Detailing the Value Created by Internet of Things

Dimitrios Matsoulis


This post summarizes an article by James Manyika, Michael Chui, Peter Bisson, Jonathan Woetzel, Richard Dobbs, Jacques Bughin and Dan Aharon, published by the McKinsey Global Institute in June 2015.

The Internet of Things (IoT) is the interface between the physical and digital realms that enables us to electronically monitor, manage and control the physical world. It opens up new horizons for collaboration, efficiency and added value. Although the IoT is surrounded by a lot of media hype it has the potential to exceed our expectations. The McKinsey Global Institute estimates that by 2025 it will have an economic impact of $3.9 trillion to $11.1 trillion.

To better grasp the potential impact, it is important to view the IoT in terms of the physical environments it will evolve in. Research in these environments led to the following outlook:

Interoperability among IoT systems. Getting IoT systems to work together can unlock 40 percent of its value, while 60 percent of this will arise from the integration and data analysis from multiple IoT systems. Interoperability has the potential to contribute $4 trillion out of the total of $11.1 trillion till 2025. It can be conquered either by designing IoT systems to communicate with each other, or even better by building a universal platform that will guarantee maximum compatibility.

Full data exploitation. At the moment, the use of the IoT is limited to fault detection and real-time monitoring. If we were to compare that with an industrial setting, it would be like less than 1 percent of an oil rig's 30,000 sensors getting used for decision making. By increasing the captured data and actually processing it, it can help us leap from basic monitoring and scheduled maintenance to conditional maintenance, workflow analysis and better operating efficiency.

IoT users will receive most value over time. More than 90 percent of the value generated by IoT applications will be enjoyed by consumers, manufacturers and fleet owners. Over time, value opportunities available to technology suppliers will lead to new services and software.

New business models. The IoT is expected to cause extensive business model disruption. The article sites the example of industrial equipment suppliers. The new technological ability to monitor and analyze machine data opens up the opportunity of getting into services well beyond the sale of capital equipment by charging based on usage time, offering software upgrades as a service or going to a subscription model that includes full hardware and software support.

Of all the nine physical environments researched on the McKinsey Global Institute article, factories posses the right infrastructure and regiment to reach the highest added value contribution of up to $3.7 trillion in 2025. As for now, the IoT is still at a very early adoption stage. To reach its full potential, certain prerequisites have to be met. RFID tag and battery costs need to come down, vendors must agree on sensible interoperability standards, privacy and confidentiality of individuals must be guaranteed, stored data must be protected, intellectual property boundaries have to be defined, business IT organization must be realigned towards an all-encompassing model and, finally, public policy must keep in step with technological developments and set the framework for sensible data practices.