The Evolving Internet of Things Market Key Trends and Implications By Kevin Foley, Todd Bricker and Syed Raza The phrase Internet of Things (IoT) is firmly established in today s business lexicon but no two definitions are alike. Lately startups demonstrating Internet of Things functionality have proliferated, however a large but quiet group of businesses have been executing in this space for years. Success in IoT will be the result of focusing on solving existing challenges or identifying new products and services enabled by the telemetry and machine-to-machine (M2M) communications technologies at the heart of IoT. This Insight examines the current state of the Internet of Things and opportunities for service providers, enterprises and investors. March 2015
The Current State of the Internet of Things The Internet of Things (IoT) has been described as the next phase in the information revolution that s been underway for the past 25+ years. IoT promises to deliver the next phase of IT-driven productivity growth in the world economy dramatically improving our ability to meet human and business needs. Simply put, IoT is defined as technology that enables any device to connect to the Internet. These devices will provide sensor information, either about the state of the device or the device s operating environment, to a central location or to other devices which can aggregate data, improve decision-making, or affect change to a device in the environment. Why Are We Seeing a Proliferation of IoT Solutions Now? We ve reached an interesting technological inflection point and now is the time to capitalize on this market opportunity - Moore s Law (chips get smaller), Metcalfe s law (the value of a network increases with each additional node on the network), Koomey s Law (batteries get smaller), and the rise of Big Data are enabling the rise of IoT. With lower costs, higher value, and wider application, problems that were intractable a few years ago can now be resolved. Two other key enablers are: (1) the implementation of IPv6, which supports 128-bit addresses ensuring that each device can have a unique IP address; and (2) ubiquitous smartphones serving as the personal hubs/ gateways to IoT. Figure 1 below illustrates the current state of the evolving IoT market: as costs drop and value increases, solutions that are currently only available for niche applications become accessible to both consumers and enterprises. Figure 1. Sample List of Use Cases for the Internet of Things Copyright 2015 Cartesian, Inc. All rights reserved. 1
Where Is the Value in IoT? The Internet of Things provides value through one of two approaches: improving existing products & services and enabling the development of new products and services. Figure 2. Sample Use Cases for The Internet of Things As the technology matures and firms become more accustomed to operating in an IoT environment, expect to see more autonomous product operation and improvements to service definition. Equipment will be able to self-diagnose and order service, resulting in fewer failures and lower maintenance costs. Coordination with real-time intelligent systems and devices will catalyze operational efficiency within and between companies. Longer term services include product design feedback products in the field will report back usage and performance information that will improve the next generation of products. Trends Likely to Continue Hardware and connectivity costs will continue to drop Hardware costs, in terms of the chips and sensors required to connect devices, have all seen significant price reductions over the past 10 years. Along with the drop in prices, the technology has seen an increase in capability (more powerful semiconductors, digital signal processors) and a broader array of sensors (cameras, accelerometers, radios, microphones, etc.) now have vastly increased capabilities. Connectivity costs are also dropping currently a device can be connected for less than three dollars per month. Figure 3 illustrates the rapid decrease in bandwidth costs over the past 16 years. Figure 3. Decreasing Bandwidth Costs (Source: Alcatel-Lucent) $2.00 $1.50 $ per MB $1.00 $0.50 $- 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Copyright 2015 Cartesian, Inc. All rights reserved. 2
With reduced costs to implement an IoT solution, business cases that once had a negative NPV may now show a positive return. Market structures and business models will change IoT is aiding the shift in business competition from transactional, product-based models towards technology-intensive, service-oriented solutions. As this shift plays out it is putting seemingly unrelated market participants in competition and/or collaboration with each other. From an offering perspective, Product-as-a-Service business models will be introduced from both existing and start-up firms. Companies are moving from a transactional model (Samsung sells you a dishwasher) to a relationship model (Samsung sells you a dishwasher that connects your home and Samsung 24/7/365 and links to Samsung s Digital Health platform to track food intake). Note that in order for these models to be successful both the companies and the end-users will need to change: buying habits, customer expectations, sales models, and support & maintenance approaches will all adapt in this new IoT environment. Security and privacy concerns are likely to remain but not slow adoption With the addition of potentially billions of new devices connected to the internet, security concerns remain one of the top priorities for firms implementing IoT solutions. On the consumer side, the volume of personal data designed to be collected raises privacy issues who is going to own the data? Who is going to have access to the data? How is the data going to be stored and how will it be retrieved, changed, or deleted? While it is currently unclear how both security and privacy issues are going to be addressed, either existing cyber-security methods will work or new ones will need to be developed, and it is certain that there will be serious data breaches along the way. However, neither of these issues will derail the broader implementation of IoT. Implementations will proceed where organizations and customers value the benefits derived from their IoT implementation more highly than the potential security risks. Privacy issues in the IoT markets will parallel those in the existing Internet environment. Detailed risk-assessments of points-of-failure are required to surface critical vulnerabilities. Every company will have an IoT Solution whether or not it makes business sense Much like the dot com bubble of the late-1990s, virtually every company will offer an IoT solution, even if only as a marketing exercise. Additionally, many products will take advantage of the drivers of IoT (cheap sensors, improved connectivity protocols, etc.) to offer devices that have only a marginal relationship to IoT. This can be seen in the consumer market today are children s toys with Wi-Fi connectivity IoT devices? Consumer products will see many entrants and many will fail Consumer products, including wearables, the connected home, and connected car applications, are large and growing markets with multiple competitors in each sector. Currently these sectors are experiencing something similar to the land grab witnessed in the early days of the Internet in the mid-1990s. Lots of firms are trying lots of solutions Copyright 2015 Cartesian, Inc. All rights reserved. 3
because the ultimate value of each solution is currently unclear and each firm is hoping to capture as much market share as possible. Many of these solutions have only weak value propositions versus traditional, non-connected, approaches. Expect to see the bulk of media hype focus on the consumer markets, but also expect many of those companies to fail given the crowded and competitive markets for everything from smart watches to toys. IoT Opportunities for Service Providers, Enterprises and Investors Service Providers Service providers are well-positioned for the enterprise IoT market given the breadth of current service offerings including connectivity, cloud infrastructure, and an industry-focused sales force. Service providers also have infrastructure in place to support their expansion into the consumer IoT market, including physical retail locations, customer support services, distributed field technicians, as well as brand recognition and marketing skills. With connectivity driving the growth of IoT, service providers have a unique opportunity in the emerging IoT market as infrastructure providers. For service providers without a significant M2M solution, this is an opportunity to enter this market with a well-designed IoT offering. Firms with an existing M2M solution should consider expanding their offering to capture customers that were previously price sensitive or who couldn t see the value of an M2M/IoT solution. Service providers should begin to target industries that have communications-intensive applications with high-throughput and low-latency requirements. They can enhance their existing offerings with additional IoT capabilities. Service Providers should also consider how their offerings fit into the broader IoT ecosystem. With their diverse sales and deployment channels, service providers are positioned to offer white label home security or digital life solutions. Other services may include cloud infrastructure and services, predictive analytics, and Go-To-Market capabilities. Enterprises While the building blocks of IoT have been in place for years (RFID tags, connectivity, sensors and actuators, data analysis), much of the value of IoT is derived from new combinations of the technology. Enterprises need to evaluate where they should sit on this technology spectrum should they adopt bleeding edge technology and the associated benefits and risks or implement only mature technology? Firms should evaluate the opportunity IoT presents to offer new products and services to endusers. What value can be derived, both for the firm and end-user, from real-time connectivity, increased automation, and analytics? How should this functionality be sold and supported? Copyright 2015 Cartesian, Inc. All rights reserved. 4
What additional functionality can be implemented? Ultimately, IoT can lead to new products, enhanced product delivery, and new business models. Examples include functionality that reports back real-time products usage data and predictive quality control for manufacturing companies. Investors With over $1.5B of start-up investment in 2014, IoT is a focal point for angel, venture, and private equity firms as multiple opportunities for investment exist. Investors need to understand the key trends driving IoT adoption rates in order to successfully identify and select firms that will provide long-term returns. While there are some similarities between the current rush to invest in IoT and the explosive growth seen in the Internet revolution of the 1990s, there are some clear differences. Firms that are extending proven M2M offerings into the broader IoT marketplace are well positioned given their experience in the sector and their existing sales forces and distribution channels. Firms operating in horizontal M2M/IoT markets have the operational infrastructure in place which provides a foothold in the market as it expands. As IoT technologies become more widely understood and easier to use, we anticipate that firms with deep vertical experience will be increasingly well positioned to identify and exploit opportunities for high returns by applying IoT to solve major business challenges. Firms that are approaching IoT as a completely new marketplace will be challenged. IoT technologies are new to many markets and firms new to this technology face multiple roadblocks to success from educating customers to delivering working solutions. In every cross-vertical market there are not only multiple start-up firms, but also established companies competing to solve similar problems. Conclusion The Internet of Things provides a generational opportunity for businesses to transform their competitive approaches and standing. The fundamental ingredients of low-cost devices and sensors with ubiquitous connectivity and real-time data analysis capabilities are more accessible today than ever. These technologies will enable radical shifts in the consumer and industrial sectors. To take advantage of this opportunity, firms need cohesive strategies to address IoT challenges such as fragmented technology standards, security and privacy concerns, commercial viability, legacy technology investments, and end-user resistance. The most successful firms will be those that use IoT to enhance core value propositions focused on specific market opportunities. Copyright 2015 Cartesian, Inc. All rights reserved. 5
Cartesian is a specialist provider of consulting services and managed solutions to leaders in the global communications, technology and digital media industries. For over 20 years, we have advised clients worldwide in strategy development and assisted them in execution against their goals. Our unique portfolio of consulting services and managed solutions are tailored to the specific challenges faced by executives in these fast-moving industries. Combining strategic thinking, robust analytics, and practical experience, Cartesian delivers superior results. www.cartesian.com For further information, please contact us at cartesian@cartesian.com Copyright 2015 Cartesian, Inc. All rights reserved.