The Internet of Things: Sizing up the opportunity

internet-of-thingsThis 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.