunity for MVNOs to aggregate bandwidth across multiple carriers and simplify purchasing and billing for applications providers, as addressed earlier in this report Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. 50 International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

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