The internet of things simply refers to the networking of smart devices to the internet, so that businesses and consumers can interact with them remotely via computer, tablet, or smartphone. It’s really the near-universal availability of smartphones that is driving consumer enthusiasm for these connected devices. Smartphones are really powerful universal pocket computers, and thus can act as remote monitors and controls for anything that’s connected to the internet.
Of course, the other driver is Moore’s Law -- with controlling chips dropping in price to the point where incorporating them into a previously “dumb” device is not prohibitively expensive to the average consumer.
Industry has led the way in smart devices, but the trends noted above suggest an imminent breakout into the consumer space, where there is vast potential for expansion.
Smart Homes for Consumers
Any mechanical device that would benefit from remote monitoring and control is a possible node in the internet of things. If you think of questions you’ve asked yourself after leaving the house (did I lock the door? did I turn down the thermostat? did I leave the stove on? did I turn off the lights?), you have an initial list of smart devices that would be useful -- potentially enhancing safety and delivering savings.
One of the first movers is Nest Labs, a company which makes smart thermostats and smoke detectors. A Nest thermostat communicates with household WiFi and permits users to monitor and adjust their home environment remotely. Similarly, a smart lock could be monitored, opened, and closed remotely -- you would know when you’d forgotten to lock the door, and you could open it for a visitor without the need to be home or to have a spare key. A smartphone application can serve as a home automation hub -- such as the Iris system offered by Lowe’s ($LOW), which can cover locks, thermostats, security cameras and alarms, and pet doors. Nest Labs was acquired by Google ($GOOG) this week.
And more home appliances will eventually be added to such services -- ovens and refrigerators, for example.
Timing Is Key For Investors
Some observers saw the internet of things coming long ago -- perhaps too long. Apple ($AAPL) co-founder Mike Markkula saw it coming 30 years ago, and tried to capitalize on it with the foundation of Echelon Corporation ($ELON) (which now makes smart meters). But the infrastructure was not yet in place to support it. “I was 20 years too soon,” he says -- a common lament for those who see emergent tech trends. The idea may be brilliant, and the long-sighted investor may be correct in believing that its adoption may be an eventual sure thing. But that does not mean that the time is right to invest -- it may be too early.
Certainly the landscape is more favorable for the takeoff of the internet of things than it was in the 1980s or 1990s. We believe that this trend is very real; and the tenor of opinion in the tech sector is extremely bullish. Analysts estimate that there will be 30 to 50 billion networked smart devices by 2020, up from some 10 billion today. These additional devices will drive revenues far beyond those associated simply with hardware manufacture -- associated services, as well as the generation of vast amounts of data, will also be powerful drivers of value.
Watch For Pitfalls
However, there are still potential pitfalls for investors.
Many of the brilliant new ideas will be incubated in startups -- who will then find their ideas implemented by much larger rivals able to leverage their powerful market position to dominate the newcomers. So finding early movers in whom to invest can be a risky business -- while the existing giants, such as Cisco ($CSCO), are unlikely to have their needle moved much by the expansion of the smart device space. This will be most likely, perhaps, in the realm of hardware, where big players such as Home Depot ($HD), Lowe’s and others will be able to offer integrated, turnkey solutions to consumers.
Further, although the infrastructure is far more developed and robust than it was when the internet of things was a twinkle in the eyes of visionaries, there are compatibility issues still to be ironed out. Consumers are used to thinking of connectivity that simply works -- their home WiFi, and perhaps Bluetooth. But there are many more rival radio communication systems and standards, which have not yet fallen into uniformity. This poses a risk for hardware manufacturers -- but also an opportunity for manufacturers of network hubs that can communicate across many platforms.
In short, while we see clearly the secular promise of this space, we are cautious in evaluating potential winners -- and our tendency is to look more to service providers than to hardware manufacturers.
Data, Data Everywhere
The other aspect of the internet of things worth watching is the implications of enhanced data collection. Networked cars will be able to send detailed information to insurers on drivers’ habits -- potentially allowing them to make much more finely-tuned actuarial decisions about consumers. Some consumers would welcome that -- while others, even safe drivers, would view such data collection as intrusive.
And of course, all the cloud-based home automation devices would be able to collect big data on consumers’ habits -- big data which could prove extremely lucrative for the companies that own it. (We noted that one of Nest Labs’ early investors was Google -- and as we prepared this letter, Google announced its acquisition of Nest for $3.2 billion.)
Besides the privacy concerns, there are also straightforward security concerns -- such as hackers being able to access home security systems and let themselves into locked houses. The recent massive data breach at Target ($TGT) and other retailers has, at least momentarily, raised consumer consciousness about hacking and data security. Winning service providers in the internet of things will have to provide especially robust protection and assurance to win consumers over to a world in which their homes (and someday their cars) will be remote-controlled. So while we watch this space with great interest, we have a number of criteria in mind by which to judge which entrants are most likely to provide returns to investors.
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