The Internet of Things

Transcription

U.S. Research
Published by Raymond James & Associates
January 24, 2014
Technology & Communications
Industry Report
Tavis C. McCourt, CFA, (615) 665-3644,
[email protected]
Daniel Toomey, CFA, Sr. Res. Assoc., (615) 665-3864,
[email protected]
Simon Leopold, (212) 856-5464, [email protected]
Frank G. Louthan IV, (404) 442-5867,
Georgios Kyriakopoulos, Sr. Res. Assoc., (212) 856-5462,
[email protected]
Eric Lemus, Sr. Res. Assoc., (404) 442-5819, [email protected]
Brian Peterson, CFA, Sr. Res. Assoc., (727) 567-2218,
Hans Mosesmann, (212) 856-5404,
[email protected]
J. Steven Smigie, (212) 856-4893, [email protected]
Terry Tillman, (404) 442-5825, [email protected]
[email protected]
[email protected]
Alexander Sklar, CPA, Sr. Res. Assoc., (404) 442-5804,
[email protected]
The Internet of Things
A Study in Hype, Reality, Disruption, and Growth
Please read domestic and foreign disclosure/risk information beginning on page 55 and Analyst Certification on page 55.
© 2014 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved.
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800-248-8863
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Contents
Introduction ...............................................................................................1
The Internet of Things: History, Summary, Perspective ...........................2
The Internet of Things Value Chain ...........................................................5
A Study of the Diverse Vertical Market Solutions Enabled by IoT ............6
Connected Devices Disrupting and
Creating Consumer Product Markets ......................................................31
Software and MVNO Opportunities Created by the IoT .........................34
Semiconductors: Sizing the IoT Opportunity ...........................................38
IoT, Networking Architecture, and Equipment Ramifications ................47
What Does the IoT Mean for Wireless,
Cable and Data Center Service Providers? ..............................................50
Conclusion ...............................................................................................52
Cover illustration courtesy Jasper Wireless, Inc.
International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863
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Introduction
The confluence of efficient wireless protocols, improved sensors, cheaper processors, and a bevy of
startups and established companies developing the necessary management and application software has
finally made the concept of the Internet of Things (IoT) mainstream. The number of Internet-connected
devices surpassed the number of human beings on the planet in 2011, and by 2020, Internet-connected
devices are expected to number between 26 billion and 50 billion. For every Internet-connected PC or
handset there will be 5-10 other types of devices sold with native Internet connectivity. These will include
all manner of consumer electronics, machine tools, industrial equipment, cars, appliances, and a number
of devices likely not yet invented. In our view, the concept of the IoT will disrupt consumer and industrial
product markets generating hundreds of billions of dollars in annual revenues, serve as a meaningful
growth driver for semiconductor, networking equipment, and service provider end markets globally, and
will create new application and product end markets that could generate billions of dollars annually. In
the following report, we explore the history of the IoT, some early applications that are already disrupting
existing markets, and some interesting applications that have the potential to go mainstream in the next
several years. We also explain the value chain of companies that creates the IoT in various end markets
and attempt to quantify its impact on specific semiconductor, software, device, and service provider end
markets. Below are our summary findings.
A Series of Verticals Rather Than One Market
We do not believe an “S” curve of adoption for the IoT is likely, as the concept is broad and will have
differing growth curves in different end markets. It is more helpful from an investment perspective to
think of the IoT as a series of vertical market solutions that may witness growth at various rates over the
next decade or more, all of which aggregates to 15-30% or so annual growth for the concept in totality.
The vertical markets that have the most opportunity for accelerated growth in the next two to three years
include home automation, connected car, and wearable devices.
Semiconductors: IoT a Bigger PAN Than WAN Driver; Microcontroller/Sensor Growth Meaningful
The vast majority (80%+) of IoT connections will occur on unlicensed wireless frequencies due to cost and
battery life advantages. Whereas cellular IoT connections are expected to grow at a nearly 20% CAGR for
the next several years, various personal area network (PAN) wireless connections (Wi-Fi, Bluetooth,
Zigbee) into M2M (machine-to-machine) end markets should grow closer to 30%. Aside from significant
growth in PAN-based chipsets, we view the microcontroller and sensor opportunities as meaningfully
positive with industry forecasts of single-digit growth potentially being too pessimistic.
Product Disruption in Consumer and Industrial Markets
The addition of Internet connectivity to devices provides an opening for disrupting previously sleepy end
markets dominated by sometimes slow moving consumer and industrial product companies. Nest Labs’
entry into the thermostat and smoke alarm markets and subsequent $3.2 billion purchase by Google is a
high profile example, but we believe that this type of disruption is a potential in markets as diverse as
home appliances, audio equipment, agriculture equipment, machine tools, construction equipment,
clothing, and even toothbrushes, and Silicon Valley is gearing up to drive this disruption.
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Impact on Networking Equipment
We view the IoT as yet another driver of network demand, contributing to an expected 23% CAGR in
network traffic growth (2012-2017). The IoT will impact network architecture and help drive a modest
mix shift from core to metro and access equipment spending, which has implications for pricing, margins,
and competitive dynamics in the $125 billion service provider market for WAN equipment.
Impact on Wireless Service Providers
The IoT is already generating ~$16 billion in annual service revenues for wireless providers in 2013, and
this should double by 2017. However, even with this level of revenues, IoT-related revenue streams will
represent less than 5% of wireless service provider revenues, making it more of an incremental than a
transformational driver. However, we expect wireless providers to invest heavily to benefit from this
growth as the rest of their traditional handset-related service revenues will likely be very mature.
For a Select Few, the IoT Defines Their Business
There are a number of software, service, and product companies whose primary product or service
revolves around connecting devices beyond cell phones. Garmin, Trimble Navigation, Jasper Wireless,
Sierra Wireless, Digi International, NETGEAR, Numerex, Kore Telematics, any number of fleet tracking
software vendors, Telit, Gemalto, Nest Labs, Control4, Savant, and Roku are clearly in this category. Most
are small today, but the successful ones will end up disrupting markets or creating markets, and
generating meaningful shareholder returns along the way.
The Internet of Things: History, Summary, Perspective
The IoT is not new, and we would argue the Internet has always been an IoT. From its beginning, the
Internet was a network of networks, connecting various government and academic computers together to
share data. What has changed increasingly over the past two decades is the ability to connect remote and
mobile “things” or “machines” or “assets” to the Internet or corporate Intranets through the use of
wireless communications and low-cost sensors/computing/storage. In a sense, the Internet is expanding
from a network of computers to a network of things. Or to reverse the order, almost every thing / asset/
object in the world is transitioning to become a computer that happens to be connected to a network
using the IP protocol.
The confluence of efficient wireless protocols, improved sensors, cheaper processors, and a number of
startups and established companies developing the necessary management and application software has
finally made the concept of the Internet of Things mainstream.
© 2014 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC.
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Drivers of “Internet of Things” Growth – Why Now?
Source: Raymond James research.
Based on data from Ericsson, in 2003, there were 6.3 billion humans on the face of the earth and about
500 million devices connected to the Internet (mostly PCs and a few smartphones.) By 2011 there were
approximately 7 billion human beings on the face of the earth, and 12.5 billion devices connected to the
Internet including nearly every PC in the world and well over a billion smartphones. This equates to
nearly 2 connected devices for every human on the face of the earth. By 2020, Ericsson expects the
human population to grow to 7.6 billion with 50 billion devices connected to the Internet.
Although this forecast appears aggressive (Gartner estimates 26 billion), when one looks around a typical
U.S. household of four today with two laptops, four smartphones, a gaming console, a Wi-Fi router, a
connected stereo system, two iPads, and an Apple TV or other media player, it becomes easy to
understand how the ratio of connected devices to human beings (3:1 ratio in the example above) will
increase to ~7:1 by 2020. The added connectivity will not only come from consumer devices, but all kinds
of industrial or company-owned assets as well, with connectivity becoming an expected feature on just
about every physical asset in the world, much like it is becoming on consumer electronics devices today.
To put this in perspective, today there are 80 “things” connecting for the first time to the Internet every
second, and by 2020 this will expand to 250 every second.
Human Beings vs, Internet Connected Devices (millions)
Source: Cisco Systems, LM Ericsson, Raymond James research.
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The driver of all this connectivity is essentially the desire to “add value” to products or services. From a
corporate perspective, this added value can come from increased revenues (e.g., a $100 handset turns
into a $600 smartphone with the right connectivity and application software) or decreased costs (e.g.,
connecting one’s trucking fleet can save on productivity, gas, maintenance, etc.). Cisco published a
fascinating white paper outlining what it calls the Internet of Everything (IoE) index. It calculates that
businesses are already generating $613 billion of additional profits annually due to the connection of
devices to the Internet (mostly the impact of connecting computers/mobile devices). Cisco calculates that
this represents only 50% of the potential of the Internet to drive profits, with $14.4 trillion of net profit
likely to be generated by corporations over the next decade if the Internet of Things is embraced. In
essence, it has taken 15 years or so for companies to harness about 50% of the productivity potential of
the Internet, and the next 50% of productivity gains likely requires connecting things.
These additional profits from connecting everything to the Internet are roughly equally distributed
between increased asset utilization, increased employee productivity, better logistics management,
better customer experiences, and increased R&D productivity. Cisco highlights future gains in
manufacturing through the use of intelligent robots, asset tracking within facilities, shipment tracking,
energy management, and employee collaboration. Cisco highlights similar gains to be had by retailers and
utility companies, and although it is unclear if Cisco’s numbers are conservative or aggressive, it is clear
that all of a sudden something has changed to make connecting various devices or assets or things an
increasing investment priority.
At its beginning, connecting remote/mobile assets was expensive and largely based on connectivity through
satellite-based systems, and as one would expect, with expensive inputs, use cases focused on high value
assets where ROI was quick – Omnitracs fleet tracking through satellite and GPS tracking of commercial
aircraft, for instance. The advent of digital cellular in the late 1990s allowed wireless air time to become
cheaper, enabled lower value use cases like wireless security alarm systems, cellular controlled door locks,
and telematics applications for automobiles, all of which have flourished over the past 10 years.
The third wave of IoT is being enabled by essentially “free”/unlicensed wireless spectrum, lower cost
sensors and microcontrollers, and a bevy of software applications and devices designed for specific,
vertically-focused use cases. The applications that appear to be prime for IoT disruption include home
automation, appliances of all types, wearable computing devices, home health care, retail and
warehousing inventory management, connected farms/agriculture equipment, and likely many more that
have not yet been invented.
Internet of Things Timeline
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The IoT expansion has already lasted 20+ years, and has been painfully slow due to the necessity of multiple
inputs to come down meaningfully in price, and the need for companies and application vendors to create
vertically-specific applications that make use of all these new connected devices. Having things connected is
useless unless one can use the information gathered for a meaningful purpose, and this takes time.
As far as we can tell, there is no magical horizontal software app that allows every industry to attach a
cellular or Wi-Fi module to all of its assets and get immediate ROI (or if there is, please let us know as we’d
like to invest). Every industry and company has specific use cases that take time to perfect and “productize”
into a usable software application or device format. This has happened most successfully in fleet tracking,
but then again fleet tracking is a technology that is over 20 years old and still is less than 5% penetrated
globally. Our expectation is that there is no “S” curve of adoption of IoT; it will happen at varying paces
across different industries, and the inexorable march of connecting things will continue for many decades.
As we move deeper into this report, we will often use the term M2M (machine-to-machine) as
synonymous with IoT (Internet of Things). The concepts are similar, but generally, the industry reserves
the M2M moniker for more industrial type applications where there is little human involvement, and
includes most consumer applications under the broader umbrella term of The Internet of Things. The
Internet of Things is a concept that will create opportunities and threats in just about every industry we
can think of. The beneficiaries will include semiconductor companies, device and product companies,
infrastructure software companies, application software companies, consulting companies, and telecom
service providers. For some companies, everything they do will revolve around the IOT concept (, but for
most it will be an incremental driver of their business. In aggregate, the IoT will create tens of billions of
dollars of new revenues annually for telecom service providers, semiconductor vendors, software
application vendors, and product vendors, and potentially create substantial market share shakeups,
especially in end markets not used to the pace of technology-based competition. In the following report
we attempt to quantify the opportunity created by the Internet of Things within various segments of
technology, point out a few interesting vertically-focused use cases in practice today, and highlight how
companies within our research universe are benefitting from IoT.
The Internet of Things Value Chain
From an investment perspective, the IoT can be confusing because it can be heard in presentations from
semiconductor companies, software companies, product companies, etc. Additionally, in many vertical
markets there are companies that provide many parts of the value chain rather than just software or just
devices. The reason for this is a general lack of standardization within many areas of connected devices
and very little commonality between application software and solutions between different verticals or
end markets. This has forced many of the successful early players in the IoT to vertically integrate in order
to develop a full solution of hardware, software, and services designed for a specific vertical market.
One can view the various layers of the IoT value chain in at least nine distinct product or service categories.
Radios/communications chips provide the underlying connectivity, sensors provide much of the data
gathering, microcontrollers provide the processing of that data, modules combine the radio, sensor and
microcontroller, combine it with storage, and make it “insertable” into a device. Platform software provides
the underlying management and billing capabilities of an IoT network, while application software presents
all the information gathered in a usable and analyzable format for end users. Finally, the underlying telecom
infrastructure (usually wireless spectrum) provides the means of transporting the data while a services
infrastructure needs to be created for the tasks of designing, installing, monitoring and servicing the IoT
deployment. Some companies will compete at one layer of this value chain, while many will create solutions
from multiple layers and functionally compete in a more vertically integrated fashion.
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Product
Radios
Sensors
Description
Chips that provide connectivity based on various radio protocols
Chips that can measure various environmental/electrical variables
Microcontrollers
Processors/Storage that allow low-cost intelligence on a chip
Modules
Combine radios, sensors, microcontrollers in a single package
Platform Software
Application Software
Device
Software that activates, monitors, analyzes device network
Presents information in usable/analyzable format for end user
Integrates modules with app software into a usable form factor
Airtime
Use of licensed or unlicensed spectrum for communications
Service
Deploying/Managing/Supporting IoT solution
A Study of the Diverse Vertical Market Solutions Enabled by IoT
In the following section of the report, we highlight a few of the vertical market solutions that have been
created through connecting devices to the Internet.
Fleet Tracking
Tracking commercial trucking fleets in order to save on fuel, downtime, maintenance, etc., is a 20+ year
old industry that can probably fairly be thought of as one of the first IoT applications, although in its first
iteration it did not use the IP protocol. In the 1980s this started out as a satellite-based solution, and has
transitioned over the past decade to primarily a solution utilizing cellular networks.
Additionally, fleet tracking has expanded in terms of its application set over the years. What started out
as really just tracking the location of a truck has expanded greatly through the use of added sensors and
analytics to measure driver behavior, route optimization, engine diagnostic, tire pressure, etc. A great
example of an extreme deployment is UPS, which measures over 200 variables on each truck through the
use of sensors and wireless connectivity.
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Fleets
Vehicles
Drivers
Collect
Key
Attributes
Transmit
• Location
• Vehicle Metrics
• Driver Behavior
• Hours & Miles Driven
Process
Information
Secure data
centers
Web and mobile device
accessible reports &
analytics
In all fleet tracking deployments, a truck or van is equipped with a device that manages the input from all
the sensors on the truck and typically sends this data through the cellular or GPS network. Data is then
kept in a secure database and analyzed in real time and presented in application software for the fleet
manager/dispatcher. Through analytics the system can typically optimize routes, alert the system to subpar driver performance/behavior, and optimize maintenance schedules.
Fleet Tracking
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As in most vertical applications in the IoT, the value chain is a little messy. There are chipset vendors,
module vendors, device vendors, and software vendors, and in some cases these are all one in the same.
The table below highlights the value chain of technology companies that need to come together to make
a solution for a commercial fleet operator, and gives only a small subset of each player in specific areas of
the value chain.
Fleet Tracking Value Chain
Airtime Providers
Software Applications
Device Vendors
AT&T, Verizon, Kore Telematics, ORBCOMM
Trimble, Omnitracs, MiX Telematics, TomTom
Digi International, Trimble, TomTom
Cellular Module Vendors
Sierra Wireless, Gemalto, Telit
Cellular Radio Vendor
QUALCOMM, ST Ericsson, Intel
Although the industry is over 20 years old and generates roughly $5 billion in annual recurring revenues
for application software vendors, it is less than 5% penetrated of the commercial vehicle fleet globally,
and we believe it should grow at a 25% CAGR for the next five years and still be just over 10% penetration.
Estimated
FleetTelematics
Management
Telematics Revenue Opportunity
Estimated
Global FleetGlobal
Management
Revenue Opportunity
(Assumes
fleetmanagement
vehicles undereconomics
mgmt. Economics
based
on $30/month
subscription)
(Assumes fleet vehicles
under
based on
$30/month
subscription)
~$14 bil oppty:
assumes 40 mil
commercial vehicles
$16,000
$14,000
~$12 bil oppty:
assumes 32 mil
commercial vehicles
$12,000
$10,000
$8,000
$6,000
~$5 bil oppty:
assumes 13 mil
commercial vehicles
~$6 bil oppty:
assumes 16 mil
commercial vehicles
~$7 bil oppty:
assumes 20 mil
commercial vehicles
~$9 bil oppty:
assumes 26 mil
commercial vehicles
$4,000
$2,000
$0
2012
2013
2014
2015
2016
2017
Source: Company reports reflecting ABI Research data, Raymond James research.
Source: ABI Research, Raymond James estimates.
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Home Automation
Home automation, or the smart home, is the concept of being able to monitor, manage, control, and
automate just about every piece of electronics in your home, such as your TV, music system, lighting,
thermostat, appliances, video surveillance, door locks, etc. Like fleet tracking, home automation has been
around for decades, but it is transitioning from custom/high-cost solutions to more mainstream price
points, driven by the use of lower-cost wireless networking standards and low-cost processing, storage,
and sensing technologies. Also like fleet tracking, home automation is still relatively nascent, with less
than 2% of U.S. households having any form of automation inside their homes.
Home Automation System Shipments Forecast by Type (Units in Thousands)
Source: ABI Research, Raymond James research.
Based on data from ABI, there will be about 5 million home
automation systems shipped this year globally, and this should
grow to nearly 20 million by 2017. The mainstream home
automation market (which excludes the high-end luxury
market), the DIY market where consumers buy at retail, and
the market for service provider offerings alone generated over
$500 million in product revenue in 2012, growing to $2.6
billion in 2017 according to ABI, nearly a 40% CAGR, with most
of the growth coming from managed service offerings of
various telecom, cable, and security service providers.
Mainstream Automation
Market Revenue Growth
If one includes revenues from installation services, DIY
products, and service provider offerings, the home automation
market is already generating $8 billion annually in revenues,
growing 10-15% annually.
Source: ABI Research, Raymond James
research.
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The home automation market, like fleet tracking, is a relatively complex market, with a number of
competitors with varying degrees of vertical integration and business models. At the high end of the
market there are full home automation systems from the likes of Control4, Savant, Crestron, AMX, and
others that sell for thousands of dollars and can control just about every electronic device in your home.
Then there are point solutions from appliance vendors such as Nest Labs with its thermostat and smoke
detector offerings, Logitech’s Harmony remote controls, NETGEAR’s video surveillance products, Lutron
lighting products, Sonos music streaming systems, Kwikset’s remote locks, etc. Finally, there are service
providers such as AT&T, Comcast, ADT, and others that use cloud-based control software from vendors
such as iControl and alarm.com to offer home automation of security, lighting, and thermostats for a
monthly fee.
Additionally, each appliance connects to a control system or the Internet in its own unique way. For
extreme low power needs, Zigbee modules are generally used, while for higher bandwidth applications
Wi-Fi tends to be used, and HDMI and various audio Input/Output (I/O) networking standards are used for
connecting TVs and audio systems. This means that there are a number of chip types and vendors that
sell into the home automation market.
Home Automation Value Chain
As shown above, in the service provider channel, large telecom, cable, and security service providers have
entered the home automation market utilizing control/automation software, typically from either
alarm.com or iControl, and devices from a number of vendors to develop a service with a recurring
monthly fee attached. At retail, companies like Roku, Sonos, NETGEAR, and others have developed point
product solutions that include a product and an application to remotely monitor and control that one
product. In the dealer channel, full home automation vendors such as Control4, Savant, and Crestron
provide complex full home automation solutions that integrate the control of just about everything
electrical in your house through a single application sold primarily as a one-time sale.
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Home Automation
Some of the more high-profile technology vendors in the home automation space (although by no means
an exhaustive list) include the following.
Control4
Control4 helped disrupt the home automation market over the last decade with a materially less
expensive controller, interoperability with existing appliances, and easy, GUI-based programming tools
that allow consumers get started with home automation for a few thousand dollars rather than the few
hundreds of thousands of dollars historically. In the full home automation market, we estimate that the
company is the market leader in terms of units, and we expect it will generate a bit more than $150
million in revenues in 2014.
Savant
Similar to Control4, Savant boasts a controller-based, full home automation system that is materially less
expensive and easier to program than legacy systems from vendors such as Crestron and AMX. Its point
of differentiation is a heavy emphasis on Apple products (its controller hardware is a Mac Mini) and a
software user interface design that is quite Apple-esque. Savant sells into the commercial market as well,
which is also a ripe opportunity for automation.
Nest Labs
Nest Labs reinvented the thermostat market with the Nest Thermostat and more recently added a
smoke/carbon monoxide detector to its product portfolio. Nest not only makes connected devices that
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allow users to control and monitor them remotely, but it also creates the products with an ability to learn
from their surroundings through sophisticated sensors, taking automation essentially one step further
into the realm of artificial intelligence. The company announced in early January that it would be
acquired by Google for $3.2 billion.
NETGEAR
NETGEAR makes a series of home automation-related products sold at retail and through service
providers. First and foremost, the company is the market leader in Wi-Fi routers and extenders, which
form the connectivity foundation for most connected devices in the home. Additionally, the company’s
VueZone line of video surveillance cameras feature wireless connectivity and use standard batteries, and
are sold online and at big box retailers. The company also makes panels and other connected devices for
service providers. We expect NETGEAR to expand further into this category in the future, potentially into
lighting, thermostats, etc. to round out their home automation product portfolio.
Belkin
Belkin is a consumer electronics manufacturer that has launched a complete range of connected home
appliances under the brand WeMo. Its product line includes light switches, motion detectors, baby
monitors, and surveillance cameras. The company also has developed an ecosystem of appliance
manufacturers whose devices, such as slow cookers, coffee machines, etc. can be controlled remotely
through the WeMo application.
QUALCOMM AllJoyn
AllJoyn is an application development framework developed by QUALCOMM to make it easier for
products to connect in a standards-based way.
DropCam
DropCam revolutionized the consumer video surveillance market with an affordable and easy to install
remotely monitored camera through an app on your smartphone. The company also offers a cloud
storage solution for the video from $10-30/month.
SmartThings
SmartThings sells a hub that wirelessly connects to a number of connected devices in your home, and
allows you to control and automate these devices with a single app on your smartphone. The company
offers motion sensors, moisture sensors, lighting solutions, HVAC control, and many other solutions on a
“do-it-yourself” basis.
AT&T, Verizon, Comcast, ADT
A number of service providers have entered the home automation space using a combination of in-house
software platforms (AT&T) and outsourced management platforms from the likes of iControl, Alarm.com,
and Arris. Generally, these services wrap home automation around a home security monitoring service and
allow remote monitoring of video cameras, lighting, thermostats, and a growing list of other appliances.
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Sonos
Sonos makes a broad line of Internet-connected speakers that can be installed around your house and can
stream music from the Internet, existing audio system, or your computer to any room in your house, even
allowing one to stream different music simultaneously to different rooms. All of this is controlled through
an app on your smartphone or tablet.
Lutron
Lutron makes automated and controllable shades and lighting that can be controlled through a home
automation platform or an application on your smartphone or tablet.
Revolv
Revolv makes a controller sold directly to consumers that automatically recognizes certain connected
devices (Nest thermostats, Kwikset door locks) and allows consumers to automate these disparate devices
through a single application interface.
Garage Doors
LiftMaster makes an Internet gateway that allows customers to control their garage door remotely
through an app on their smartphone, while companies like Chamberlain make a product called MyQ
Garage, which allows consumers to Internet-enable just about any existing garage door.
Door Locks
Any number of manufacturers of door locks now enable them to be remotely activated through one’s
smartphone.
Connected Car
One could argue that the connected car has been around since the 1980s when many original analog cell
phones were sold as embedded devices within automobiles. This advanced in the late 1990s and early
2000s with the advent of various telematics applications such as OnStar’s suite of services including
automatic crash notification, stolen vehicle assistance, diagnostics, and turn-by-turn directions. The
automobile industry appears to be making a quantum leap forward as increasingly new models will be
sold with embedded LTE connectivity and much higher end infotainment systems that will basically serve
as a computing hub for the car. New applications include remote downloading of mapping/traffic
information and streaming digital music and video. Over a five- to ten-year time frame, LTE connectivity
enables driverless car concepts either fully or partially, although with fully automated driving scenarios
requiring 50GB of data every hour, based on data from Infonetics, we doubt whether this will be a mass
market application near term.
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Connected Car
The automobile industry’s term for the onboard computer that provides the interface for users to interact
with applications is the “infotainment console.” Historically, these infotainment consoles replaced knobs
and buttons with a touch screen featuring navigation and audio apps as well as Bluetooth connectivity to
speak on your cell phone through the speakers in the car. Leading Infotainment vendor Harman
estimates that the in-car infotainment market, or essentially the market for computers inside the car, is
about $10 billion annually today, and growing ~8% annually as price points come down and attach rates
increase. Current attach rates in the western world for infotainment are about 20%, with ASPs ranging
from $1,000 to $2,000 wholesale ($2,000+ as an add-on at retail), but the industry expects the
applications driven by always-connected infotainment systems to propel much higher adoption in the
future. Since infotainment vendors are largely sourcing all the hardware components and much of the
embedded software, gross margins and operating margins in the business tend to be relatively low (~20%
gross, ~5-10% operating).
It will be likely that connecting the car will happen even without infotainment systems in some cases as
well. The European Commission is expected to have an eCall service, its nomenclature for automatic
crash notification, throughout the EU by 2015, with the potential to require cellular connectivity in cars to
enable such initiative.
In terms of the value chain and players involved in the connected car market, one has to start with the
automobile companies themselves. They typically outsource infotainment solutions to third-party
suppliers such as Harman, Denso, Continental, Microsoft, and others, most of whom sell a broad range of
auto parts. In most cases the infotainment suppliers source the underlying components (hard drives,
processors, voice recognition, etc.) and write their own applications such as turn-by-turn directions, music
apps, etc.
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However, increasingly we have seen a number of car companies turn to the more traditional mobile app
developers to create applications for these infotainment players. Garmin recently won a contract with
Mercedes to provide its branded turn-by-turn directions on Mercedes cars, while 12 different auto
manufacturers intend to launch vehicles next year with Apple’s iOS embedded in the infotainment system
so that consumers interface with iOS apps such as mapping, mail, music, etc. Renault’s R-Link
infotainment operating system is based on Android OS. Traditional navigation/mapping application
vendors TomTom and Garmin are attempting to build their own infotainment systems for auto
manufacturers as well, although success so far has been fleeting. Companies such as OnStar are providing
numerous automated and call center-based services that leverage cellular connectivity in the car.
Another interesting quirk of the infotainment market is that many of the infotainment systems are built
on an operating system kernel owned by BlackBerry called QNX, most of the underlying maps are
supplied by Nokia’s Here business unit, and most of the speech recognition interfaces/technology are
provided by Nuance.
Connected Car Value Chain
Apps Vendors
Infotainment
Systems Vendors
Automobile OEMs
Chips
Apple, Nokia, Garmin, Nuance, Microsoft, Google
Harman, Continental, Denso, TomTom, Garmin
Toyota, Ford, BMW, Audi, Honda
Texas Instruments, NXP, Sierra Wireless,
Gemalto, QUALCOMM, Broadcom
Application development for automobiles could be one of the more exciting developments over the next
decade for the connected car, and ultimately “killer apps” will need to be developed to get consumers to
pay for the extra costs needed to build in connectivity. Initially, many of the apps currently available on
infotainment systems usually revolve around audio (HD Radio enabled by Ibiquity Digital or Sirius satellite
radio), navigation (turn-by-turn directions), or communications (Bluetooth enabling cell phones to speak
through the speaker system). However, connectivity, and especially LTE connectivity, allows the
streaming of Internet radio apps like Pandora and iRadio, and potentially video as well for entertainment
systems in the back seat. Additionally, turn-by-turn directions can be enhanced through the addition of
real time traffic information and points of interest. About the most futuristic use of cellular connectivity
for cars is the concept of the self-driving car, which requires a constant connection to the Internet to
manage real time information gathering.
The auto industry has always been a large end market for many chip players in the analog space, but the
increasing complexity of adding connected computers in each car is only going to increase the semi
content per vehicle. Most noteworthy will be the baseband modem opportunity, as we suspect within a
few years nearly every vehicle manufactured in the U.S. and Western Europe will have an embedded
modem for LTE or 3G connectivity. These modems will likely be sold by the same modem providers
supporting the handset industry (QUALCOMM, Intel, Broadcom, ST Ericsson, etc.), but served up in
module form typically by Sierra Wireless, Gemalto, or Telit. Below is the cellular module forecast for the
automobile end market from Infonetics.
15
Cellular modules shipped into automobiles are expected to climb from
fewer than 15 million in 2013 to more
than 25 million in 2017 (19% CAGR). In
aggregate, approximately 30 million
automobile s are expected to be sold
across North America and Europe by
the end of the forecast period, with
two-thirds of the cellular modules
being sold for these end markets. This
would equate to an adoption rate of
well over 50% of all cars sold in North
America and Europe by 2017.
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Global Cellular Modules Shipped Into Autos
Source: Infonetics.
Health Care
A number of connected devices have been developed to improve health care delivery. Over the past 1015 years, health care providers have increasingly become connected through the use of mobile
computers, iPads, iPhones, Wi-Fi phones, and communications badges. A number of companies are now
working on developing further connectivity to improve not only communications between health care
givers and patients, but real time monitoring of patient health as well. Below is an illustration of a
solution allowing for remote monitoring of bedside diagnostics, which is just one application for the
Internet of Things within the health care environment.
Source: Digi.com.
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For a more holistic view, the illustration below from Sierra Wireless describes how a health care provider
could theoretically use real time data collected from hospitals, wearable devices, home health monitoring
devices, and elsewhere to provide better service.
Source: SierraWireless.com.
Philips
Philips has a number of telehealth initiatives that it sells to health care providers globally. The company’s
TeleStation transmits vital sign data from the patient at home to the health care provider. It also offers a
number of wireless monitoring devices, enabling the transmission of a number of vital data, such as
weight, blood pressure, pulse, ECG data, blood glucose, etc., to health care providers. Another way that
Phillips is adding value to solutions through connectivity is its eICU suite of solutions, which allows a
centralized staffed center of doctors and nurses to monitor in real time remote intensive care units to
help solve a chronic shortage of health care givers in ICU environments.
Verizon
Verizon offers a solution dubbed Converged Health Management, which remotely monitors patients’
glucose levels, weight, heart rate, and blood pressure at their homes, and sends the real time biometric
information to health care givers onto PCs, tablets, and smartphones. The solution leverages wirelessly
connected glucometers, scales, heart rate monitors, and blood pressure monitors.
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QUALCOMM
QUALCOMM has developed a cloud-based platform dubbed the 2net Platform, which enables the wireless
transfer, storage, and display of medical device data, and is natively interoperable with a number of
existing medical devices and applications, and is HIPAA compliant. Interesting product developments
based on the 2net Platform include wireless ultrasound monitoring and remote vital sign monitoring from
hospital rooms.
Fitness Bands
As outlined in the consumer application section above, a number of companies including Jawbone,
Garmin, Nike, and Fitbit have been selling connected fitness bands that aggregate varying degrees of
health-related information from your body throughout the day and then wirelessly make this assessable
on your tablet or smartphone. Although fitness bands are largely viewed as a consumer device today,
ultimately they could be deployed by companies to lower their health insurance rates or by health care
providers to improve monitoring of patients.
Wearable Devices
A number of health care systems are adopting the deployment of wearable wireless devices for “at risk”
patients to wear at home. A simple push of the button gives them instant access to experts and
emergency response if needed. Ideally, this cuts down on emergency room visits materially, and unlike
many retail/commercial-based solutions, instead of automatically calling for emergency services, these
more intelligent wearable devices allow a user to speak with an expert to assess the situation and give
advice first.
Telehealth
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Embedding Video in Health Care Devices
As more and more devices and machines get connected to the Internet, video communications can be
added to differentiate products, improve service, or both. A great example of a company driving this
concept is Vidyo, a traditional competitor in the video conferencing end market that is now providing
APIs into its video network architecture to device manufacturers and software vendors in numerous
end markets.
For instance, Vidyo’s technology is currently being embedded into major medical device manufacturers,
who are outfitting hospital beds with video for doctors and other health givers to monitor patients and
bedside electronics in real time.
Encrypted Privacy
HTTPS, AES128
Every-day Devices
Mobile, tablet, PC
Natural Multi-point
Every-day Networks
Low latency, high quality
Internet, WiFi, 4G
Protects Investments
Support existing devices
Simple Self-Service
Familiar, intuitive web UI
Software Infrastructure
Workflow Integration
Carts, devices, applications
Affordable scalability
Recording
Billing & electronic records
Source: Vidyo, Inc.
Source: Vidyo, Inc.
As shown in the schematic above, Vidyo is actively marketing a concept to build in video to remote
examination rooms or clinics, home offices, ambulances, at-home patient care, etc. We note other
traditional video conferencing vendors such as Cisco, Polycom, and Lifesize are also targeting remote
health opportunities connecting care givers to patients in remote locations.
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Agriculture: The Connected Farm
In the world’s second oldest profession, connectivity to the Internet has brought meaningful
enhancements to productivity over the last several years. Trimble Navigation has been the technology
leader in this vertical market, expanding its portfolio from GPS-connected tractors that improve yields to a
full range of applications that measure a variety of factors that can improve agricultural productivity.
Precipitation Monitoring
Trimble sells what is in effect a high tech rain gauge, with more accurate measurements of rainfall. The
RainWave solution sends the data to the Internet and illustrates the data in easy-to-read and informative
charts available to the farmer.
Irrigation Monitoring
Through its subsidiary, IQ irrigation, Trimble effectively wireless connects irrigation systems, and allows
farmers to control these systems remotely over the Internet or, through an algorithm, recommends the
correct irrigation amounts based on crop, terrain, etc.
Field Monitoring
Trimble allows farmers to visualize real-time yields and field activity (fertilizing, seeding, etc.) to an online
dashboard.
Office to Field Data Exchange
Trimble allows farmers to wirelessly change guidance lines, drainage designs, and other data from the
farmer’s office computer to devices in the field.
Fleet Tracking for Tractors
Just as it sounds, Trimble offers farmers the ability to track their fleet in real time and provides useful
metrics such as fuel usage, battery voltage, movement, etc.
Connected Tractors
Trimble has offered a range of peripherals to make tractors connected to the GPS satellite system for over
a decade, and not surprisingly its products have met with substantial market reception. At its most basic
level, these solutions allow for a form of “auto-pilot” for tractors based on pre-set conditions that
maximize yields and minimize fertilizer and other costs.
The Connected Cow
Trimble and other technology vendors sell technology that allows farmers to track and monitor their
livestock. This includes RFID tags and sensors on the livestock as well as software to be able to make
sense of the data.
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Connected Farm
The Connected Construction Site
Construction is another industry that is being radically altered by the Internet of Things, and also happens
to be another vertical market where Trimble has pushed the boundaries of connectivity and productivity
technology solutions. Starting with a dominant position in optical and laser-based surveying instruments,
Trimble and others have moved into connecting everything within a construction site.
Machine Control
In its simplest form, Trimble connects bulldozers, compactors, piling systems, paving machines, and other
machines to a wireless network, allowing for more efficient and accurate use of the asset. Trimble
estimates that connected machines save as much as 43% of fuel costs.
Machine Monitoring
Sensors inside machines can monitor payload and diagnose maintenance issues, and wirelessly send this
data to the construction office, allowing more efficient asset utilization.
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Fleet Tracking for Construction
Construction sites have their own fleet tracking issues, and much like in the long-haul or short-haul
trucking market, niche fleets such as cement mixers can generate a high ROI by connecting and
monitoring their fleets.
Connected Tools
Connecting just about any tool on a worksite, combined with geofencing, can warn managers when tools
leave the construction site and allow a better understanding of hours of operation and requisite
maintenance needs.
Connected Construction Site
Industrial/Utility/Energy End Markets
Connectivity, and especially wireless connectivity, is a growing part of the business processes in a number
of applications within the broad industrial sector, including the utility and energy markets.
Monitoring of Railcars/Toxic Materials
There are numerous applications for connecting rail cars and rail networks, from remotely managing
switches, collection of fares through handheld devices and kiosks, and monitoring engine performance.
One interesting solution is for monitoring trains carrying Toxic Inhalation Hazard (TIH) chemicals. Through
the use of a security camera and sensors, the solution can track the exact location of the toxic asset, and
in the case of a leak, derailment, or any kind of impact, can stream visual evidence in real time to the rail
car operator.
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Source: Digi.com.
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Waste Water Management
OmniSite makes an M2M solution for waste water
management at landfills. The solution allows
managers to receive alarms wirelessly whenever
an anomaly occurs at a facility, and allows for
controlling waste water pumps and the ability to
turn them off and on in real time. It also provides
the ability to analyze a number of inputs from
sensors throughout the landfill, giving the
manager a real time holistic view of the landfill.
At right is an illustration from Digi International,
which offers a solution for managing water levels
for numerous end markets.
Source: Digi.com.
Traffic Safety Signs
All Traffic Solutions provides traffic safety signs
around the world that are preconfigured with
wireless connectivity. Municipalities use the data
captured from these signs in real time to
understand traffic patterns across their
geographic area and to improve road safety.
Source: Digi.com.
Automated Teller Machines
ATMs have been wirelessly enabled for many
years now, and especially in the case of portability
this brings big benefits to ATM providers and their
bank customers. Wirelessly-enabled ATMs can
now easily be brought in during conventions or
festivals when a population is likely to swell
materially, and information on remaining cash can
make the restocking of ATMs more efficient.
Source: Digi.com.
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Refrigerated Transport
Locus Traxx provides a wireless system that monitors and tracks temperature and status of refrigerated
trucks, providing instant alerts based on pre-set conditions, and allowing for temperature anomalies to be
changed in real time, limiting the spoilage of perishable goods.
Source: Digi.com.
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Intelligent Parking Lots
Parking lots can be monitored actively with occupancy sensors to measure how many available parking
spots exist, and where, and ventilation system sensors to measure air quality.
Source: Digi.com.
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Industrial Tank Monitoring
Digi International sells an M2M solution to monitor industrial tanks that can be filled with any liquid, solid,
or gas. This solution allows for the monitoring of material levels, temperature, and other data from
remote storage tanks in the oil/gas, agriculture, and environmental services industries, and for this data
to be sent wirelessly to a centralized application for real time monitoring. The illustration below shows
the example of a brewery utilizing remote monitoring.
Source: Digi.com.
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Demand Response for Utilities
The dream of demand response for electric utilities is made more real through M2M solutions. Either
through the use of a smart meter from the likes of Silver Spring Networks that is deployed with native
wireless connectivity, or various solutions that network-enable existing meters, a number of software and
hardware providers are attempting to disrupt the utility market using wireless connectivity.
Source: Digi.com.
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Monitoring Energy Infrastructure
Aside from enabling demand response systems for consumers of energy, M2M connectivity is being
deployed to better manage and monitor the infrastructure of energy utilities as well. As shown below in
an illustration from Sierra Wireless, wireless connectivity can be used to monitor not only meters
themselves, but substations, charging stations, and power generation stations of all types.
Source: SierraWireless.com.
Oil/Gas Industry
A number of applications exist for monitoring and analyzing data from wells, pipelines, flow meters,
pumps, tanks compressors, etc. Most of these utilize wireless connectivity to transmit real time
information to a centralized location so that it can be analyzed with purpose-built application software.
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Source: Digi.com.
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Warehouse Applications
The warehouse is a key ingredient to most companies’ supply chain, and it is becoming more and more
automated and efficient. Increasingly, pallets and packages are wireless tracked from the time they enter
the warehouse, are put into inventory, and then “picked” for the appropriate order to be shipped out.
Historically, this was a very labor intensive process, which utilized bar codes and scanners with only modest
automation. Increasingly, RFID tags and readers combined with Wi-Fi with location awareness are being
adopted to limit the labor intensity of the warehouse and improve the efficiency of the picking process.
Connected Devices Disrupting and Creating Consumer Product Markets
Consumers are used to their smartphones, tablets, and computers being connected to the Internet.
However, over the next decade we suspect just about every electrical device one buys will be expected to
have this connectivity. This has already started in devices such as connected audio and media streaming
(Sonos, Roku), thermostats (Nest), and to a small degree TVs (Samsung). However, the trend will become
ubiquitous with washers/dryers shipping with Wi-Fi chips to connect to the Internet, refrigerators
similarly, watches, lighting switches, security locks, garage door openers, etc.
In most instances, the IoT will not create new markets for consumer electronics but lead to potential
disruption of markets as new players attempt to out-innovate existing manufacturers. This has happened
to a small degree with Nest Labs entering the sleepy thermostat market, and we expect more startups to
take a similar strategic tact.
However, the giants are not sleeping. Honeywell now has a consumer grade connected thermostat and
Whirlpool has indicated it will ship all its appliances with embedded connectivity by 2015. Meanwhile LG
and Samsung have been making significant investments at embedding connectivity into their appliance
lineups for a number of years now.
The nice thing about the consumer market is that it is enormous, allowing for multiple winners during a
disruption phase. For instance the market for household appliances alone is over $120 billion globally;
add to this a ~$30 billion market for luxury watches, a ~$100 billion market for televisions, the $13 billion
annual market for home audio, etc. One gets the point: there are many markets that can be disrupted
and products that can become more useful and valuable to consumers (i.e., higher price points and
margins) as they become connected.
Below are a few interesting connected consumer devices in the market today.
Nike+ FuelBand
This device is worn as a bracelet and tracks steps taken and calories burned over the course of the day,
and awards its users “NikeFuel” as a way to measure one’s activity. It comes with an app and synchs via
Bluetooth so that you can visualize your daily movements on your iPhone or Android screen.
Fitbit Force
This bracelet measures your steps/calories burned, monitors your sleep patterns, and comes with a clock as
well, and is of course synched wirelessly so that you can visualize all of this data on your iOS or Android
device.
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Jawbone Up
This bracelet similarly tracks your steps and calories burned, and it monitors your sleep. Additionally, the
app allows you to track your caloric intake, thereby allowing one to track calories on the way in and on
the way out.
Garmin Forerunner
Garmin’s Forerunner series of fitness watches is over a decade old
now, and can likely claim the title as the world’s first smartwatch.
These watches measure one’s location, speed, altitude, heart
rate, vertical oscillation, and many other movements during a run,
bike, or swim. It then allows you to upload this data to the
garminconnect.com website or app to analyze your performance.
Source: Garmin, Inc.
Garmin Virb
Garmin has revolutionized the action camera market by adding
connectivity. Along with being able to video oneself while doing
something active, as made popular by the iconic GoPro Hero line of
action cameras, Garmin has added wireless connectivity to Garmin
sensors to add heart rate, speed, altitude, and other measurements
to the video.
Garmin Approach
This line of watches for golfers adds GPS connectivity and an
exhaustive database of golf courses to give the golfer distances
to just about any shot on a golf course.
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Garmin Astra
Garmin manufactures a line of dog collars that allow dog owners to
track and train their dogs for either sporting or casual purposes.
Razer
Razer is a leading vendor of high end keyboards, mice,
headphones, PCs, and tablets that are purpose-built for the
hardcore gaming market. The company recently announced
the launch of a “smart band,” which effectively looks like one
of the many fitness bands on the market, but with a use case
that integrates with video gaming.
Source: Razer.
GoPro
GoPro invented the concept of the action camera, and part of its innovation has been through connecting
the camera to your smartphone to allow users to control the camera and view video files through a
smartphone app, thereby allowing users to share video through various social media outlets.
Nest Protect/Thermostat
Nest Labs has launched two products, a thermostat and a smoke detector, both of which are remotely
manageable and monitorable through being wirelessly connected to the Internet. A great example of
how connectivity can add value, Nest sells its thermostat for $249 vs. price points in the $20-50 range for
unconnected thermostats for the home.
Connected TVs
Connected TVs are becoming mainstream now, with 50% of
the TV market now shipping with an Internet connection
(typically Wi-Fi). Additionally, tens of millions of media
players have shipped, mostly from Apple (Apple TV) and
Roku, to Internet-enable traditional TVs, while service
providers such as cable companies will likely to start offering
Internet-related content in conjunction with their current
programs through platforms from companies like aiotv.
Source: Roku, Inc.
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Connected Cameras
Camera vendors such as Sony now create cameras with wireless connectivity to instantly share photos on
social networks, and to control the camera through a smartphone app.
Connected Coffee Machines
Nespresso ships a coffee maker that comes with wireless connectivity to allow the company to know how
many Nespresso-branded coffee “pods” are being consumed.
Connected Clothing
As one may have already guessed, consumers can expect a range of clothes decked out with sensors and
connectivity. Athos, a startup in Waterloo, Canada, is expected to launch a line of exercise clothing that
measures your muscle usage, heart rate, breathing, etc. Under Armour, a leading brand in fitness clothing
and shoes, purchased app vendor MapMyFitness in 2013, and we suspect that likely is the precursor of
making similarly connected clothing. The BBC even reported in December that Microsoft is developing a
“smart bra” that would monitor heart rate and skin activity to indicate mood levels in order to prevent
over-eating due to stress.
Connected Appliances
LG has introduced an app concept called “homechat” that allows consumers to control appliances
remotely using speech recognition. LG appliances with the capability can text a user when a load of
laundry is done, ovens can suggest and read aloud recipes for users, and users can control appliances
from the homechat app.
There are numerous products and even categories of consumer products that we don’t mention above,
but one gets the point. Connectivity is coming to everything imaginable, and for consumer product
companies this is likely to bring disruption and opportunity, while for semiconductor vendors it should
serve as an incremental growth catalyst in their consumer businesses, which up until now have typically
been dominated by PCs and mobile handsets.
Software and MVNO Opportunities Created by the IoT
As devices connected to the network grow exponentially into the 10s of billions globally, telecom carriers
and enterprises run into some issues with scaling that create interesting new end markets purpose-built
for IoT management software. Additionally, enterprises that are geographically diverse likely have to
interoperate with multiple carriers/networks, which has spawned the creation of MVNOs (mobile virtual
network operators) who aggregate bandwidth across multiple networks, and simplify purchasing, billing,
activation, and management for the software vendor or end customer.
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Device Cloud Software
Wireless providers around the world have a relatively labor-intensive activation or on-boarding process
for subscribers, which includes contracts, credit cards, cross selling, and other functions, which can create
a $30 or more cost to activating a phone on a network. When that smartphone generates $100 in
monthly ARPU ($2,400 over 24-month contract), the activation cost is very manageable. However, in the
world of the Internet of Things, devices may generate less than $5/month in ARPU, so traditionally
moribund back-end systems around activation, onboarding, and billing have to be massively streamlined
to supports potentially billions of devices at very low incremental costs in order for the IoT to be
profitable to telecom carriers. Additionally, large enterprises will likely end up managing potentially
millions of remote assets across multiple carrier networks, and will run into the same issues as carriers in
terms of their need to streamline onboarding and management functions in order to realize an ROI.
IoT Software Value Chain
Carrier Network
AT&T
MVNO
Mobile Application
Platforms
End Market
Applications
Verizon
Sprint
T-Mobile
KORE Telematics, Wyless, Aeris, RACO Wireless
Jasper, Axeda, Digi/Etherios, Sierra Wireless, Telular
Security
Energy
Management
Consumer
Products
Fleet
Tracking
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Although many companies in the management layer of the IoT classify themselves differently, broadly
they can be separated into two distinct entities, MVNOs and mobile application platforms.
MVNOs
MVNOs that specialize in M2M or IoT essentially aggregate bandwidth across multiple wireless carriers
and satellite providers, offer billing services, and generally add a management software layer to manage
and control end devices. Imagine you are provisioning wireless alarm systems across the globe. You will
likely need to interoperate with dozens of wireless companies. Instead of directly purchasing bandwidth
from each, these MVNOs aggregate bandwidth from all of them, thus ensuring application providers do
not have to worry about unused airtime or overage; they simply pay per Megabyte. Additionally, the
MVNOs can buy in bulk, leading to lower pricing, and can manage the billing, activation, and monitoring
across dozens of carriers globally. Although there are numerous MVNOs, some of the larger ones include
Kore Telematics, Aeris, Raco Wireless, and Wyless.
Mobile Application Platforms
Within mobile application platforms there are those that aid in the back-end processes of integrating with
wireless carriers for provisioning, billing, security, and diagnostics (with Jasper being the market leader),
and those that focus on the application layer, providing application software for end users to analyze the
data generated by an IoT deployment (fleet management software, for example). Some application
platforms are built to broadly serve a number of diverse use cases/industries, while others are purposebuilt for certain end markets such as alarm monitoring, health care monitoring, and energy management.
Certain industries like fleet tracking and alarm monitoring are well on their way to becoming mainstream
with off-the-shelf software being readily available, but many of these mobile application platform
providers are doing the hard work of helping create the next vertical market solutions or custom
enterprise solutions for IoT deployments.
Jasper Wireless
Jasper Wireless was an early pioneer in developing software for enterprises to manage connected
devices. The company has over 2,500 enterprise customers globally using its cloud-based software,
dubbed “Control Center,” with millions of end devices under management. Jasper sells its software
primarily through wireless carriers around the world and provides the provisioning, diagnostics, billing,
and security functions, essentially allowing wireless carriers to simply sell the customer and outsource
everything else to Jasper. We believe the company is the dominant mobile application platform for
cellular carriers in the U.S. and globally. Jasper serves a market that naturally needs to be served by a
non-carrier third party due to the nature of IoT deployments typically requiring many wireless carrier
networks globally.
Numerex
Numerex, headquartered in Atlanta, Georgia, is a bit more vertically integrated than most as it both acts
as an MVNO and offers mobile application platforms for numerous verticals including the security market,
government, healthcare, and transportation. The company scaled its business through a joint venture
with BellSouth, and subsequently made acquisitions that gave it access to satellite-based solutions and
broader application expertise.
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Telular
Telular is one of the original pioneers in the M2M market in both devices and services, and today focuses
most heavily on vertically focused software solutions in the home security, fleet tracking, oil & gas, and
tank monitoring markets through software management platforms using the Telguard, SkyBitz, and
Tanklink brand names.
GreenWave Reality
GreenWave Reality developed a software platform dubbed Home2Cloud, which allows service providers
to launch connected device-based services that are scalable and easily managed. The company also has
vertically focused software applications for energy management, connected lighting, and home
monitoring.
Axeda
Axeda provides a cloud-based software suite for enterprises to deploy and manage M2M services. It has
developed applications expertise specifically in the health care, agriculture, banking, technology, retail,
and other industries.
Digi International
Digi International launched its Device Cloud a few years ago as a way to make it easier for its device
customers to build and manage applications around Digi’s mobile devices. It has grown into a deviceagnostic cloud management platform for remote devices that enables enterprises to track, monitor,
schedule upgrades, and perform analytics on their mobile devices in the field for as little as $0.50 per
device per month or as much as $2 per device per month.
Sierra Wireless
Sierra Wireless is another traditional device company that has developed its own IoT cloud management
software solution for carriers and enterprises. Dubbed AirVantage M2M Cloud, this software allows
enterprises or carriers to onboard, manage, and analyze connected devices around the globe across
multiple wireless carriers.
Alarm.com
Alarm.com provides cloud-based management software for service providers who want to launch home
automation services to allow customers to monitor and manage security cameras, locks, thermostats,
lighting, etc. over an Internet-based connection. The company bundles wireless airtime for the alarm
monitoring function with the cloud-based software for home automation. The company has over 12,000
service providers (mostly small security dealers) globally, and is actively leveraging its platform to other
verticals such as health care.
iControl
Although iControl does not bundle wireless airtime or broadband connectivity (it generally partners with
broadband providers), its cloud-based software powers the connected devices in the home automation
services for ADT, Comcast, and many other service providers. The company’s software enables
automation and control of thermostats, lighting, door locks, video surveillance cameras, and a growing list
of other home electronics.
Synchronoss
Synchronoss is not a mobile application platform, but its software could have a big role to play as the IoT
scales. The company has been a leader in automating device activation processes at wireless and cable
companies since 2001. As carriers look to sell more consumer devices that are connected to their
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network such as watches, fitness products, automobiles, etc., Synchronoss has launched an activation
service for carriers called “Integrated Life,” which automates much of the activation process so that
adding devices at very little incremental monthly ARPU can be profitable for the carriers.
Ultimately, one can imagine just about any consumer device company monitoring consumer devices in
the field across the world through a relatively small monthly fee with benefits related to improved/
proactive customer service. And even at very small unit economics (a few dollars a month), many of these
software-centric businesses can scale to have very meaningful profit streams when one considers the
many billions of connected devices that will ultimately have to be managed by enterprises globally.
Semiconductors: Sizing the IoT Opportunity
The semiconductor industry generates over $300 billion in annual revenue across a broad number of
applications and end markets. In looking at the IoT opportunity for semis, the initial knee-jerk reaction is
to focus on the billions of new nodes of “connected” devices. While these devices will offer higher
content for semis (some in new end markets), it’s also worth noting that billions of incremental devices
will require additional server/networking semiconductor content on the back end (a true multiplier
effect). For the purposes of this report, we will focus on what we view as the most direct beneficiaries of
IoT adoption, primarily wireless communications chips, microcontrollers, and sensors. Essentially, these
three components (sprinkled with a bit of storage) can transform any object into an intelligent and
connected device.
Every One Billion Connected Devices Adds at Least 1% to Industry Growth
One of the key enablers of the IoT is that the connectivity of these devices offers increased functionality
at a relatively minimal contribution to the bill of materials (BOM). As seen on the following page, most
applicable semiconductors carry sub-$2 ASPs, which represents a rounding error in terms of impact to
many products’ bill of materials (note that adding cellular 2G/3G/4G connectivity would more likely add
$20-40 in content). Considering that connectivity provides significant functionality benefits to the overall
system level, we believe the value proposition is clearly evident and remain confident in the growth
trajectory for additional semiconductor content.
In non-cellular devices, we believe the average semiconductor content to add connectivity is roughly in
the $3 vicinity, although that can vary widely based on the application. Assuming our $3 estimate is
reasonable, every incremental 1 billion devices drives ~$3 billion of semi sales and is ~1% additive to total
industry revenue. If the IoT ever gets to 50 billion connected devices, obviously this can have a very
material positive impact on the long-term health of semiconductor demand. In the meantime, IoT is
adding a few percentage points to industry growth, but it remains just one of many end market drivers.
What remains encouraging about IoT prospects is that devices often carry design cycles of multiple years,
which is more consistent with the existing high-margin product markets like industrial, medical, defense,
and aerospace. To the extent that IoT devices have similar design cycles as these end markets, we believe
IoT adoption should drive more consistent revenue streams at higher margin levels for semi providers.
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Key IoT Semiconductor Components: ASP Projections
2012
2016
Annual Price
Decline
Microcontroller
$0.49
$0.30
-12%
Wi-Fi
$1.30
$0.80
-11%
Bluetooth
$0.75
$0.35
-17%
MEMS Sensor
$1.30
$0.95
-8%
Camera
(1.8 MP CMOS Sensor)
$1.70
$1.10
-10%
GPS
$1.15
$0.65
-13%
Semiconductor ASPs
Source: Gartner, ARM Holdings, and Raymond James research.
What Kind of Wireless Connections?
Although the IoT should increase cellular connections (all else equal), the primary growth of the Internet
of Things results from utilizing low cost wireless chips on unlicensed spectrum, thereby making it more
and more economical to add connectivity to previously unconnected devices. For the purposes of this
report, we call these connections PAN (personal area network) and include protocols such as Bluetooth,
Zigbee, Wi-Fi, Zwave, Ant, and many others. As shown below, Infonetics expects M2M connections to
grow from just over 1 billion in 2011 to over 4 billion in 2017. It is worth noting that this forecast excludes
consumer devices such as smartphones, PCs, tablets, etc.
4,500,000,000
M2M
Connections
4,000,000,000
3,500,000,000
3,000,000,000
2,500,000,000
Wireline/Backhaul
2,000,000,000
PAN Wireless
1,500,000,000
Cellular M2M
1,000,000,000
500,000,000
0
CY11 CY12 CY13 CY14 CY15 CY16 CY17
Source: Infonetics, Raymond James research.
Based on data from Infonetics, there are over 1.5 billion worldwide M2M connections today (this excludes
consumer devices), which should grow to over 4 billion by 2017. Although cellular-based connections will
grow at a healthy rate, the vast majority of M2M/IoT connections will leverage unlicensed spectrum and
low cost/low energy PAN connectivity such as Wi-Fi, Bluetooth, Zigbee, and others. These connections
are expected to grow from a bit over 1.3 billion in 2013 to over 3.4 billion by 2017, which suggests a +27%
unit CAGR.
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Essentially, over 80% of connected devices on the IoT will be connected using non-cellular technologies,
with Wi-Fi, low energy Bluetooth, and Zigbee likely the most prevalent protocols in this category. Based
on the data from Infonetics, the number of PAN chipsets shipped into this market will grow from 244
million in 2013 to nearly 800 million in 2017, a CAGR of 35%. This will serve as a nice incremental growth
driver for semiconductor players in this market including QUALCOMM, Broadcom, and Marvell in Wi-Fi,
Broadcom and Samsung in Bluetooth, and Texas Instruments and Atmel in Zigbee.
Some of these PAN chipset markets will grow extremely rapidly off of a low base. For instance, the ~30
million Zigbee chipsets sold in 2011 is expected to grow to 300 million by 2015, with various home
automation products being the primary end market. Some PAN chipset markets are already large and will
continue to grow thanks to the Internet of Things. For instance, shipments of Bluetooth chips, which have
largely been placed in cell phones, PCs, and peripherals, are expected to grow from 1.6 billion units in
2011 to 3.1 billion in 2017 according to IHS.
According to the Wi-Fi alliance, Wi-Fi chipset shipments surpassed 1 billion in 2011 and will double to over
2 billion by 2015. It’s worth noting that Bluetooth 4.0 or Bluetooth Low Energy has started to gain
meaningful traction as a low power consumption chipset solution, as it has materially improved power
consumption vs. older Bluetooth generations to a level comparable to existing low power solutions such
as Zigbee and Ant. Currently, market momentum appears to be pushing more and more connected
devices that require low power consumptive communications towards Bluetooth 4.0. Future lower power
versions of Wi-Fi may also improve Wi-Fi’s ability to compete for low power applications in the future.
Wireless Communication Protocol Comparison
The graph above illustrates the give and take between choices of wireless connectivity. The x-axis
represents best power efficiency, while the y-axis represents greatest range. The size of the circle
represents the data throughput. As shown, low energy protocols such as Bluetooth, Zigbee, and Ant
provide great battery life but limited range and throughput. Satellite provides great range, but requires
substantial power. Cellular provides greater range than Wi-Fi, but generally less throughput, and is more
power consumptive.
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Unfortunately, there is no perfect wireless protocol/network for every application so a heterogeneous use
of chipsets/connectivity will likely be a long-term feature of the Internet of Things.
M2M cellular modules are basically modules that include a cellular radio (2G, 3G, or 4G) and a modest
amount of storage and processing power in order to process modest applications. Cellular modules are
designed into products for WAN connectivity, where a portion or all of the use case limits the ability to
use an unlicensed wireless protocol (Bluetooth, RFID, Wi-Fi, etc.). Examples include cellular modules that
are built into vending machines, home security systems, automobiles, remote oil wells/pipelines, or any
use case in which a cellular network is required.
M2M Cellular Modules (units)
As shown above, based on data from Infonetics, a bit more than 50 million cellular modules were shipped
in 2013, with automotive being the largest vertical market, followed by smart grid applications (connected
utility meters). The market for cellular modules is expected to grow at a CAGR of 19% over the next
several years, as cellular connectivity is baked into an increasing number of machines and devices.
The vast majority of the cost structure of a cellular module is from the cellular radio, which is generally
sourced from the world’s leading baseband processor vendors, including QUALCOMM, ST Ericsson,
MediaTek, Intel/Infineon, etc. These larger chip companies generally do not compete in the market for
modules as it tends to require support for a large number of smaller scale customers. This compares to a
baseband chip vendor’s existing organization structure, which is designed to service a few very large
customers. However, the baseband modem vendor captures much of the economics of the module itself.
An additional large part of the cost component of a cellular module is the standard IP royalties paid to
large patent holders such as QUALCOMM, Nokia, Ericsson, etc. for the right to sell 2G/3G/4G-based
devices.
The module vendors themselves include Sierra Wireless, Gemalto, Telit and Novatell, who make up the
vast majority of the global module market, and generate 30-40% gross margins on their module product
lines, with ASPs ranging $20-40 depending on radio technology, use case, and processing power.
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M2M Cellular Modules (units)
As shown above, the majority of M2M connections on cellular networks today are 2G as bandwidth
requirements for M2M are generally low. However, 3G and 4G modules will likely grow meaningfully over
the next several years as more bandwidth-intensive applications are developed (e.g., connected
infotainment services in automobiles).
M2M Module Revenue
Microcontroller Growth Forecasts Likely Conservative
Connectivity aside, we expect microcontrollers will be one of the largest beneficiaries of IoT adoption.
Note that microcontrollers (MCUs) offer a processing core, memory, and I/O all on a single integrated
circuit, which allows for lower costs and smaller size relative to designs that use separate microprocessors. Based on existing use cases for IoT applications, we believe MCUs will be the most
predominantly used processing vehicle vs. standalone processors (which are likely excessive from a
performance, power, and cost perspective). Given the wide variety of use cases for IoT, it’s unclear on the
incremental unit opportunity for MCUs. That said, with a total IoT opportunity of ~4 billion units
annually vs. an existing MCU market of ~9 billion units annually, we suspect that mid-single-digit
growth CAGRs from third-party forecasters are overly conservative.
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The main beneficiary of this dynamic will be ARM Holdings, who has seen its market share in microcontrollers rise to 18% in 2012 vs. 0% just a few years ago. What’s been interesting in this ascent is that
the largely fragmented MCU market (only Renesas has 10%+ market share) has seen a massive adoption
of ARM’s Cortex-M MCU architecture vs. predominantly fragmented and proprietary architectures
previously. We believe the ARM ecosystem and low power architecture puts at the forefront of MCU
adoption for IoT devices, especially given its strength at 32-bit (which we expect to be in most IoT
applications). In our coverage universe, we believe Atmel is also well positioned from an MCU vendor
perspective. Note that Atmel has a strong ARM (and proprietary) 32-bit MCU portfolio and has been
proactive in addressing IoT needs through the acquisition of low-power Wi-Fi provider Ozmo. This is
complementary to the company’s existing Zigbee solutions, and we expect Atmel will be a key player in
low power unlicensed IoT devices going forward.
One key wildcard for IoT is Intel, who announced its Quark product line at IDF late last year to address IoT
applications. While we understand the strategic intent to play in all areas of compute, the question
remains how Intel will drive price points for its Atom product lines to low-single-digit (or below) price
points. Pricing aside, x86 power performance vs. ARM in other end markets has also shown a preference
for ARM (especially in consumer devices, where raw compute power is less of a differentiator). Thus we
believe Intel will be fighting an uphill battle with Quark, but we would not discount its intentions here
especially given a higher sense of urgency under new CEO Brian Krzanich.
Another wild card is QUALCOMM, who recently announced its Internet processor, which appears to
combine an ARM-based processor with a Wi-Fi radio. Given QUALCOMM’s position in the Bluetooth
market as well, it could also be a new entrant in the heretofore sleepy world of microcontrollers and find
a way to benefit from the IoT in ways beyond cellular modems.
Revenue ($MIL)
Microcontroller
Microcontroller Growth
Forecast
Growth Forecast
$18,000
8%
$17,000
6%
$16,000
4%
$15,000
2%
$14,000
0%
$13,000
-2%
$12,000
-4%
$11,000
-6%
$10,000
-8%
2011
2012
2013
MCU Revenue
2014
2015
2016
2017
Growth Rate
Source: Gartner, Inc.
As shown above, Gartner estimates the Microcontroller market at roughly $15 billion annually, with
generally low- to mid-single-digit growth expected for the next several years. However, we believe this
forecast is likely conservative given the substantial momentum we are seeing for connected devices
across both consumer and industrial end markets.
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Sensors: The True Magic of the IoT
In our view, sensors are the “magic” of the IoT. The sensor market is enormous, with Analog Devices
estimating it to approach $100 billion annually, much of which is not related to semiconductors at all. The
sensor market applicable to semiconductor vendors includes micro-electromechanical systems (MEMS) based sensors, optical sensors, ambient light sensors, gesture sensors, proximity sensors, touch sensors,
fingerprint sensors and more. These chips effectively detect changes in the environment, creating the
information that is ultimately transmitted via a wireless chip and interpreted through application software
to create an IoT solution. Sensors or sensor networks (Smart Dust, Mesh Networks, etc.) can provide
feedback about numerous physical phenomena including inertia, gravity, light, pressure, temperature,
humidity, chemical composition, time, heart rate, glucose, distance traveled, etc.
One of the more interesting sensor categories is MEMS-based sensors, which are creating new
applications and taking share from more legacy sensor technologies. MEMS sensors have come down in
price from $10 to $1 for many devices and in size down to 2mm x 2mm squared or smaller, which has
dramatically improved MEMS adoption over the last several years. MEMS devices can be manufactured
in CMOS processes, allowing them to become increasingly cost efficient and smaller going forward as well.
Another critical factor driving MEMS adoption is that MEMS devices can easily be incorporated into
electronic systems. All sensors ultimately need to be attached to analog-to-digital converters (and other
analog devices) so that the information they have collected can be turned into a signal that can be
digitally processed. MEMS sensors, given their small size and manufacturing, can be easily packaged with
or integrated with an analog-to-digital converter, leading to lower overall module cost.
Source: Analog Devices.
In September 2013 Gartner forecasted that the MEMS market will grow at a 13.5% CAGR between 2011
and 2017, growing from $3.1 billion to $6.8 billion. The largest market for MEMS is the automotive
market, estimated at $1.8 billion or 44% of the MEMS market in 2013. The major application for
automotive MEMS is for sensing when to deploy airbags. In this market MEMS sensors are replacing
sensors such as fiber optic gyroscopes and ring-laser gyroscopes. Additional applications are in
electronics stability control, tire pressure measurement and, going forward, using the sensor to track
location while in a structure such as a parking garage where a GPS signal cannot reach.
Of course air deployment is not really something that can be categorized as part of the Internet of Things.
However, “the connected car” seems to be a reality that is approaching rapidly. Once the car is
connected to the Internet via one of the wireless technologies mentioned here or one that is coming
specifically for automobiles, and software like iOS or Android gets installed, we expect the car to see a
significant increase in the use of the sensor information. For example, the MEMS sensor could indicate
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that a tire is flat and then with location-based services, a nearby garage could be suggested. Similarly, the
adoption of MEMS into the car to determine position while satellites cannot reach the GPS can also be
used to tie into location-based services. Also, airbag deployment and associated g-force readings from
the MEMS accelerometer taken during a car crash could send a signal to local emergency services to send
police and an ambulance. The six-year CAGR forecast for MEMS sensors in the automotive market is 8%,
which is still reasonably good considering penetration of the auto for MEMS started in 1992.
Table 1. Revenue
for MEMS Semiconductor Sensors, by Application, Worldwide, 2011-2017 (Millions of
Dollars) for MEMS Semiconductor Sensors, by Application, Worldwide, 2011-2017 (millions of dollars)
Revenue
Market Sector
2011
2012
2013
2014
2015
2016
2017
CAGR
(20112017)
Compute
187
336
427
534
667
806
973
23.7%
Storage
11
10
11
11
11
12
12
4.1%
Wireless
655
961
1,266
1,660
2,011
2,372
2,660
22.6%
Wired
NA
Consumer
324
349
355
364
366
362
344
−0.3%
Automotive
1,772
1,767
1,814
2,041
2,249
2,428
2,605
8.1%
Industrial
178
180
185
197
204
209
218
3.9%
Military
18
20
20
22
22
23
24
3.9%
Total Market
3,145
3,623
4,078
4,829
5,530
6,211
6,836
13.5%
Source: Gartner,
Raymond
JamesJames
research.
Source:
Gartner,
Raymond
& Associates, Inc.
Between 2011 and 2017 Gartner forecasts
computing and wireless applications to be the two
fastest growing areas for MEMS sensors at 24%
and 23% CAGR, respectively. Given the number of
connected devices that are being launched both
in consumer and industrial end markets, most of
which require sensors to capture valuable
information, we believe this forecast could prove
somewhat conservative as it relates to categories
outside of compute and wireless.
As far as competition in the MEMS sensor space,
STMicroelectronics is the current market leader
with 22% share, followed by Robert Bosch at 21%.
Bosch had been the leader due to its exposure to
the original markets in automotive, but ST gained
ground based on its exposure to the fast growing
market of handsets and tablets.
Source: Gartner, Raymond James research.
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As we mentioned, mobile applications have been growing the fastest and the following players are
leaders in that market.
Table 1. Manufacturers'
Market Shares for MEMS Motion Sensors in
Mobile Phones, 2012
Manufacturers' Market Shares for MEMS Motion Sensors in Mobile Phones, 2012
2012
Rank
Manufacturer
2011
Revenue
($M)*
2012
Revenue
($M)*
Percentage
Change
2012
Share
1
STMicroelectronics
331
410
24%
60%
2
Robert Bosch
51
80
57%
12%
3
Kionix/Rohm
46
57
24%
8%
4
InvenSense
28
57
104%
8%
5
Analog Devices
35
50
43%
7%
6
Memsic
14
13
-7%
2%
7
Hokuriku Electric
Industry
8
10
25%
1%
8
Murata
Manufacturing
0
5
NA
1%
NA
VTI Technologies
2
0
-100%
0%
Total Market
515
682
32%
100%
Source: Gartner, Raymond James research.
Source: Gartner and Raymond James & Associates.
Other capable firms that we expect to enter the market soon include Maxim Integrated, likely in 2015 and
Fairchild Semiconductor.
Another major semiconductor sensor category is ambient light/proximity/gesture sensors. IHS forecasts
this market to grow from $545 million in 2012 to $1.3 billion+ in 2017, or 11% CAGR. This market
included players such AMS, Maxim, Intersil, and many others. Some solutions are being done in-house as
well. For example, Apple purchased PrimeSense, which offers a 3D sensor that combines ambient light
sensor and a CMOS sensor. These products have shown up on applications such as Internet-capable TVs
from Samsung that have gesture and voice recognition.
Additionally, fingerprint sensors, CMOS camera sensors, touch sensors, and sound-based gesture sensors
may have a place in various IoT applications. While we expect the use cases to largely remain in existing
devices in the near term, we note that some companies such as OmniVision (with its OmniGlass offering)
have developed reference design platforms for certain use cases (wearables, in this case). We see
additional reference designs as a method to enter these markets from various sensor players, which can
help OEMs integrate additional functionality over the next several years. Overall, the IoT will be a modest
driver of global semiconductor growth, with each 1 billion devices connected each year adding about 1%
to global growth. However, for PAN-based communications chips, microcontrollers, and certain sensor
categories, we believe the IoT could drive double-digit growth for many years, benefitting vendors that
are well positioned.
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IoT, Networking Architecture, and Equipment Ramifications
In general, we view the IoT as one of many drivers of network equipment spending over the next several
years, and a meaningful contributor to what Cisco predicts will be a 23% CAGR in network traffic growth
through 2017. Networking equipment, specifically in the Wide Area Network (WAN), is agnostic to the
ultimate traffic source. The IoT represents yet another source of network traffic, which is likely to grow
meaningfully. In this sense, the IoT is a driver for network equipment deployment, but just one of many
trends driving increased network traffic. In general, equipment sales do not depend on any particular
element of IoT (e.g., connected car) but certainly require mainstream success of some IoT applications to
gain traction to fuel the 23% global traffic CAGR forecasted by Cisco.
Global Traffic Growth
120,000
Global Traffic Growth (Petabytes/Month)
100,000
Mobile Data
80,000
CAGR 23%
Managed IP
Petabytes
/Month
Fixed Internet
60,000
40,000
20,000
0
2011
2012
2013E
2014E
2015E
2016E
2017E
Source:
Cisco,
Raymond James research.
Source: Cisco, Raymond
James
Research
We expect both the number of connected IoT devices and the bandwidth consumed per device to
stimulate demand for networking equipment. Many of today’s most demanding traffic sources involve
human beings (cell phone, tablets, PCs), while M2M applications are less intensive (in fact, well over half
of global cellular modules sold into M2M applications today are still 2G). However, a number of the
developing applications envisioned by the IoT trend could feature devices that consume significant
bandwidth such as LTE connected cars, video security monitoring, and medical device monitoring.
Infonetics sizes the market for service provider equipment spending growing from $125 billion in 2013 to
$150 billion by 2017, exhibiting a CAGR of 5%, and we believe IoT is one of the drivers of this growth.
The $125 billion service provider equipment market reflects contributions from a range of segments,
according to data from Infonetics. Wireless infrastructure makes the largest contribution at $58 billion or
46% of total spending in 2013, growing to $62 billion, but just 42% of spending by 2017. Switching and
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routing contributes significantly in 2013 at $16 billion or 13% of spending, growing to $23 billion or 15% of
spending by 2017. Optical transport also contributes significantly at $13 billion or 10% of spending in
2013 growing to $17 billion or 11% by 2017.
Global Service Provider Equipment Spending
$160,000,000,000
Global
Service Provider Equipment Spending
$140,000,000,000
$120,000,000,000
Service enablement and subscriber intelligence
Service provider mobile/wireless infrastructure
$100,000,000,000
Service provider VoIP and IMS equipment
Service enablement and subscriber intelligence
$80,000,000,000
Carrier routing, switching, and Ethernet
Service provider VoIP and IMS equipment
$60,000,000,000
Optical network hardware
Pay TV
$40,000,000,000
Broadband CPE
Broadband aggregation hardware
$20,000,000,000
$0
CY12
CY13E
CY14E
CY15E
CY16E
CY17E
Source:
Raymond James
JamesResearch
research.
Source: Infonetics,
Infonetics, Raymond
The IoT will affect networks in several ways, and perhaps architectural changes represent one of the more
significant factors. Cisco predicts that metro traffic will exceed long-haul traffic in 2014 and account for
58% of total IP traffic by 2017, and suggests this change is influenced by increased use of more localized
data centers and Content Delivery Networks (CDNs), which in effect bypass long-haul links to deliver
traffic within metro and regional markets. As traffic growth from IoT applications increases, we expect
data center deployments associated with IoT applications to become more localized as well, and
therefore play into this transition from long-haul to metro traffic. This architectural shift may affect the
market in several ways:
Increased bandwidth demands. Today’s state of the art commercial interfaces are 100 Mbps, and
this could grow to 1 Tbps by 2017 in long-haul applications. End point bandwidth will also rise, with
the typical fixed broadband connection in the U.S. near 7 Mbps today. We expect 100 Mbps
connections to become commonplace with the trend towards 1 Gbps connects already underway.
Wireless connections will increase as well with the evolution of 5G in cellular and advances in
Wireless LAN technology. Today’s 3G mobile technology typically operates at <1 Mbps with 4G
networks typically supporting 5-10 Mbps and often as much as 20 Mbps, whereas 5G technology is
not yet defined and unlikely available before 2020.
Deeper fiber deployment. Fiber optics offer greater traffic carrying capacity than radio or metallic
media, and therefore we expect continued proliferation of optics closer to the end users.
Network densification. The deployment of small cells represents a simple example of network
densification.
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Greater percentage of edge/access sales = margin pressure. Edge/access equipment generally has
lower gross margin than long-haul gear, and generally more competitors and lower barriers to entry.
Catalyze software defined networking (SDN). The increased volume of network equipment will
create greater operational challenges that can only be addressed with greater automation of
networks via software.
Vendor competition may increase. Historically, metro/access applications/equipment have had
lower barriers to entry and more participants making these segments more competitive than the
long-haul counterparts in applications such as routing and optical transport.
In general, from a network perspective, the IoT is simply another driver of network traffic, on top of other
drivers such as smartphone proliferation, streaming audio/video, etc. These increased traffic loads are all
part of the industry’s ~5% revenue growth forecast, and within our coverage specifically, we focus on
players in optics, access, wireless infrastructure, and routing/switching as being positively impacted by the
traffic driven by the IoT.
Optics: We highlight Ciena and Alcatel-Lucent on the systems side and note that the private Chinese
vendor Huawei leads the market. Finisar, JDS Uniphase, and NeoPhotonics offer exposure for optical
components. All should see increased demand for their products as the IoT drives more traffic on
networks globally.
Fixed access: We highlight ADTRAN, Alcatel-Lucent, ARRIS, NETGEAR, and Calix as well as component
supplier Applied Optoelectronics. As traffic in the home and office increases to support various IoT
applications, we believe access equipment may increase as a percentage of the overall
telecommunications capital spending mix, which should have a demand benefit for successful
vendors.
Wireless infrastructure: Although PAN connections will see more benefit than WAN, the mobile
network will certainly witness increased demand from IoT applications, especially the connected car.
Ericsson and Huawei lead this market, but Nokia, Alcatel-Lucent, and Cisco could increasingly benefit
from the evolution of mobile networks including small cells. We also highlight CommScope as a
supplier of cell site apparatus (e.g., antennas).
Routing and switching: More traffic growth certainly requires more routing and switching. Cisco,
Alcatel-Lucent, Juniper, and Huawei lead the market for routing. Historically, core routing has been a
duopoly between Cisco and Juniper, whereas the edge routing market has featured more
competitors.
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What Does the IoT Mean for Wireless, Cable and Data Center Service Providers?
Wireless Service Provider Impact
Based on data from Infonetics, global wireless service providers generate roughly $800 billion in annual
revenues, with a low-single-digit growth outlook as voice revenues are declining and data revenues are
maturing along with the multi-year smartphone transition. The IoT is the next logical driver of wireless
service provider growth, and therefore we are witnessing material increases in resources committed to
increased adoption and revenues from the IoT.
As shown below, M2M global service revenues were $16.2 billion in 2013, according to Infonetics, and are
expected to grow to $31.1 billion in 2017, a 16% CAGR, well above the overall growth rate of wireless
services.
M2M Global Service Revenues
However, it is important to recognize that the IoT/M2M revenue contribution to wireless carriers globally
will be small for some time, and that by the end of the forecast period, it is expected to still represent less
than 5% of global service provider revenue. However, we expect the percentage will be higher in the
developed world, where most IoT applications are being adopted.
Although small in revenues, connected devices and machines that can talk to each other and the network
represent large, very high margin revenue opportunities for the likes of AT&T, Sprint, Verizon, and TMobile. In general, IoT applications use very little data, and traffic is generally not as time sensitive as
voice, resulting in a margin-rich service opportunity that in effect can make use of excess network
capacity and provide a recurring revenue stream for 5-10 years given the long life of many IoT assets in
the field.
As discussed previously, most IoT devices will connect through unlicensed wireless spectrum, creating
limited opportunity for carriers, but devices that are inherently mobile or deployed in areas where a PAN
solution is not relevant (e.g., cars, trucks, smart grid, etc.) will likely require a national cellular-based
platform, and typical multiple platforms. This has even created an opportunity for MVNOs to aggregate
bandwidth across multiple carriers and simplify purchasing and billing for applications providers, as
addressed earlier in this report.
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Currently, AT&T has ~18 million “connected devices” on its network, and this number is growing roughly
30% y/y. We believe some of these are tablets, but they do include many IoT-type devices as well, such as
automobiles, security alarms, commercial trucks, etc. Although other wireless carriers do not provide a
similar level of details, we believe most carriers are seeing similar growth rates in non-handset/tablet
device connections, with AT&T having the largest base in the U.S.
Cable/Wireline Impact
Cable companies and broadband wireline companies in general will benefit from the IoT trend in their
terrestrial networks as residential and commercial customers adopt more connected IoT-like devices and
thus become even more dependent on the quality and speed of their broadband connections as a basic
utility. Existing IoT applications are generally low bandwidth in nature, but with applications like video
surveillance monitoring and streaming audio/video in the home, both the quality and speed of the
Internet connection will become even more important to consumers than it is today, which should allow
for continued price increases to monetize the needed investment to support higher bandwidth
applications.
Additionally, the proliferation of connected TVs is likely to add to customers’ use of TVs in the home as
they adopt more PC- and tablet-like applications and uses, while home automation is now serving as the
fourth revenue stream for many cable and telecom providers today. Although difficult to quantify, we
view the IoT as a modest benefit to residential and commercial broadband service providers, especially
those that embrace new revenue streams created from these applications and enjoy a broadband quality
advantage through meaningful capital investment in the network.
Data Center Impact
We expect data centers to benefit from the IoT trend as well as third-party multi-tenant data centers,
which are becoming the default home of data for businesses and consumers. As the IoT progresses, we
expect more devices to be creating and transferring data than we currently have in the marketplace. The
result will be a greater need for data storage and for servers and other devices to route and manage that
data. For example, a utility company that deploys smart grid or remote meter reading will need data
center space to house the servers for these applications. Similarly, an HVAC company with remote
monitoring and service call capabilities will also require data center space to host and deliver those
applications. These demands become even more acute as one considers that the companies being
pushed into adopting IoT-like products are in many cases inherently non-technical (like our utility and
home maintenance examples).
As these non-traditional participants find themselves in a technology product race to remain competitive
and remove cost, we believe they will look for partners that can manage the technology resources they
will need to be competitive. The large third-party data centers and hosting companies such as Equinix,
CyrusOne, Internap, and Rackspace are likely to benefit from these trends, as will the RBOCs and
eventually the cable providers, with their internal data center operations and acquired businesses
(Verizon/Terremark, CenturyLink/Savvis, and Time Warner Cable/NaviSite).
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U.S. Research
Conclusion
A Series of Verticals Rather Than One Market
We do not believe an “S” curve of adoption for the Internet of Things is likely, as the concept is broad and
will have differing growth curves in different end markets. It is more helpful from an investment
perspective to think of the IoT as a series of vertical market solutions that may witness growth at various
rates over the next decade or more, all of which aggregates to 15-30% or so annual growth for the
concept in totality. The vertical markets that have the most opportunity for accelerated growth in the
next two to three years include home automation, connected car, and wearable devices.
Semiconductors: IoT a Bigger PAN Than WAN Driver; Microcontroller/Sensor Growth Meaningful
The vast majority (80%+) of IoT connections will occur on unlicensed wireless frequencies due to cost and
battery life advantages. Whereas cellular IoT connections are expected to grow at nearly a 20% CAGR for
the next several years, various PAN wireless connections (Wi-Fi, Bluetooth, Zigbee) into M2M end markets
should grow closer to 30%. Aside from significant growth in PAN-based chipsets, we view the
microcontroller and sensor opportunities as meaningfully positive, with industry forecasts of single-digit
growth potentially being too pessimistic.
Product Disruption in Consumer and Industrial Markets
The addition of Internet connectivity to devices provides an opening for disrupting previously sleepy end
markets dominated by sometimes slow-moving consumer and industrial product companies. Nest Labs’
entry into the thermostat and smoke alarm markets and subsequent $3.2 billion purchase by Google is a
high profile example, but we believe that this type of disruption is a potential in markets as diverse as
home appliances, audio equipment, agriculture equipment, machine tools, construction equipment,
clothing, and even toothbrushes, and Silicon Valley is gearing up to drive this disruption.
Impact on Networking Equipment
We view the IoT as yet another driver of network demand, contributing to an expected 23% CAGR in
network traffic growth (2012-2017). The IoT will impact network architecture and help drive a modest
mix shift from core to metro and access equipment spending, which has implications for pricing, margins,
and competitive dynamics in the $125 billion service provider market for WAN equipment.
Impact on Wireless Service Providers
The IoT is already generating ~$16 billion in annual service revenues for wireless providers in 2013, and
this should double by 2017. However, even with this level of revenues, IoT-related revenue streams will
represent less than 5% of wireless service provider revenues, making it more of an incremental than a
transformational driver. However, we expect wireless providers to invest heavily to benefit from this
growth as the rest of their traditional handset-related service revenues will likely be very mature.
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U.S. Research
For a Select Few, the IoT Defines Their Business
There are a number of software, service, and product companies whose primary product or service
revolves around connecting devices beyond cell phones. Garmin, Trimble Navigation, Jasper Wireless,
Sierra Wireless, Digi International, NETGEAR, Numerex, Kore Telematics, any number of fleet tracking
software vendors, Telit, Gemalto, Nest Labs, Control4, Savant, and Roku are clearly in this category. Most
are small today, but the successful ones will end up disrupting markets or creating markets, and
generating meaningful shareholder returns along the way.
All statements in this report attributable to Gartner represent Raymond James’ interpretation of data, research opinion or viewpoints
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The Raymond James
Technology & Communications Research Team
Brian G. Alexander, CFA, Electronic Manufacturing Services/IT Hardware and Distribution
Robert P. Anastasi, CFA, Director of Equity Research
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Wayne Johnson, Transaction Processing
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Alexander Sklar, CPA, Sr. Research Associate
Daniel Toomey, CFA, Sr. Research Associate
James Wesman, Sr. Research Associate
Brandon Pickett, Research Associate

The Internet of Things

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