“Cisco Pegs Internet of Things as $19 Trillion Market” — that was the big bold headline of a Bloomberg article last year. Unfortunately, the article didn’t explain that this was an estimate of value realized, not revenue of IoT solution providers. More egregiously, the article failed to mention that this estimate was the total over the next 10 years, not an annual figure as most people would assume if not told otherwise. It may have made for a sensational headline, but a figure like $19T (when not properly explained) only serves to create confusion and reinforce skepticism about the hype.
We see other figures touted, such as Gartner’s prediction that the IoT Market will be $300B in 2020, IDC’s forecast that the IoT market will reach $7.1T by 2020, and GE’s estimate that the Industrial IoT will add $15T of value by 2030. There are dozens of other predictions. How is it that these estimates vary so wildly and how can we make sense of them? It turns out that sizing IoT markets is not such a simple exercise and the actual numbers you come up with can vary by orders of magnitude, depending on what you are including and how you are measuring it. In order to really understand the size of the IoT market, first we have to understand what is being counted. At the highest level, there are three levels on which to view the market size.
Selling Picks and Shovels
At the bottom (blue box), we are counting the total revenues for selling the ‘picks and shovels’ for this IoT gold rush. This includes things like the sensors and embedded processors, communications services, middleware, development platforms, data storage, analytics, IoT software applications, security software and services, consulting and implementation services, new or expanded data centers needed, and so forth. Gartner, IDC, Harbor Research, Markets and Markets, and others have made forecasts for IoT Solutions and Services revenues. We suspect that IoT Solutions and Services is what most people think about when someone says the IoT market is $XB — and depending on where they are coming from, they may be thinking about a subset of these (such as IoT Development Platforms). We will dig into the sizing of IoT Solutions and Services in a future article, since there is a lot to consider.
Incremental Revenue for Makers, Movers, and Service Providers
At the middle level (green box), we have incremental revenue1 realized by incorporating IoT capabilities into products and services, as well as whole new IoT-based services. This includes incremental revenue in industrial and consumer products, transportation and logistics services, buildings, venues, hotels, restaurants, etc. that offer IoT-related services, and more. This is the most difficult set of numbers to calculate of the three IoT market measurements for a couple of reasons. First is the diversity of sectors and types of revenues. Even more of a challenge (second) is trying to separate the incremental revenue generated by IoT from the base revenue of the core product. If GM or Mercedes sells a connected truck laden with sensors, what portion of the selling price of the truck should be allocated to IoT? I have yet to see an estimate of the revenue that IoT will generate for product and service providers — the GEs, GMs, Maersks, and Disney’s of the world. I suspect there are some industry- or sector-specific estimates out there — I just haven’t run across them yet.
As a rule, over the long run the size of the market for products and services using IoT (green box) must be larger than the market for solutions and services (blue box) used to build those IoT capabilities. The equipment and service companies in that middle tier might be willing for a while to invest more than they make from IoT, but eventually it has to become a profitable investment.
Value Realized from IoT
The third way to measure the IoT market size is the value realized by using IoT (maroon box at the top of the diagram). This is the largest and most inclusive market sizing approach. It has been one of the most widely used methods for estimating the market size, partly because it yields the most impressive (i.e. enormous) figures, but also because it can be estimated fairly easily (though very roughly) using some back-of-the-envelope calculations. However, some folks (like McKinsey) have put considerable effort into analyzing these numbers in a pretty granular way.
Figure 2 – Productivity Growth Rates Diagram
One example of the value realized approach is GE’s IoT market size calculation which, at least on the face, looks pretty simplistic (see Figure 2). They looked at changes in productivity between 1950 and 2011. Their premise is that without IoT, we would continue at a productivity improvement rate of about 1.6% per year, as we have been doing for the past several years, and as was the average from 1969-1995. They further assume that the advent of IoT will cause productivity gains to jump to something like 3.1%, which was the rate of improvement that was spurred by the Internet. Using the difference between those two levels of productivity, they can calculate the impact on GDP. They use that difference in improvement rate for the US and assume half that difference in improvement rate for the rest of the world. With a few other assumptions baked in, they calculate that IoT will add $10T – $15T to Global GDP in 2030.
In June of this year, McKinsey published a 130 page report, The Internet of Things: Mapping the Value Beyond the Hype.2 In this they estimate the economic impact of IoT in 2025 to be between $3.9T and $11.1T, the latter figure being about 11% of 2025 global GDP. Those are huge numbers, but I commend McKinsey for the effort and detail they have put into their analysis, which gives credibility to these numbers and helps readers understand exactly where this value is coming from. Also in their report, McKinsey takes a crack at estimating the IoT technology solutions and services market (blue box), which they calculate to currently be between $50B – $150B, or about 15% of their current estimate of the total value realized for IoT (maroon box).
There is still a lot to be learned on this topic. We all know this market is going to be big. But people want to know which parts of the market are going to be biggest and when — where is the greatest growth and opportunity. In future articles, we will talk more about the IoT Solutions and Services market and take a look at how different people have segmented and sized that market, with some thoughts on what it all means. Stay tuned!
_ _ _ _ _ _ _ _ _ _ _ _
For more on IoT, see our IoT research library.
1 An example is the additional revenue from selling an IoT-enabled piece of equipment vs. its non-IoT counterpart. Alternatively, the price-point may be the same, but you sell more units because of the differentiation of having IoT capabilities. On top of that, the equipment provider might now be able to offer some new services leveraging the IoT capabilities in their systems, that were not previously possible without IoT. — Return to article text above
2 To read a summary of this report, see Unlocking the potential of the Internet of Things. That summary has a link at the bottom of the page where you can download the full report. — Return to article text above
To view other articles from this issue of the brief, click here.