The Internet of Everything

In our December 2014 issue, we described a world in which every "thing" - every device, every appliance, every car, literally everything - is connected to the Internet. That's the vision of the "Internet of Things," and it is accelerating rapidly. The number of connected things will reach 50 billion by 2020, according to projections from Cisco.

According to new research by the McKinsey Global Institute, by 2025, the total economic impact of the Internet of Things is likely to range from $3.9 trillion to $11.1 trillion a year.

Like so many technologies that depend upon "network effects" to generate economic value, the Internet of Things has had a slow ramp up to critical mass; but once critical mass is achieved an explosive economic chain reaction will occur suddenly, delivering enormous and transformative benefits. Those who are familiar with deployment of the World Wide Web in the nineties or the automobile eighty years earlier should not be surprised.

If the most optimistic projection in that range is accurate, the value created would be equal to 11 percent of the world's GDP.

As we've discussed in previous issues, the Internet of Things is only now becoming a reality because several enabling technologies are now ready for adoption. These include:

• cheap sensors
• big data
• the cloud
• the almost ubiquitous availability of smartphones to connect users to all other devices
• the increasing reach and decreasing cost of myriad networks including WiFi, MESH, NFC, Bluetooth, and others

Like so much of what is going to happen during the Deployment phase of the Fifth Techno-Economic Revolution, the Internet of Things will deliver value by changing the economics of existing industries.

The McKinsey researchers focused on nine environments or "settings" which the Internet of Things is expected to transform. These nine settings are:

1. The Human environment, including devices attached to or inside the body to monitor human health, manage diseases, improve fitness, and increase productivity, with a value of $170 billion to $1.6 trillion per year by 2025.

2. The Home environment, including home controllers and systems for managing safety, security, and energy use, with a value of $200 billion to $350 billion per year by 2025

3. The Retail environment, including self-checkout, in-store offers, inventory optimization, and shrinkage prevention at supermarkets, banks, restaurants, and so on, with a value of $410 billion to $1.2 trillion per year by 2025.  

4. The Office environment, including energy management, organizational redesign, and security in workplaces, with a value of $70 billion to $150 billion per year by 2025.

5. The Factory environment, including improving the efficiency of routine work and equipment not just in manufacturing facilities, but also in hospitals and in farms, with a value of $1.2 trillion to $3.7 trillion per year by 2025.

6. The Worksite environment, including improving safety and efficiency in mining, oil extraction, and construction environments with a value of $160 billion to $930 billion per year by 2025.

7. The Vehicle environment, including driverless cars and trucks, as well as maintenance optimization for ships, trains, and airplanes, with a value of $210 billion to $740 billion per year by 2025.  

8. The City environment, including smart utility meters, resource management, and adaptive traffic control, with a value of $930 billion to $1.7 trillion per year by 2025.

9. The Outside environment, meaning between urban environments and beyond other settings, including logistics, navigation, and shipment tracking, with a value of $560 billion to $850 billion per year by 2025.

An approach based on specific environments enables us to recognize the implications of connections between the various environments or settings, and it makes it easier to quantify the synergy created by investments in the Internet of Things across multiple environments.

If we used the conventional approach to examine how the Internet of Things is creating value for automakers, we would conclude that it reduces costs and increases efficiencies in manufacturing. But, by looking at the impact of connected automobiles on other settings we recognize further benefits. For example, within the "cities environment," sensors in vehicles could be linked to systems that would monitor and manage traffic in the city, rerouting cars to less congested streets.

While there are many opportunities across the nine settings, a large portion of the value will not be captured unless systems in one setting connect with systems in other settings. In fact, according to McKinsey, $4 trillion of the total potential economic impact of $11.1 trillion a year depends on interoperability between the nine settings analyzed.

For example, in retail environments, 57 percent of the total potential value depends on interoperability. This includes the ability of the store to transmit real-time personalized promotions to users' smartphones based on their purchase history and location in the store. It also includes the interoperability between customers' smartphones and the payment and item detection systems that will need to be linked for automatic checkout, in which all of the items in shopping carts will be instantly charged to the customers as they exit the store.

Automated checkout is expected to save retailers between $150 billion and $380 billion per year by 2025 because three-fourths of the industry's cashiers will no longer be needed. For shoppers, checkout queue times will drop by 40-80 percent, generating an economic benefit of $30 billion to $135 billion in time savings.

Looking ahead, we offer the following forecasts based on this important trend:

First, all of the devices and systems in the Internet of Things will need to work together in order to achieve their full potential.

As discussed earlier, $4 trillion of the $11.1 trillion potential value depends on interoperability across the nine settings. One approach to interoperability is to implement platforms of "middleware" that allow different Internet of Things systems to communicate with each other by translating their various languages. Another approach is to adopt widely accepted standards so that all of the systems speak the same language. Either way, this is a critical step that cannot be left to evolve haphazardly on its own.

Second, safety, security, and privacy are all important considerations that must be addressed.

When billions of devices are gathering and sharing information, the potential for hacking of private data will be exponentially greater than it is today. Similarly, when a city's traffic, or its water supply, can be monitored and managed via the Internet of Things, anyone who illegally gains access to the system can wreak havoc. Encryption schemes that are far more advanced than today's cyber-security programs will need to be developed and implemented.

Third, the primary challenge for policy makers will be to develop appropriate regulations as fast as the technology is deployed.

Laws governing self-driving cars and trucks are already urgently needed. In addition, laws will need to address privacy issues, security concerns, and intellectual property disputes. As always, the risk of overregulation, which stifles entrepreneurialism and innovation, must be carefully balanced with the need to protect consumers.

Fourth, the Internet of Things will provide more momentum for the American manufacturing renaissance that we've reported on previously.

McKinsey estimates that advanced economies will capture 70 percent of the value from improving worker productivity from the Internet of Things. For example, U.S. companies can easily afford to spend a few hundred dollars per year to deliver employee training through augmented reality, which might entail having the worker wear a set of smart goggles so she can see the correct way to perform a task while adjusting a machine. For businesses in the developing world where wages are much lower, such an investment would be prohibitive. However, developing economies are often rich in natural resources, so they are expected to capture roughly half of the value from the Internet of Things in mining.

Fifth, ultimately, users will capture most of the value from the Internet of Things.

New products and services that save time, reduce costs, monitor health, and improve fitness will enhance individuals' quality of life and living standards. Companies that implement Internet of Things systems will also capture a great deal of value through greater efficiencies and new business opportunities based on the data they accumulate. McKinsey calculates that users of both types -consumers and B2B customers - will capture up to 90 percent of the value created by Internet of Things applications ten years from now.

Sixth, the remaining value - as much as $1.75 trillion per year - will be split unevenly between the members of the Internet of Things ecosystem.

Hardware suppliers will receive the smallest share, as their offerings risk becoming commoditized. Their best hope, according to McKinsey, is to develop unique technology, such as low-power semiconductors, chipsets, sensors, or communications hardware. Over time, as hardware costs drop, suppliers of software and services will capture the greatest share of value. By 2025, software and services are likely to represent 60-85 percent of supplier revenue.