Investor's Guide to IOT Part 2 - Understanding The IOT Vendor Landscape

March 2016

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IoT Landscape

The IoT ecosystem is comprised of a large number of technologies. Many of these have existed for years, while others have emerged recently. Sensor technologies have been around for decades. What’s new is that today’s sensors have become smarter, cheaper, and connected, which opens up new opportunities to access real-time data produced by humans, machines, or any connected object. This abundance of sensors, combined with a large distribution of connected devices (mobile phones, tablets, wearables, etc.), is creating new business opportunities.

Businesses can now collect huge amounts of data in real-time and use this data in ways that are transforming industries. The following image shows a small subset of the various technologies that make up the layers of the IoT stack (for more info on the IoT stack, see Part 1).

Investing in IoT

Over the last few years I’ve talked to a variety of people in the investment community about IoT. One venture capitalist said he was looking through the ecosystem for technologies that wouldn’t be commoditized over time. We know a large number of sensors and connected things will be marketed. But which products–drones, for example– will retain value?

Another executive I talked to was from a company that helps farmers analyze crop health and field utilization and is now known as a drone player.. He told me the only reason they build and modify drones today is because they can do it faster and cheaper than if they tried to purchased the technology they need. They have intellectual property in the area of infrared and thermal camera technology that captures  high resolution images from high above the crops. They buy a drone and a GoPro and modify them both to meet their requirements. The executive said that once he can purchase similarly modified drones from a manufacturer for less than his costs today, he will stop building drones and spend more time focusing on his software platform that produces high value insights. The drone and camera technologies are just a means to an end. The drones will soon be a commodity, and the real value is in the data and the software.

The same scenario plays out with sensors. Some investors are excited about companies that will be manufacturing and distributing the billions of sensors that will be installed globally the next several years. Others see sensors as a commodity business that will be dominated by very few companies with deep pockets.

Still other investors look at the innovators creating advanced new sensors, drones, wearables, medical devices, etc., and see opportunities for first market movers who could quickly grab new markets or become a merger and acquisition target. Nest, the smart thermostat company, , is a great example of a first market mover. They were purchased by Google in 2014 for $3.2 billion. Over time, the physical thermostat will surely be commoditized, but the real value of Nest is in the data and the platform they created.

A venture capitalist also looked at the application layer, trying to understand how often applications can be sold or “leased” in the  Software as a Service (SaaS) model. For example, he cited a particular software suite that enables oil companies to greatly reduce the time and money it takes to explore for new drilling sites. The system uses sensors to collect geologic data to determine the feasibility of establishing a new oil rig at a current site. He concluded that this software created great value, but was likely to be purchased by just a handful of large oil companies. He felt that limited volume potential limited the investment opportunity.

Investing in IoT can be tricky, with so many players in each layer of the IoT stack. Many of these companies have been around forever and are upgrading their products and services to take advantage of the IoT revolution in its very early stages.

IoT Companies

There are hundreds of companies that have an IoT product or service. I will highlight a few that I am familiar with. What is more important is understanding the types of companies and the products and services that make up the IoT ecosystem. In Part 3 of this series, I will take a deeper dive into the platform and software categories and highlight a few IoT platforms and public cloud offerings.

Fog Computing

Vendors addressing opportunities in fog, or edge, computing, comprise a mixture of companies that manufacture sensors, provide networking services, manufacture appliances and connectivity devices, and produce phones, tablets, wearables, and other mobile devices. Large companies are very active in this space. Intel produces chips and gateway technologies for enabling physical machines to connect to the internet. Cisco has a range of networking hardware that enables data collection and transmission from connected “Things” in the fog. In addition, they offer an end-to-end platform with data security and encryption services, and even backend analytics.

There are a large number of companies in this space with technologies ranging from sensors, to beacons, to Wi-Fi networks. Wi-Next produces what they call edgeware, which includes their innovative End Node Power, a low power Wi-Fi device that can connect old analog machinery via the power supply plug and turn legacy machines into real-time streaming IoT machines.

Cloud Computing

One of the challenges with IoT, is building systems that can scale with the incoming data. This is a sweet spot for the public cloud and companies like Amazon, Google, Microsoft, and IBM are major players.

In addition to public clouds, there is a huge demand for hosting and co-locations. Companies like Equinix, Terremark, AT&T, and others have a good chunk of market share in this area. There are also many different types of IoT platform services, including IoT specific platforms, general PaaS (Platform as a Service) solutions, platforms focusing on mobile development, and many others. I will cover these in detail in Part 3.

Big Data

IoT is the killer app for big data. Collecting huge amounts of real-time data requires a different type of database technology than the traditional Oracle, SQL Server, and MySql relational databases used by most enterprises. Big data has been a sweet spot for open source technologies like Hadoop, Apache Spark, and many others. Big data has its own ecosystem made up of several technologies that focus on areas such as data access, data management, security, scheduling, workflow, visualization, machine learning, streaming, search, and the list goes on. Cobbling all these pieces together on your own can be a very complex and cumbersome adventure. Companies like Hortonworks, Cloudera, and MapR bundle all of these open source modules together and provide a database as a service (DBaaS) offering, so that customers don’t have to spend so much time implementing and integrating the technologies.

The big three public cloud providers provide pay-as-you-go managed services for big data. Google has Big Query, along with a number of managed services that assist in data ingestion, machine learning, and visualization. Amazon (AWS) has DynamoDB and Redshift, two capable big data DBaaS offerings. Microsoft offers HDInsight, which provides managed Hadoop, Spark, HBase, and Storm services. There are too many vendors in the big data space than I can cover in this brief article.

Applications

The application category is diverse. A number of consulting companies can architect and build IoT solutions. (Disclaimer: I am an architect for one, so I’ll refrain from naming any.) There are also families of applications. In the connected home area, for example, there are applications for connected appliances, home monitoring, and smart energy (smart thermostats, lights, etc.).

In the consumer IoT space, popular companies like Fitbit and Jawbone dominate the wearables market. All the major auto makers are testing connected cars. Tesla manufacturers an electric car that is essentially a computer on wheels. Its wi-fi enabled software platform can receive updates on the fly. So instead of taking your car in to get the electronics fixed, you simply download a software patch.

Disruption

Many IoT technologies will not disrupt an industry all by themselves. Disruption usually requires composite applications. For example, smart lights, smart refrigerators, and smart home surveillance are each really neat. But when you create a service that integrates all those technologies, you really start to disrupt things.

Take assisted living. By combining many different connected home technologies, it’s now possible for older people to lead a high quality of life in their homes without having to move to a nursing facility. Technology can detect motion or lack of motion, and send appropriate alerts to appropriate people when an emergency is detected. Smart appliances can even help an elderly person order groceries that get delivered to the door.

Remote healthcare is also booming. Doctors can get real-time biometric data and proactively treat or consult patients. This can drastically reduce costs and improve service levels. Previously, doctors would need to order lab work to get this kind of data, a process that could take weeks or months to schedule and perform.

Uber is a classic disruption example. It’s now the top taxi service, yet doesn’t own any taxis. Uber is basically a software company that leverages mobile device data from both customers and drivers to orchestrate an on-demand transportation service. In addition, they’ve revolutionized payments and eliminated the cumbersome and sometimes dangerous process of exchanging money between customers, drivers, and the company.

Finding companies that are disrupting industries can be a very profitable strategy for investors. The hard part is discovering who the disruptors are early on, before they become over valued.

Summary

The IoT ecosystem is very large and diverse, so defining an IoT investment strategy is a good first step. Do you want to invest in the companies that are producing the underlying technologies that are driving IoT–sensors, chips, networks, etc.? Many of these technologies will eventually become commodities, but a few companies will make a killing in these early years.

Do you want to bet on the consumer IoT market? Are wearables a fad or can sales be sustainable for a number of years to come? Do you believe in smart homes or are they just a luxury? Are drones a hobby or are they a major technology for transforming industries like agriculture, search and rescue, energy, etc.? Will drones and other connected devices become too commoditized?

Are you looking to find the next Uber? Are you betting on which large companies will make the needed transformation to IoT and clobber their competition? If so, look at what companies like GE are doing.

There is no silver bullet for investing in IoT. My advice is to understand the entire ecosystem, pick a strategy, and follow the vendors closely to see who is moving the needle. IoT will be a multi-year journey, but finding the next Nest or Uber early on can be a very profitable move.

 

This article was written by Mike Kavis from Forbes. This reprint is supplied by BNY Mellon under license from NewsCred, Inc.  

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