Harbor Research IoT Market Opps Paper 2013

The Emergence of

Smart Systems

Analyzing Internet of Things Market Opportunities

Internet of ThingsBackgrounder

HarborResearch

Opportunities Within The Smart Systems And Internet Of Things Arena

Are Continuously Evolving

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The Emergence of Smart Systems

The Internet of Things and the world of Smart Systems are ushering in an era where people, machines, devices, sensors, and businesses are all connected and able to interact with one another. As these previously disaggregated parties come together, new modes of collaboration and intelligence will abound fostering a trend that we call Smart Business. Machine-to-Machine communication (M2M) systems are merely the starting point. The development of the Internet of Things and the evolution toward Smart Business practices will enable a truly connected world. Inputs from machines, people, video streams, maps, newsfeeds, and sensors will be digitized and placed onto networks. This will lead to the convergence of the physical & virtual worlds, thus enabling collective awareness, creativity, and better decision making capabilities for societies that increasingly rely on real-time information and interactions. Many observers believe that this phenomenon will drive the largest growth opportunity in the history of business.

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TABLE OF CONTENTS

4 Smart Systems Market Opportunities

7 Key Questions About The Internet of Things

8 Technology and Market Forces

10 Smart Systems Opportunity Scale

13 Innovation Potential

THE EMERGENCEOF SMART

SYSTEMS

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Smart SystemsMarket Opportunity

Smart Systems will drive a multi-year wave of growth based on the convergence of innovations in software architectures; back-room data center operations; wireless and broadband communications; and smaller, powerful, and numerous client devices connected to personal, local and wide-area networks. We expect the rate of investment in Smart Systems to be measurably higher than in maturing IT systems and network infrastructure and occur in three key areas:

Smart System Platform Technology To Integrate Systems and Applications

Purpose-Built Device & Hard-ware Innovation To Support New User Experiences

Business Process Integration

Value-Added Appli-cation Services

Beyond mobile phones, laptops and other traditional IT devices con-nected to networks, the scope of what is considered an intelligent device is expanding as more and different products get connected to the network. Health monitor-ing devices on the body, telematics in vehicles for safety, automated

service scheduling, and driver convenience as well as smart grid equipment and meters that can monitor real-time electricity usage all delivered via the Internet. We are entering an age of enhanced asset awareness, where real-world assets (e.g., HVAC systems, shipping containers, shop-floor machinery, pipelines, etc.) can monitor events, execute rules, and automate busi-ness processes. Intelligent device communications is converging with IT and network infrastruc-ture to enable vast improvements in efficiency and productivity.

The intersection of Information and Communications Technology (ICT) and device connectivity creates value at two disparate ends of the business spectrum. New IT technologies like cloud computing are moving to the enterprise and rapidly being embraced. Managed IT services will increasingly dominate ICT systems and networked services development.

At the other end of the spectrum, the rise of the machine-to-machine (M2M) and the Internet of Things has helped transform product companies into value-added service companies. Manufacturers are learning that by putting products

SMART SYSTEMS DEFINITON

As the blurring of lines continues between IT-centric devices and machines, we believe it makes more sense to refer to this evolution as one belonging to a class of technologies we would propose to call Smart Systems.

Smart Systems are: a new generation of systems architecture (hardware, software, network technologies and managed services) that provide real-time awareness based on inputs from machines, people, video streams, maps, newsfeeds, sensors, and more that integrate people, processes, and knowledge to enable collective awareness and

better decision making.

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on networks they are essentially placing themselves into continu-ous contact with their customers, thereby enabling them to bet-ter understand their customers needs and act appropriately.

The intersection of these two trends creates an opportunity for new differentiated business models by cleverly combining the potential of both. The two need to be interwoven and mutually supportive, and increasingly, success in either goes to the player that effectively utilizes the combined potential of both.

A new generation of systems architecture (hardware, software, network technologies and managed services) that provide real-time awareness based on inputs from machines, people, video streams, maps, newsfeeds, sensors, and more that integrate people, processes, and knowledge to enable collective awareness and better decision making.

Harbor Research believes there is substantially greater recognition of the technological capabilities and the potential benefits of connecting devices to the Internet today than at any other time. However, our

analysis and, more importantly, our experience working with many diverse players in this arena points to the many challenges in realizing such growth, including:

Challenges with developing an effective cross-industry technology reference architecture that will allow for true interoperability and ease of deployment.

Complex services and solution delivery eco-systems that require supply-side players to relate in new and different ways

Fragmented M2M and Smart Systems vendor landscape that is not yet well aligned with the larger IT infrastructure and network services players.

Requirement for vertically focused solutions from a supply-side world that historically has been far more horizontally driven.

Technology disruption causing shifts across value chains in where revenue and profits are realized.

Challenges in adopting new business models and making


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the business case to support investments.

Anticipation of new product, service and systems innovation modes that are not widely adopted today.

When it comes to laying the groundwork for the future Internet of Things, we think most people assume that the technologists are taking care of it. They take it on faith that the best possible designs for the future of smart systems will emerge from large corporations or centralized authorities. But those are big, unfounded assumptions. In fact, most of these newly arrived IT and network services players are showing little appetite for radical departures from current practices. Yet current practices will not serve the needs of a genuinely connected world.

When we say Smart Systems we are literally contemplating incorporating the Internet into physical things and infrastructure, making something like a smart building much easier to contemplate than ever before. The building itself is literally on the Internet and the Internet is in the very matter of the building. If this is such a good idea, why hasnt it

been done before?

The answer is that most of the current IT and communications technology in this area is really a holdover from the early days of client server systems. All the new entrants are trying to drag yesterdays story to tomorrows opportunity.

The realization of pervasive smart systems will involve billions upon billions of protean network nodes that ultimately take on a life of their own. Our present-day conception of intelligent devices and global data networking does not allow for that. Until we change that situation, we will not achieve the emergent magic implied by the phrase the Internet of Things.

So how will all this work? For all of this smart systems value to be realized the alignment of embedded systems technologies, intelligent device communications, network services and IT infrastructure and application services will all have to be re-thought. The knowledgeable players in this arena today and all newcomers will the newcomers will have to communicate and align themselves in ways that will change all the players business models.


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Key Questions About The Internet of Things

Our analysis and research is focused on understanding the strategic business implications of growth within the emerging Smart Systems arena.

We are particularly interested in answering the following fundamental questions:

What key forces are impacting adoption of Smart Systems, M2M and connected product solutions?

What devices and applications are driving intelligent device networking?

What is the size and growth rate of the opportunity?

What impact will cloud computing technologies and related IT services delivery technology have on the smart systems and internet of things arena?

What managed services opportunities are developing by vertical market?

How will new data aggregation, integration and analytics technology impact customers and users;

How fast will data analytics capabilities converge with real-time and state-based systems?

What are the evolving competitive dynamics in the Smart Systems arena?

What ecosystem and go-to-market structures will emerge?

What are the biggest unmet growth opportunities?

What issues and hurdles are there in the market impacting adoption of Smart Services?

Our analytical and research work examines the current state of intelligent device networking, a key element of the emerging Smart Systems and Internet of Things arena.

Our work also provides perspectives on emerging opportunities and threats, but more importantly, our research outlines how adopters are using device networking solutions, and how device manufacturers and related service companies should leverage networking technologies to gain advantages in this new chapter of the connected economy.

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Technology and Market Forces

The technology and market forces that are driving business and government interest in smart machine to machine (M2M) so-lutions are many, including:

The cost of devices will con-tinue to plummet with ad-vances in silicon, packaging and integration technology making them network fluent and af-fordable to virtually everyone;

A ubiquitous broadband infra-structure (significantly ahead of most predictions) has been

developed, which is enabling virtually everyone in the devel-oped world to be connected both to other users, to new types of sensors and instru-ments and to massive process-ing and storing infrastructure;

Carriers are dramatically reduc-ing their monthly fees for cellu-lar device links -- most network service providers worldwide have deployed IP networks on a broad scale and the wider avail-ability of 3G wireless networks is fostering market adoption;

Figure 1: Smart Systems and Internet of Things Landscape

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The storage capacity and pro-cessing power of computers will continue to grow exponen-tially and enable a whole new generation of infrastructure to perform an enormous variety of data management tasks - both carriers and IT infrastruc-ture providers are working to develop software and data management platforms to sup-port new managed services;

The miniaturization of com-ponents and the integration of a broad range of sensing capabilities into intelligent devices will continue to provide a variety of features that sup-port the integration of digital information and sensory inputs from the physical world, thus broadening the range of pos-sible applications available;

The continuing developments of IT systems, the Internet and of next generation telecommu-nication network architecture will enable movement and analysis of very large amounts of information (much beyond traditional communication and messaging) which will extend the value of managed services;

Finally, technology advances have improved and simpli-

fied system and user inter-faces and interactions which, in turn, is driving adoption of new business models.

Tied to these market and tech-nology forces are a number of regulatory and economic stimu-lus efforts such as smart grid and healthcare initiatives that are also fostering increased market adoption. End customers par-ticipation in the design, develop-ment and management of Smart Systems will rise during this next period of market development:

End users will emerge as a force and place greater em-phasis on vertical solutions that readily integrate with enterprise systems, innova-tive solution design and more effective service and support.

Demand for adaptability, agility and features will grow. Innova-tion in product and systems design will be heavily rewarded. Customers will creatively ap-ply and integrate technology in their work and personal lives to unimaginable levels.

Customers will require a tailored experience from service providers; user experi-ence will become critical.

Technology andMarket Forces

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Smart Systems Opportunity Scale

Software Tools, Middleware

Network Infrastructure & Connectivity

Mobile Equipment

Aerospace

On-Road Off-Road

Complex Systemic Equipment Fixed Equipment

Tools & Infrastructure

Electronic Interconnect

Systems and Equipment

Types

Systems Applications

Carrier & Network Services

Services & Applications

Standard Machines & Equipment

Facility Systems & Equipment

Facility Infrastructure Components & Sub-Systems

Marine Rail

Facility Systems

& Equipment

Mechanical Sub-Systems & Components

Fluid & Pneumatic Sub-Systems & Components

Electrical Sub-Systems & Components

Machine/Device Sub-Systems, Assemblies, Modules & Components

Power & Control Systems

Semiconductors & Micro-Electronics

Embedded Electronics

Terminals Diagnostic Tools Mobile Telephony, IT Terminals & Tools SmartPhones Tablets

Vehicles

Figure 2: Smart Systems Drives Common Architecture

As networks have invaded the physical world, traditionally unique components and in-terfaces between and among electronic as well as mechani-cal elements are becoming more and more standardized.

The implications of these trends are enormous. No product develop-ment organization or its suppliers of componentry and sub-systems will be able to ignore these forces -- product and service design

will increasingly be influenced by common components and sub-systems. Vertically defined, stand-alone products and appli-cation markets will increasingly become a part of a larger horizon-tal set of standards for hardware, software and communications.

As it becomes easier and easier to design and develop smart systems, competitive differentiation will shift away from unique, vertically focused product features towards

SMART SYSTEMS VALUES

Smart Systems technology values revolve around real-time situational awareness and automated analysis.

Technology moves beyond just proposing task solutions such as executing a work order or a sales order to sensing what is happening in the world around it, analyzing that new information for risks and possibilities, presenting alternatives, and automatically taking actions.

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how the product is actually used and how the product fosters interactions between and among users in a networked context.

The opportunities this opens up to forward thinking product and service organizations are nearly infinite. Businesses can begin to explore many new possibilities for system solutions unthink-able just a few years ago.

Many IT equipment suppliers and wireless carriers have made recent pronouncements con-cerning the scale of the Internet of Things. Our analysis points to the many significant chal-lenges in realizing such growth.

For the scale of opportunity to be fully realized, many habits and as-sumptions will need to be broken.

Though their business models are intermingling today, all of the ma-jor categories of solution suppliers (or as we like to call them - The IT and Network Arms Merchants) have historically operated within well-established business mod-els that reflected the distinctive competencies that each group believed to be at its core. The ad-vent of Smart Systems is causing

a blurring between these legacy business models forcing all the major suppliers to re-think their strategies.

We believe the IT and telecom sectors have failed to re-evaluate their relationship to advancing technology and to their constitu-ents. The business and technology paradigms to which these sectors cling today are far too limiting, too cumbersome and too expensive to foster new capabilities for smart systems. These players continue to extend outdated models of data, networking and information management that were conceived in the mainframe and client-server eras and cannot serve the needs of a truly connected world.

The technology and market forces that are driving growth in smart machine to machine (M2M) solutions are many. This repre-sents a whole new generation of technology innovation and, if history repeats because certain conditions repeat, we expect to see a significant wave of growth in Smart Systems.


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Here are some related points on the scale of the Smart Systems op-portunity:

The total Smart Systems mar-ket value forecast for 2013 is approximately $275 billion. By 2018, the market is expected to grow to $873 billion, repre-senting a 5-year CAGR of 26%. Cumulative networked devices in use are expected to grow to over 26 billion by 2018.

ICT investment topped 3.8 tril-lion dollars in 2012, we believe that Smart Systems invest-ment has already reached approximately 10% of the ICT

market; Our analysis indicates the

rate of investment in smart systems will be measurably higher than in maturing IT and network infrastructure technologies; we are forecast-ing Smart Systems growth at 3X the compounded rate of traditional ICT technologies;

Investment in Smart Systems, particularly as the market and supply side players recog-nize its distinct requirements and characteristics, will likely increase in scale to as much as 20% of all of ICT investment within five years.

Figure 3: Total Smart Systems and Services 2013 - 2018 ($M)

$-

$100,000.00

$200,000.00

$300,000.00

$400,000.00

$500,000.00

$600,000.00

$700,000.00

$800,000.00

$900,000.00

$1,000,000.00

2013 2014 2015 2016 2017 2018

Managed Services Revenue

Network Services Revenue

Enablement Revenue

SMART SYSTEMS ENABLES COMPOUND VALUE

Previous waves of computing and network technology each have had significant impacts on productivity and efficiencies.What is important about this next wave of Smart Systems is the combined impact of the cycles of innovation in computing, software, and archiutecture that will allow technologies to inform smarter systems.

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Innovation Potential

We believe there are indications that this era is fostering new types of innovation based on emerging technologies that will impact the growth of Smart Systems. There are several phenomenon that can potentially drive significant new modes of innovation that will positively impact adoption and growth. To understand the future of networked information, it helps to remember that the Internet of Things will largely be driven by collaboration and collective intelligence. Some important forces evident in the marketplace include:

Collaboration and Crowdsourc-ing Are Real: It is becoming in-creasingly clear that crowdsourc-ing, meaning that a large group of people can create a collective work whose value far exceeds that provided by any of the in-dividual participants, including building applications that literally get better the more people use them; and, designing participa-tory systems that harness network effects not only to acquire users, but also to learn from them and build on their contributions. From Google and Amazon to Wikipe-

dia, eBay, and craigslist, we are seeing that value is facilitated by technology, but was co-created by communities of connected users. This trends towards collaborative systems continues with newer platforms like YouTube, Facebook, and Twitter, and, we believe, will begin to spill over into new and innovative Smart Systems.

Smartphones Are Driving Inno-vations In User Experience and Sensory Systems: Many people fail to understand the significant sensor innovations that are being designed into smartphones. To-days smartphones contain micro-phones, cameras, motion sensors, proximity sensors, and location sensors. New internet-connected GPS applications also have built-in feedback loops, reporting your speed and using it to estimate arrival time based on traffic pat-terns that are no longer estimated but measured and reported in real time. Sensor-based applications can be designed to get better the more people use them, collect-ing data that creates a virtuous feedback loop that creates more usage. Sensors are dramatically improving the user experience.

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Analytics Drive New Values: Data analysis, visualization, and other techniques for seeing patterns in data are going to be an increas-ingly valuable. Sensors and moni-toring programs are not acting alone, but in concert with their human partners and an increas-ing number of machine learning algorithms. The continuing prom-ises of an Internet of Things will finally produce tangible value via a hodgepodge of sensor data con-tributing, bottom-up, to machine learning applications that gradu-ally find more patterns and make sense of the data that is handed to them.

Information Signatures Drives Awareness To New Heights: As more and more microcontrollers and sensors are embedded in everyday objects, encoded infor-mation in physical objects will also create pervasive information signatures. Seen in this way, a printed bar code, a CD or DVD disc, a house key, or even the pag-es of a book can have the status of an information signature on a network. A product on the super-market shelf, a car on a dealers lot, a pallet of newly produced

food sitting on a loading dock all have information signatures now. In many cases, these infor-mation signatures are linked with their real world analogs by unique identifiers: an ISBN or ASIN, or a part number. Take the smart grid as an example--neutral web services back-ends for energy-related sensor data will combine smart meter and power device data from homes and businesses to discover unique energy signa-tures--it is possible to determine not only the wattage being drawn by the device, but the make and model of each major appliance or any electrical device plugged into any wall socket. Signatures will combine with data fusion tech-nology to drive rapid advances in systems awareness.

The Internet Is Becoming A Real-Time Medium: Applications driven by machines and sensors demand that data is collected, presented, and acted upon in real time. The Web is no longer a collection of static pages of HTML that describe something in the world -- it is becoming a real-time communication and informa-


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tion forum for interactions. The Internet is getting faster than you might think and real time is not limited to social media or mo-bile. Much as Google has realized that a link is a vote, retailers like WalMart realized that a customer purchasing an item is a vote and the cash register is a sensor count-ing that vote. Real-time feedback loops drive inventory and avail-ability. Sensor-driven purchasing and real-time analytics is having a huge impact on the business world and customer responsive-ness.

B2C Drives B2B and Visa Versa: The Smart Systems phenomenon is not limited to consumers with smartphones. Ciscos Connected Communities initiative and its planetary skin project with NASA as well as IBMs Smarter Planet program demonstrate how the B2B world is being transformed by the sensors on the Internet. Fac-tories, refineries, steel mills, and supply chains are being instru-mented with sensors and machine analytics that we see in mobile consumer applications.

The Internet of Things and People will depend on managing, un-derstanding, and responding to massive amounts of user and machine-generated data in real time. With more users and sensors feeding more applications and platforms, innovators and devel-opers are able to tackle serious real-world problems.

ABOUT HARBOR RESEARCH

Founded in 1984, Harbor Research Inc.

has more than twenty five years of ex-

perience in providing strategic consult-

ing and research services that enable our

clients to understand and capitalize on

emergent and disruptive opportunities

driven by information and communica-

tions technology. The firm has estab-

lished a unique competence in develop-

ing business models and strategy for the

convergence of pervasive computing,

global networking and smart systems.


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Harbor Research IoT Market Opps Paper 2013

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