The Internet of Things represents a major opportunity for incumbent technology suppliers as well as for emerging players. The market for IoT components and systems grew 160 percent in 2013 and 2014, and growth is projected to remain above 30 percent a year through 2025.65 As in other technology markets, the IoT market will have a variety of players and strategies. Some suppliers will compete by offering distinctive technology; others will offer distinctive data.
There also will be companies that establish technology platforms and those that specialize in offering comprehensive, end-to-end solutions. The opportunities to assume these roles vary by type of player. We also look at the different sources of competitive advantage for technology suppliers, how we expect value to be distributed among different types of technology suppliers, and how technology suppliers can play across multiple vertical markets—or find it difficult to do so.
The shifting IoT industry value chain
We expect that, as in other Internet applications, users (businesses and consumers) will capture most of the value created by IoT use—potentially as much as 90 percent in 2025. But given the huge amount of potential value that IoT can generate, this still leaves a substantial market for the suppliers of IoT hardware, software, and services.
As the IoT industry evolves over the next ten years, we expect the division of value among players to shift, with an increasing share going to suppliers of software and analytics. Exhibits 31 and 32 illustrate potential shifts among different players. Suppliers of foundational technologies such as hardware and IoT device clouds as well as installers of IoT systems are likely to capture less value in 2025 than they do today. Makers of packaged software and applications developers are likely to gain. In 2025, we would expect software and service providers to capture up to 85 percent of the IoT revenue generated by suppliers.
Phases in evolution of IoT technology
The shift in value among IoT suppliers could follow a course similar to the pattern of previous technology waves. In the personal computer industry and in the history of the Internet itself, there were three overlapping periods in which value shifted toward three types of companies. In the first phase, suppliers of infrastructure and hardware dominate. During the Internet era, companies such as Cisco and 3Com provided the basic building blocks of infrastructure.
In the second phase, some core services, built on the infrastructure, grow quickly to global scale. In the case of the Internet, companies such as Google and Yahoo provided services such as search. In the third phase, adjacent business models appear. On the Internet, this has included companies such as Amazon, which pioneered Internet retailing, and Airbnb, in peer-to-peer lodging services. Today, the Internet of Things is somewhere between the first and second phases. Some companies are focusing on the basic building blocks, such as connectivity, sensors, and other IoT devices, while others are beginning to specialize in software, analytics, and security that could begin to scale (Exhibit 33).