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Exploring the Internet of Things

Jose Zepeda

Apr 19, 2017

The evolution of technology has increased our ability to store and analyze seemingly meaningless information in ways that increase productivity and expand our knowledge of the world around us.

Technology has also provided business leaders with the ability to paint more effective ways forward by using predictive models. This desire for companies to find use for the mass amounts of data that is collected has caused the emergence of a new industry, the “Internet of things” (IoT). In order to understand the importance of this emerging industry in helping companies drive revenue, it’s important to know what “big data” and IoT are as well as the industries that are benefiting.

IoT is the networking of physical objects through embedded sensors and other devices that transmit information about the object. These devices come in all shapes and sizes — from small items like fitness wristbands to larger ones such as jet engines. While the technology sector has exploded in popularity in recent years, the wheel is not being reinvented with the emergence of IoT — this was already a concept and has been possible since the late 1990s, or at least the necessary tools were already in existence. Increasing demand for technologies such as smart phones was one of the main reasons the prices of microchips and sensors needed to feed the IoT were able to drop 25 percent year over year since 2007. Before the financial crisis in 2008, demand for smartphones was around 170 million, while last year, nearly 1.5 billion were sold, according to Gartner research.1 This is one of the many reasons the number of installed sensors has increased from 10 billion units in 2013 to a projected 30 billion installed units by 2020.2

In the agriculture sector, the new age is combining with the old as John Deere, the biggest name in farming equipment, is connecting its famous yellow and green tractors to the Internet and using data to display key information (e.g., crop yields). John Deere is also developing self-driving tractors that would feed real-time information in conjunction with satellites, with the goal of improving production and minimizing cost — all while also preserving resources.

The graph below shows the amount of daily data that is projected to be generated from the agriculture industry as a result of the adoption of big data as a business driver.

Estimated Amount of Data Generated by the Average Farm per Day

The oil and gas industry is realizing the benefits of IoT, as well. According to research from Cisco, the savings provided from analyzing rig data can increase the annual profit of a $50 billion company by 11 percent. The majority of the benefit of analyzing all of the data is cost reduction, 72 percent, while 28 percent results in increased revenue by optimizing level of effort through the anticipation of equipment failures and maintenance requirements, minimizing downtime.3

This increased adoption of IoT has benefited the semiconductor industry and also explains why much of the industry's outlook was attributed to the increase in performance. In a space dominated by companies such as Intel, Qualcomm and Samsung, semiconductor players are also able to profit indirectly from IoT because data generated from the billions of devices they supply needs to be turned into big data, and users will require greater storage capacity — thus increasing the demand for the technologies they supply.

The graph below shows the performance of the S&P Semiconductor Select Industry Index since its inception in March 2011. The increase in smart technology and the role the semiconductor industry plays as a supplier to new IoT technologies and innovations have certainly impacted the performance seen during the last five years.

Semiconductor Select Industry Index

Tech giants like Amazon, Google, Cisco and IBM have become integral players in the IoT space. Amazon created Alexa and the Dash Button for the consumer side of IoT and created Amazon Web Services (AWS) IoT for business. AWS was created to help developers build, manage and analyze their own IoT devices. IoT in the form of wireless communication and data storage has now come to the forefront as a necessity for businesses to remain competitive. Amazon realized this during its infancy and used a model called Six Sigma, which is a data-driven process that defines, measures, analyzes, implements and controls. This process was created in the mid 80s and was made more effective by Amazon's big data collection rather than relying on manual data collection.

Amazon itself is proof of the power of implementing IoT to drive business. According to research from Ingram Cloud Director of Global Cloud Product Management Louis Columbus, companies that have adopted big data have experienced 53-percent greater growth than those that have not. Additionally, 73 percent of multimillion-dollar companies say the complexity of the stored data requires big data analytics to gain better insight from the information being stored.4 How did Amazon’s AWS perform? In the fourth quarter of 2016, AWS reported $3.53 billion in revenue, up 47 percent from the previous year. The AWS arm continues to be a major focus for Amazon — AWS had a profit margin of 25 percent, compared to the companywide operating margin of merely 3.2 percent.5

The value that IoT brings has already been seen in various industries, and the benefit to the global economy is projected to be between $4–11 trillion by 2025, according to McKinsey&Company.6 Companies that decide to gather, store and tackle the challenge of interpreting the information stand to benefit the most by maintaining competitive advantages.

We are currently in a period in which we are able to collect more information than ever before and have developed the necessary skills and tools to turn that information into action. Being able to use all available resources also translates to the decisions we make in our personal lives and with our investments. The next time you sit down with your advisor, remember that the more you can share, the more tailored the solution will be to your financial situation.

 

1 “Gartner Says Worldwide Sales of Smartphones Grew 7 Percent in the Fourth Quarter of 2016.” Gartner, Feb. 15, 2017.
2 Harald Bauer, Mark Patel and Jan Veira. “The Internet of Things: Sizing up the opportunity.” McKinsey&Company, December 2014.
3 Joel Barbier, Robert Moriarty, Andy Noronha, Kathy O’Connell, Nicolaas Smit. “A New Reality for Oil & Gas: Complex Market Dynamics Create Urgent Need for Digital Transformation.” Cisco, April 2015.
4 Louis Columbus. “Businesses Adopting Big Data, Cloud & Mobility Grow 53% Faster Than Peers.” Forbes, Oct. 17, 2015.
5 Trefis Team. “Amazon Web Services: 2016 in Review.” Forbes, Dec. 29, 2016.
6 Harald Bauer, Mark Patel and Jan Veira. “The Internet of Things: Sizing up the opportunity.” McKinsey&Company, December 2014.

 

Disclosures

Definition of Index: S&P Select Industry Indices are designed to measure the performance of narrow GICS® sub-industries. The index comprises stocks in the S&P Total Market Index that are classified in the GICS semiconductor sub-industry.

Asset allocation/diversification of your overall investment portfolio does not assure a profit or protect against a loss in declining markets. Investing in a non-diversified fund that concentrates holdings into fewer securities or industries involves greater risk than investing in a more diversified fund.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Securities offered through 1st Global Capital Corp. Member FINRA, SIPC. Investment advisory services offered through 1st Global Advisors, Inc.

 

Jose Zepeda is an IMS trader in the Capital Markets Group at 1st Global. In this role, he uses his industry experience to assist with advisors establishing new accounts, to implement assets in accounts and to make trades to rebalance accounts as needed. He also works on the brokerage side, executing trades for non-managed accounts.

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1st Global Capital Corp. is a member of FINRA and SIPC and is headquartered at 12750 Merit Drive, Suite 1200, in Dallas, Texas 75251; 214-294-5000. Additional information about 1st Global is available at www.1stGlobal.com.

 


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