15th Jul, 2015

The Internet of Things: Sizing up the opportunity

This connectivity trend is now recognized as a source of growth for semiconductor players and their customers. Here we consider the opportunities and constraints for components manufacturers.

The semiconductor industry has been able to weather the fallout from the global financial crisis and realize several years of healthy growth—in part because of the widespread adoption of smartphones and tablets, which created demand for mobile and wireless applications. The industry’s average annual growth rate between 2010 and 2013 was about 5 percent. Could the same sort of growth result from widespread adoption of the Internet of Things? Many semiconductor players have been asking themselves just this question.

The Internet of Things refers to the networking of physical objects through the use of embedded sensors, actuators, and other devices that can collect or transmit information about the objects. The data amassed from these devices can then be analyzed to optimize products, services, and operations.

Perhaps one of the earliest and best-known applications of such technology has been in the area of energy optimization: sensors deployed across the electricity grid can help utilities remotely monitor energy usage and adjust generation and distribution flows to account for peak times and downtimes. But applications are also being introduced in a number of other industries. Some insurance companies, for example, now offer plans that require drivers to install a sensor in their cars, allowing insurers to base premiums on actual driving behavior rather than projections. And physicians can use the information collected from wireless sensors in their patients’ homes to improve their management of chronic diseases. Through continuous monitoring rather than periodic testing, physicians could reduce their treatment costs by between 10 and 20 percent, according to McKinsey Global Institute research—billions of dollars could be saved in the care of congestive heart failure alone.

In each of these cases, the connected devices that transmit information across the relevant networks rely on innovations from semiconductor players—highly integrated microchip designs, for instance, and very low-power functions in certain applications. The semiconductor companies that can effectively deliver these and other innovations to original-equipment manufacturers, original-device manufacturers, and others that are building Internet of Things products and applications will play an important role in the development of the market. That market, in turn, may represent a significant growth opportunity for semiconductor players.

Indeed, semiconductor executives surveyed in June 2014 as part of our quarterly poll of the components-manufacturing market said the Internet of Things will be the most important source of growth for them over the next several years—more important, for example, than trends in wireless computing or big data. McKinsey Global Institute research supports that belief, estimating that the impact of the Internet of Things on the global economy might be as high as $6.2 trillion by 2025.1 At the same time, the corporate leaders polled admit they lack a clear perspective on the concrete business opportunities in the Internet of Things given the breadth of applications being developed, the potential markets affected—consumer, healthcare, and industrial segments, among others—and the fact that the trend is still nascent.

In this article, we take the pulse of the market for Internet of Things applications and devices. Where along the development curve are the enabling technologies, and where can semiconductor players insert themselves in the evolving ecosystem? We believe components manufacturers may be able to capture significant value primarily by acting as trusted facilitators—it is their silicon, after all, that can enable not just unprecedented connectivity but also long-term innovation across the Internet of Things.

Sizing the opportunity

Three years ago, industry pundits and analysts predicted that, by 2020, the market for connected devices would be between 50 billion and 100 billion units. Today, the forecast is for a more reasonable but still sizable 20 billion or 30 billion units. This leveling off of expectations is in line with what we have seen in past introductions of new technologies. Throughout the late 1990s and early 2000s, for instance, there was much discussion in the semiconductor industry about the potential benefits and implications of Bluetooth technology, but the inflection point for Bluetooth did not happen until 2003 or 2004, when a large enough number of industry players adopted it as a standard and pushed new Bluetooth-based devices and applications into the market. The market for Internet of Things devices, products, and services appears to be accelerating toward just such an inflection point, in view of four critical indicators.

Supplier attention. Internet of Things developer tools and products are now available. Apple, for instance, has released Health Kit and Home Kit developer tools as part of its latest operating-system upgrade, and Google acquired Nest to catalyze the development of an Internet of Things platform and applications.

Technological advances. Some of the semiconductor components that are central to most Internet of Things applications are showing much more functionality at lower prices. Newer processors, such as the ARM Cortex M, use only about one-tenth of the power that most energy-efficient 16-bit processors used only two years ago. This leap forward in technological capabilities is apparent in the evolving market for smart watches. The first such products released in 2012 boasted 400-megahertz single processors and simple three-axis accelerometers. Now a typical smart watch will include 1-gigahertz dual-core processors and high-end, six-axis devices that combine gyroscopes and accelerometers. Meanwhile, the prices of the chip sets used in these products have declined by about 25 percent per year over the past two years.

Increasing demand. Demand for the first generation of Internet of Things products (fitness bands, smart watches, and smart thermostats, for instance) will increase as component technologies evolve and their costs decline. A similar dynamic occurred with the rise of smartphone usage. Consumer demand for smartphones jumped from about 170 million devices sold annually just four or five years ago to more than a billion devices in 2014. The increase in orders coincided with a steep decline in the price of critical smartphone components.

Emerging standards. Over the past two years, semiconductor players have joined forces with hardware, networking, and software companies, and with a number of industry associations and academic consortiums, to develop formal and informal standards for Internet of Things applications. AT&T, Cisco, GE, IBM, and Intel, for instance, cofounded the Industrial Internet Consortium, whose primary goal is to establish interoperability standards across industrial environments so that data about fleets, machines, and facilities can be accessed and shared more reliably. Other groups have been focused on standardizing the application programming interfaces (APIs) that enable basic commands and data transfer among Internet of Things devices.

Implications for semiconductor players

Analysts have predicted that the installed base for Internet of Things devices will grow from around 10 billion connected devices today to as many as 30 billion devices by 2020—an uptick of about 3 billion new devices per year (exhibit). Each of these devices will require, at a minimum, a microcontroller to add intelligence to the device, one or more sensors to allow for data collection, one or more chips to allow for connectivity and data transmission, and a memory component. For semiconductor players, this represents a direct growth opportunity that goes beyond almost all other recent innovations—with the exception, perhaps, of the smartphone.

PROCESSING, PLEASE WAIT...