By Michelle Jones
Goldman Sachs (NYSE:GS) analysts continue their series about the Internet of Things with a look at the impact it will have on the Industrial sector
The Internet of Things is starting to take over all aspects of life. More and more devices and even appliances are connecting to the Internet, not only supposedly making our lives more convenient, but also making them inherently more complicated in some ways. In a report dated July 16, 2014, analyst Joe Ritchie and the rest of his team at Goldman Sachs said the Internet of Things is impacting the Industrial segment by creating a shift from hardware to software.
The economics of the Internet of Things
The Internet of Things has already had a major impact on Consumer segments over the last 15 years or so. Now it is beginning to move into Industrials, where the Goldman Sachs team thinks the economic impact will be greater. They expect the segment to make up $2 trillion of the $7 trillion total addressable market by 2020. IDC estimates that currently, the Internet of Things has an installed base of around 9.1 billion devices. They break it into three main verticals: Building Automation, Manufacturing and Resources.
The analysts compare the impact of connected devices in the Industrial sector as being similar to the Industrial Revolution. Equipment is becoming more connected and digitized as machines connect to networks, thus creating new ecosystems.
Industrial companies rethink business models
They note that there are a number of infrastructure booms ending and that competition across borders is increasing. As a result, they expect industrial companies to move from hardware to software. They say that already, fixed investment growth is moving more and more toward software rather than "traditional capital goods equipment. The result is new business models "that more seamlessly integrate hardware and software offerings."
They say these models offer more recurring revenue streams and greater penetration of smart devices, as well as inexpensive big data processing and low cost bandwidth or wireless coverage. The analysts believe acquisitions will play a major role as companies move toward building out their capabilities. They say the biggest interest will likely be in buying data management and analysis companies.
Home automation leads the way
Just as Consumer segments had a head start in adopting the Internet of Things, so they expect home automation to lead the way for Industrials. They note that homes make up more than 30% of electricity usage and naturally overlap with consumer devices like smartphones. Also there's more room for homes to digitize.
The Consumer Electronics Association estimates that about 10% of new U.S. homes currently have home automation. However, the Goldman Sachs team expects this to grow significantly due to the rapid growth in the smartphone user base. They're estimating that today's 1.9 billion smartphone users will grow to 4 billion in 2016. As home automation grows, they say the key areas of focus for Industrials will grow. Those areas include home energy efficiency, comfort and security.