The Internet of Things is a marketing term that generally describes everyday objects as connected devices. Examples of IoT devices include the Nest thermostat where users can control a thermostat from a smartphone app, wearable devices that track your steps or smart meters that allow users to monitor conditions remotely. I’ve recently looked over investor presentations from companies like General Electric (GE, Financial), Rockwell Automation (ROK, Financial) and ARM Holdings (ARMH). Each company presents IoT as a source of future growth. For instance, GE estimates that the industry could add $10 trillion to $15 trillion in the world economy in the next 20 years.
When you look at industry growth forecasts, they vary widely. In this Forbes article from December 2015, they list a number of forecasts.
- Cisco (CSCO, Financial) predicts the global IoT market will be $14.4 trillion by 2022.
- IC Insights predicts revenue from the Industrial IoT to grow from $6.4 billion in 2012 to $12.4 billion in 2015.
- McKinsey estimates the potential financial impact of IoT in 2025 including consumer surplus is $3.9 trillion to $11.1 trillion.
Cisco Chart From Forbes Article
After seeing these different projections, one wonders, “How do you get these numbers?” Cisco’s $14.4 trillion figure comes from this paper. The paper gave breakdowns by geography and industry but did not give many details about the underlying assumptions.
I Googled around because I wanted more detail than just blanket numbers. I was hoping for definitions, assumptions and forecasting methodology. That’s when I found this paper by IDC, “Worldwide and Regional Internet of Things (IoT) 2014–2020 Forecast: A Virtuous Circle of Proven Value and Demand.” The paper is more methodical than the other forecasts I saw. First, IDC is specific about how it defines IoT:
“IDC defines the Internet of Things as a network of networks of uniquely identifiable endpoints (or "things") that communicate without human interaction using IP connectivity — be it "locally" or globally.”
“To create the worldwide IoT units installed forecast, IDC considered intelligent and embedded system shipments as well as ensuing retirement rates across several industry implementations. The forecast also builds in assumptions for white good adoption. The following are not counted as installed IoT units in this forecast: standalone sensors, "dumb" devices, smartphones, tablets, PCs, and the majority of wearables.”
The second paragraph gives some color on the forecasting methodology. It’s looking at embedded shipments but also accounts for retirements. It also spells out that devices like smartphones are not counted.
Here is a statement that surprised me.
“To create the worldwide IoT revenue forecast, IDC considered two major revenue categories — IoT system shipment revenue (recognized in the year the unit was first connected) and the IoT stack revenue per installed device, inclusive of connectivity services, infrastructure, purpose-built IoT platforms, applications, security, analytics, and professional services.”
My assumption was that most IoT forecasts would include only hardware. I got that impression because many IoT articles quote Cisco, which is mainly a hardware company. However, the paragraph above clarifies that services are included in the forecast. The IDC paper goes on to say that, “The IoT embedded system shipment revenue makes up nearly one-third of revenue today.” However, embedded system revenue decreases toward the end of the forecast period, 2020, because embedded systems will drop in price. Over time, IDC expects the other forecast components like security, analytics, and services to comprise a larger percentage of the revenue.
IDC’s bottomline
- "IDC estimates that as of the end of 2013, there were 9.1 billion IoT units installed — with IP connectivity and communicating without human interaction."
- "IDC expects the installed base of IoT units to grow at a 17.5% CAGR over the forecast period to 28.1 billion in 2020."
- "IDC estimates that revenue will grow from $1.9 trillion in 2013 to $7.1 trillion in 2020 at a 20% CAGR."
Questions still remain
The paper does a good job listing out more assumptions. It states its assumptions on economic growth, internet user growth, fiscal policy and even oil prices. However, I was disappointed that the paper did not go into more detail about its calculation methodology. It makes me ask questions such as:
- How granular were the forecasts? Were forecasts made by country and then summarized by region?
- How did they account for areas that don’t have the infrastructure for IoT?
- How did they derive total addressable market? Did they look at major metropolitan areas and make an estimate for IoT devices per person?
- How did they estimate the proliferation of new technologies like smart home appliances, devices for stoplights, drones, medical devices, self-driving cars, etc?
I have no clue what a reasonable guess for IoT forecasts are. The forecasts are all over the place and none of them give much detail behind their numbers. Gartner, the IT research company, produces a report called the "Hype Cycle for Emerging Technologies" where they forecast customer adoption for different trends. In the graphic below, you can see that they perceive the Internet of Things to be in the "Peak of Inflated Expectations" phase. Gartner believes IoT is five to 10 years away from reaching mainstream adoption or the "Plateau of Productivity." With so much uncertainty, it’s difficult to say any IoT forecast is believable. More importantly as an investor, it's difficult to quantify the growth potential of companies that claim IoT will be a big source of future revenue.
