Emerging Technology Analysis: The Internet of Things Creates Semiconductor Business Opportunities at Several Levels

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1 Gartner for Business Leaders G Emerging Technology Analysis: The Internet of Things Creates Semiconductor Business Opportunities at Several Levels Published: 27 February 2013 Analyst(s): Jim Tully A plethora of new device types are being connected to the Internet, leading to many opportunities for semiconductor vendors. Growth is initially in enterprise solutions and will switch rapidly to consumer applications over the next few years. Key Findings Opportunities will exist for semiconductor and other technology providers at a number of levels notably within "things" (such as fitness sensors or home automation devices), the communication infrastructure and data centers. Market success will hinge upon encouraging people inspired by the Internet of Things to develop solutions. Many are not technical experts, so require a simple, rapid prototyping environment linked with smartphone or tablet infrastructures. The strategic use of distributors will be important for semiconductor vendors to reach their widely disparate audience for Internet of Things applications. Enterprise applications for the Internet of Things currently dominate in revenue terms. Consumer applications are growing, and will likely exceed those of enterprises within three to four years. Recommendations Make it easy for developers to utilize your technology in their solutions. Provide reference designs, low-cost evaluation boards and useful software development kits in a wide range of usage scenarios. Create online forums and communities, and encourage sharing of open-source software. Work through partners if necessary, to provide this environment and ensure that your technology is a part of it.

2 Seek ideas that have potential for the greatest impact on your business. Those likely to result in significant revenue require special attention as you help developers convert prototypes into reliable production versions. Closely observe funding markets to assess which ideas are gaining traction. Table of Contents Strategic Planning Assumption(s)... 2 Analysis...2 Technology Description... 3 Technology Adoption...4 Enterprise Adoption is Being Driven Primarily by Cost Savings...4 Consumer Adoption is Long Term and Difficult to Predict... 5 Factors That Will Drive Adoption... 5 Factors That Will Inhibit Adoption...7 Technology Impact...8 Actions for the Next 6 to 18 Months References Recommended Reading...11 List of Figures Figure 1. The Internet of Things Links Services With Things...4 Figure 2. Relative Costs of a Number of Representative Internet of Things Components... 7 Figure 3. The Internet of Things Operates in a Hierarchy of Functions...10 Strategic Planning Assumption(s) By 2017, 50% of Internet of Things solutions will originate in startups less than three years old. Analysis While the Internet of Things is a major evolution from the traditional Internet, the emerging opportunities are significantly more challenging to quantify. The evolution has been discreetly under way for some time but is currently gathering pace, making the coming years critical in technology providers' understanding, acceptance and utilization of the technologies. Page 2 of 12 Gartner, Inc. G

3 Technology Description The Internet of Things is a fast-developing concept defined by Gartner as: "The network of physical objects that contain embedded technology to communicate and sense or interact with their internal state or the external environment." Simply put, the Internet of Things is the network of data-connected devices that operate in a semiautonomous way. This excludes devices that are directly operated by humans, such as PCs, smartphones and tablet computers, and includes almost everything else. Smartphones and tablets will be the principal means by which the Internet of Things communicates and interacts with the human world so they represent a vital link in the overall ecosystem. In more tangible terms, the Internet of Things is a pairing of physical objects with a service or app of some kind, through the use of embedded intelligence (within the thing) and communications technology (see Figure 1). Many services will be very simple and may not be chargeable, such as a social media service. Nearly every physical item could become part of it if the value of doing so exceeds the costs of the technology. A sensor connected to a plant can tweet that water is required; manufacturing equipment can monitor its status and schedule maintenance; kitchen appliances can signal that they have completed a task and cars can signal a need for service. This is no longer science fiction; these examples exist today. This migration of digitization to physical objects has enormous implications for all kinds of businesses, IT organizations, technology providers and consumers. Gartner, Inc. G Page 3 of 12

4 Figure 1. The Internet of Things Links Services With Things Service or App Example: Home energy management Autonomous machine-tomachine communication (Could be dedicated M2M service offering) Embedded intelligence Thing Example: Thermostat M2M = machine-to-machine Source: Gartner (February 2013) Technology Adoption Adoption of the Internet of Things is moving at different speeds in different parts of the global economy. Enterprise Adoption is Being Driven Primarily by Cost Savings Enterprises in a number of vertical industries are among the first to adopt the Internet of Things. Logistics and asset tracking of delivery vehicles is an early example where GPS technology is used to calculate the closest vehicle to a location. Health services also have a keen interest in utilizing the Internet of Things for remote patient monitoring, as this may allow for more patients to stay at Page 4 of 12 Gartner, Inc. G

5 home, and frees up medical resources. Various organizations are starting to deploy the technology as a way of safeguarding elderly people in their homes, so that help is available to them in case of emergencies. Public utilities are deploying remote monitoring of refuse bins to minimize wasteful truck runs when bins do not need emptying. All of these examples have one thing in common they result in cost savings over the current way of handling these situations. These examples also utilize existing available Internet connections over broadband, or via cellular networks to achieve connectivity; and they function with a minimal need for user operation or input. Operation is semiautonomous where remote "things" (including things attached to people) are probed by software running on a host computer. Alternatively, these things may initiate communication with the host if an abnormal situation has been detected by a sensor within it. Cost is a primary driver, but not the only one (see the Factors That Will Drive Adoption section). As more enterprises see the benefits of an Internet of Things through a few early-stage examples, the expectation is for it to be further adopted. The speed of adoption will vary widely and will depend on upgrade or replacement cycles for things and on budget cycles. Some of these cycles are quite long term such as for buildings and capital infrastructure. Others may be shorter term such as the use of smart badges to indicate if an employee or conference attendee is in a building. Consumer Adoption is Long Term and Difficult to Predict The first wave of adoption of the Internet of Things is linked to enterprises with the primary goal of reducing costs. Consumer adoption is following and, within three to four years, will exceed that of enterprises in terms of traffic, number of things and market value for vendors. Consumer use is developing on a widening front. Application areas include health and fitness, energy monitoring in the home, home security, elderly person monitoring, smart appliances and many more. Devices on offer range from: smart bathroom scales (including the option to tweet the user's weight to social media); to door locks that can be remotely-controlled via a smartphone. Especially in the case of consumers, the uptake and acceptance of specific things is virtually impossible to predict. Unusual and bizarre items could capture the imagination of millions of consumers. It is important to think of offerings and user experiences as services rather than things because the service (or app) dominates this experience. Developers and designers have yet to envisage many of the future devices and services that will capture the imagination of consumers. This is another reason why it becomes a futile exercise to quantify the market at this stage. Consumers may be more unpredictable than enterprises, but adoption can be very rapid for the right Internet of Things offering. One reason is that consumers do not conform to budget cycles and often act on impulse particularly for small monetary amounts. Factors That Will Drive Adoption In addition to the underlying need for solutions relating to the Internet of Things (such as the need to reduce costs, improve security, and so on) several factors are driving adoption. One of these is the infrastructure that is supporting the explosion of apps for smartphones and media tablets. This is Gartner, Inc. G Page 5 of 12

6 enabling a large range of devices such as the igrill meat thermometer to monitor cooking, fitness sensors such as the Nike+ running-shoe sensor, credit card scanners, heart-rate monitors with Bluetooth connectivity, and hundreds of other devices. This existing infrastructure lowers the barriers to entry for new service providers. It includes cloud computing and services which allows small service providers to offer solutions without the need to own expensive assets such as data centers. The global communications infrastructure and especially older 2G cellular communication capacity that is available for low bandwidth machine-to-machine (M2M) communication allows many services to be offered globally and supports rapid market penetration. This situation varies by region since some countries want to retire 2G in order to reallocate the spectrum for 3G and 4G purposes. Embedded cellular M2M solutions will tend to be most attractive for more expensive items costing over $100 or that have significant service revenue associated with them. This includes offerings such as that of BigBelly Solar's "intelligent" trash cans and associated emptying service. Regulation is another key driver. This is the reason for the large-scale introduction of smart meters and emergency crash sensors in cars. Such regulation is set to continue across many areas and will provide an ongoing boost for Internet of Things solutions. The third primary driver which is actually more of an enabler, is the falling cost of embedded technology for use in things. Figure 2 shows the current and projected costs of several Internet of Things components. These costs are already low enough for many applications and will continue to fall over the next several years. Page 6 of 12 Gartner, Inc. G

7 Figure 2. Relative Costs of a Number of Representative Internet of Things Components Technology Component Basic 8-bit microcontroller $0.60 $0.50 Radio, Wi-Fi $1.30 $0.80 Radio, Bluetooth $0.75 $0.35 Sensor (temperature) $0.80 $0.75 Sensor (vibration/accelerometer) $1.30 $0.95 Camera (1.8 MP CMOS image sensor) $1.70 $1.10 Microphone $1.10 $0.95 GPS $1.15 $0.65 Energy source (inductive loop wireless power, incremental cost per unit) $2.50 $2.00 CMOS = complementary metal-oxide semiconductor; MP = multiprocessor Source: Gartner (February 2013) The sheer number of devices will also create a momentum that will almost certainly prove unstoppable. Some industry predictions are very high. Ericsson, IBM and Cisco have publicly discussed numbers of connected devices ranging up to 1 trillion units by The figures are somewhat subjective, but we can be confident of very high numbers. Gartner's bottom-up analysis of currently visible things reveals a figure of 5 billion by 2018 across enterprise and consumer markets. Most of these are consumer devices ranging from light-emitting diode (LED) light bulbs in smart lighting, to wearable activity monitors. The danger of quoting a figure is that most potential things and their associated services and apps cannot be envisaged at this time, so the true figure is likely to be much higher. The wide range gives reason for market optimism because if some types of service falter for technical, business justification, or other reasons there will be plenty of other areas that can drive adoption. Factors That Will Inhibit Adoption In both enterprise and consumer contexts there are many likely barriers to adoption and market growth. The most intangible of these inhibitors is the need for new and innovative services and Gartner, Inc. G Page 7 of 12

8 apps. These require creative individuals who can imagine, develop and devise solutions for needs that we do not currently recognize. If the services and apps can be envisaged, the things will soon follow. Many of these solutions will probably be developed, but are not yet available to be counted or itemized. For this reason, this factor becomes an inhibitor. Another issue is the difficulty of integrating Internet of Things solutions with enterprise IT systems. Most enterprises are unprepared for the streams of data that would arise from thousands or potentially millions of client devices and sensors. Most organizations have no idea of how they would achieve this integration with existing databases, such as customer accounts, billing and so on. These solutions and technologies will take time to develop. Communications service providers (CSPs) are one of the few industries used to this level of data flow; and their position in the smartphone ecosystem might make them ideal partners in learning how to develop smart systems for the Internet of Things. Many of these companies are expanding their existing M2M services into full Internet of Things offerings. Security and privacy is another factor that will tend to slow down adoption. Information originating in a myriad of disparate smart devices, perhaps geographically diverse, raises obvious security implications. Encryption of data may be part of the solution, but enterprises will be reluctant to deploy Internet of Things installations until they are satisfied with the robustness of the solution. Government regulations protecting the privacy of citizens vary significantly from one country to the next. The transfer and storage of personal information may require separate approaches and systems within a region. The seriousness of this issue will vary by application. No one would argue that automotive firmware updates and energy monitoring systems need highly secure connections, whereas users may be more relaxed about data originating from smart bathroom scales. Most of the embedded technology for use in things is readily available and is already reasonably low-cost (see Figure 2). One technology component that is tricky to fulfill is the energy source. It may become impossible to access some things in order to replace batteries. Rechargeable batteries have a limited lifetime and are often unsuited to many applications. Wireless power and energy harvesting are most likely to be the only solutions for many applications, but these are still at an early stage of development. See Gartner's "Hype Cycle for Semiconductors and Electronics Technologies, 2012" for more information on wireless power. Technology Impact Semiconductor and other electronic component market opportunities within the Internet of Things will exist at several levels (see Figure 3). At Level 1 (things) are the things themselves, such as a baby monitor or home automation devices. These may require microcontrollers, sensors such as microphones or accelerometers, and actuators such as motors or speakers. Furthermore, they will also require an energy source and power management technology. Many things that appear quite diverse will be almost identical in terms of their semiconductor content. For semiconductor vendors this provides real economies of scale for those that can provide the tools and technology for easy integration and development. Page 8 of 12 Gartner, Inc. G

9 The things connect with a communications infrastructure at Level 2. This is often the cellular network for wide-area communications. There may also be local connectivity, perhaps involving Bluetooth, Wi-Fi, ZigBee or another technology. The entire Internet communications infrastructure also sits at this level and could lead to new opportunities for CSPs and ISPs to create a new level of billable data and services. Level 3 contains the computing and storage for Internet of Things services. If several billion new services and things come online over the next few years, then a lot of investment will be required in Level 3 data center and cloud computing capacity. These support Level 4, which is where the services or apps that provide the main value to users are positioned. Between each layer are aggregation, compression and security functions. In many cases data from lower levels will not need to be passed up to the service. This maybe because it is unchanged or irrelevant. In other cases, several sets of data maybe combined and compressed in order to optimize the communications' bandwidth available. These blocks of data may also be encrypted for security reasons. In this model all these functions are handled in the "aggregation and security" sublevels between the layers. The model is deliberately simplified to illustrate the opportunities. Communication, for example, can exist at several levels. However, using this structure you can see that significant hardware and software market opportunities exist throughout the entire ecosystem that supports the apps or services not only in the things. This also helps to illustrate that the Internet of Things is not one "market." It comprises many diverse market opportunities across several distinct industry sectors. Gartner, Inc. G Page 9 of 12

10 Figure 3. The Internet of Things Operates in a Hierarchy of Functions Level 4: Apps and services Consumers Baby minding service or app; home security service Enterprises Vending machine refilling and maintenance service Level 3: Computing and storage Level 2: Communications and networking Data centers, servers, storage, cloud Aggregation and security M2M communications: cellular, mesh, Wi-Fi, ZigBee, TV white space Aggregation and security Level 1: "Things" Baby monitor, home automation devices Vending machine, hotel room door lock M2M = market-to-market Source: Gartner (February 2013) Actions for the Next 6 to 18 Months Semiconductor vendors should closely examine where and how the Internet of Things can fit into their portfolios: Recognize the fragmented nature of the market and prepare to utilize distributors to reach the wide range of potential customers. Recognize also that you probably cannot anticipate the full nature of future services and apps. Page 10 of 12 Gartner, Inc. G

11 Get your technology out there through developer gatherings, "hackathons" or other means, and allow communities and developers to find the applications. Easy access to reference designs and developer kits will be critical. When assessing a particular opportunity related to the Internet of Things, examine the viability of the service or app first. This is the part of the offering that must be most compelling to users. Other organizations will need to be involved in the provision of the service since the Internet of Things involves multiple companies operating at all levels of the hierarchy (see Figure 3). Many of these solutions will originate in innovative startups. Actively look for these companies, partner with them, license technology, and search for a mutual win-win relationship. References "Hype Cycle for the Internet of Things, 2012" Recommended Reading Some documents may not be available as part of your current Gartner subscription. "Key Technologies for the Internet of Things" "Internet of Things Research for CIOs" "Internet of Things Scenario: When Things Negotiate" "Hype Cycle for Semiconductors and Electronics Technologies, 2012" "Predicts 2013: Semiconductors and Electronics" "Predicts 2013: Smart City Business and Service Models Need to Keep Citizen Value in Mind" "The Internet of Things Will Support a Wide Range of Business Models" Gartner, Inc. G Page 11 of 12

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