The Internet of Things

The importance of the Internet of Things (IoT) in our everyday lives is increasing. It seems that every day more and more devices and even appliances are connecting to the Internet. Devices ranging from door locks to toll booths to refrigerators are Internet-connected, smartphone accessible and responsive. The increasing connectivity of once inert objects represents the next logical step in the growing importance of the Internet. Ultimately it will force companies large and small to transform dramatically.

Over time, technology’s role in our everyday lives is likely to expand even more as even the clothes on our backs could be connected to the IoT. For individuals, an increasing number of smart watches and fitness bands are already available. One can also purchase eyeglasses with wireless connectivity. The day that our smartphones will be integrated into the dashboards in our cars is also not that far off, as technology companies have already signed deals with the major automakers. In order for these initiatives to succeed, all of the connected items will need to get much smarter and much cheaper.

Internet and the Industrial Sector

While the IoT is already having a major impact on consumer businesses, it is still in the early stages of moving into the industrial sector. Goldman Sachs believes the economic impact in this sector will be even more significant than in the consumer sector. They forecast that by 2020 the segment will make up $2 trillion of the $7 trillion total addressable market, which consists of revenues from the sale of connected devices and services, and revenues from related services. The International Data Corporation (IDC) estimates that the IoT’s current installed base is roughly 9.1 billion devices.

Internet and Home Automation

Home automation is expected to drive growth for industrial companies. According to estimates from the Consumer Electronics Association, approximately 10% of new US homes currently have home automation. The sharp rise in the smartphone user base (Goldman Sachs estimates that today’s 1.9 billion smartphone users will more than double to four billion in 2016) is likely to drive increased home automation. Key areas for growth include home energy efficiency, comfort and security.

Internet and Software

Corporations have already started to move away from hardware and more toward software. This move also changes how companies spend their capital. They are allocating greater sums to software rather than fixed investment in property, plant and equipment. In the past, we have highlighted how companies have been hesitant to increase their capital expenditures. To a certain extent, we believe the movement from hardware to software is impacting how companies allocate their capital. The outcome is new business models that are able to integrate hardware and software offerings more seamlessly.

Internet and Investments

We believe the growth in the IoT of things will continue. When evaluating potential investments for inclusion in client portfolios, we have taken the trends discussed above into consideration. This has led to the avoidance of companies that produce more traditional electronic hardware. At the same time, we favor companies that can benefit from increased demand for the applicable computer chips and those that can benefit from growth in smartphone sales.