Reality Check On The Internet Of Things

Because value comes before potential

Analysts have predicted massive potential for of the Internet of Things (IoT). This new technology, where everyday devices become connected, is estimated to contribute an estimated $7 billion dollars by 2020 and develop a market eclipsing all technology growth in the coming years.

Gartner’s prediction on number of connected devices

McKinsey & Co. analysts predict similar numbers with connected devices growing from 10 billion in 2013, to 30 billion connected devices in 2020, a 20% rate of annual growth.

Surprisingly, nobody seems to be talking about how these devices will communicate with each other, how they will be brought together and what value they will deliver to the consumer.

The ubiquity of the smartphone

So why the hype? There are vested interests in IoT. Smartphone companies, (with the exception of Apple) are losing money. And by extension, a lot of other companies who’s business it is to supply smartphone components, are losing money.

Semiconductor components were, until the past couple years, riding a wave of massive growth in smartphones. Today, that growth is much harder to come by. Companies like Samsung are seeing low cost Xiaomi phones eat away at their market from the low end and on the high end, consumers in established markets have saturated choices from LG, HTC, Apple, and more. Moral of the story? It is harder to make money on smartphones.

Semiconductor companies want to find growth to replace diminishing smartphone market revenues. As publicly traded companies, their goal is to find new markets for growth (and please shareholders). That’s where the excitement and push towards IoT comes in.

Gartner predicts IoT chip market to have 30% compound annual growth YoY until 2020

Technology is not about the chips

Remember how television companies tried to sell us a wonderful new thing that was going to blow our minds, and just as quickly vanished — something called 3D television? You’re probably going, “Oh, right, that!” Isn’t it amazing how quickly we forget the technologies that fail to deliver on value.

“If you build it they will come.”
— said nobody, except Kevin Costner in Field of Dreams.

With 3D television, although the technology was there, the value to consumers was unclear. Many people gather around a television with family and friends to join in on an experience together. 3D glasses were a barrier and had little value in the family room with a lot of added cost. Issues of incompatibility and varying standards that confused consumers was the last nail on the coffin.

Technology has never been about selling components or the technology. Just look at the BluRay vs. HD-DVD battle that only ended up hurting consumers. That’s why Apple spends so much marketing money on videos with people in them. Technology is about selling the future, a way to make life easier, better. And that takes a lot of work to turn into reality.

With IoT, we are throwing a chip at everything in the home and car, in the hopes that one thing sticks. And this is the biggest problem with this prediction of growth. Nobody is able to define how we get to the value. Don’t believe the hype — it is a long road ahead.

We are not there yet

I’ve written before that Apple has a long way to go before everyday people adopt the Watch. Going luxury was the smartest thing Apple has done to give a blasé piece of technology, a sense of allure. We should be asking if they knew this was necessary because the value of what they were offering consumers was simply not there.

The question we should be asking, is what IoT will do for our lives? The lack of clarity around value astonishing. Connected devices alone do not signal value. Consumers today are much more tech savvy than when the iPhone was introduced, and we already have connected devices everywhere.

It’s also interesting to consider what consumers would pay for a connected device. To a family, is it a compelling enough purchasing decision if the fridge can scan items and call the grocery store to restock supply? Or, are we going to find out that most consumers prefer shopping for their own groceries?

If we consider the iPhone, it was the modern gateway to the Internet. The value was that it brought us closer to people we care about as a communication tool and a way of expression. It helped each person tell their story. Nobody today would argue about that value. But sure, hindsight is 20/20.

The problem I see, is that the vast majority of value in IoT hinges on the idea of what might be possible if all our devices come together. What is more likely, is that they won’t.

We will end up with companies racing to be first, shipping products that are incompatible with others, don’t speak the same protocol, don’t work well together and consumers will hate it. Companies have a terrible record of working together towards open standards. And I’m not the first to bring this up.

McKinsey & Co., had an interview with semiconductor company CSR’s CEO, Joep van Beurden, who had the most honest IoT discussion ever, when he was asked about what is inhibiting growth of IoT. He answers,

Joep van Beurden: A lot of analysts have evaluated the potential financial value that Internet of Things applications may create over the next five to ten years — it’s a $300 billion or $15 trillion opportunity, depending on whom you listen to.
When you drill down, however, you see that about 10 percent of this value is created by the “things,” while 90 percent comes from connecting these things to the Internet. The Internet of Things is not just about storing information in the cloud; the data only become interesting when you combine them with sensors and analytics.

Only some companies will unlock IoT’s value

I predict, the only companies who truly have a chance to deliver on IoT and it’s promise will be those that have existing infrastructure, ecosystem experience, and cloud intelligence the likes of only Google, Amazon, Apple and Microsoft, can deliver.

Why these companies? Because I agree the true value in IoT is in being able to make sense of the data. In other words, what Google Now is doing with your email, location, check-ins, searches, on your smartphone, translated to a massive scale known as real-life. That is the value proposition.

It’s a very expensive one that not many companies can unlock without huge R&D investments in cloud infrastructure, cloud intelligence, and a heck of a lot of lobbying.

Consumers don’t want a billion apps on their home screen (or whatever future input method we use) for the billion different IoT devices on the market. They want one ecosystem to control it all. Until we get to that point, the value in IoT is more likely to be disjointed than one cohesive experience.

Ben Thomson wrote about how Apple is positioning the Watch to be the input mechanism for connected devices in Apple’s HomeKit, CarKit and their vision of IoT. Apple can afford to do that because they own a large percentage of the ecosystem that connects users to the cloud. They have valuable data, and user context that can be directly leveraged. Can you imagine any other company aside from the one’s listed above having that much consumer and enterprise sway?

Conclusion

So to recap:

  • Declining revenues in the smartphone space have semiconductor companies looking for new areas of growth and that affects the noise we hear about IoT.
  • Throwing a chip in something won’t make it sell. Just because a device is connected, won’t make it sell. IoT companies need to think more about value and think more about working together.
  • Companies who gained during the smartphone and cloud boom, are the only ones in a position to unlock huge value from the consumer when it comes to IoT. Input devices like Android, iPhones, Watches will likely be the first enablers of IoT.
  • The combination of investment in cloud intelligence, infrastructure, ecosystem and development necessary to position a company on the same stage as Google, Apple, Amazon, Microsoft, is monumental. We will more likely see partnerships with the listed providers.

To be frank, I’m not even sure if IoT should be defined as a market because it seems to group all industry horizontals into one market vertical. I understand that connective devices is an enabler that should be measured but it is arguable that everything from a retail register at McDonald’s, to a sprinkler system in our homes can be considered one market.

Personally, I think the value in IoT lies in one place only. Identity. Many of us have given up our identity data in the name of ease of use, to Facebook, Apple’s iTouch, Google and soon, Microsoft Hello. And it is interesting that private companies may soon hold more accessible data about our identities than our Government — there’s an article for the future.

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