How Cambrian is the Internet of Things?

Last year, SoftBank CEO Masayoshi Son likened the imminent explosion in the number of “internet of things” devices to the Cambrian explosion. When someone of that stature exudes such conviction about something, anyone would be forced to look up Wikipedia and find out what the word ‘Cambrian’ means. The “Cambrian Explosion” refers to the sudden appearance in the fossil record of complex animals with mineralized skeletal remains. It may represent the most important evolutionary event in the history of life on Earth. Internet of things has sent entrepreneurs, investors, corporates and investment bankers like me on a hunt for innovations and use cases that could turn into tangible business models, and in turn lead to investment, fund raising and M&A opportunities. Every passing day is making it easier to agree with Mr. Son.

How big is the opportunity?

The number of connected devices globally is expected to grow to over 25 billion by 2021 (approximately 2x current devices). This, however, understates the opportunity at hand as much of the existing devices are constituted of smartphones and other “traditional” mobile devices. The growth will be driven by new devices and applications which are expected to grow from ~2.0 billion to 15 billion by 2021, including massive cellular and LPWA (Low-Power Wide Area) growth and non-cellular from less than 1.0 billion today to 8+ billion units. (Source: Benchmark Co). As per NASSCOM, Global IoT industry revenue is expected to grow over 3 times from approximately USD 1.5 trillion currently to USD 3 trillion by 2020. McKinsey estimates the impact of IoT at a much higher USD 11 trillion by 2025. IDC’s corresponding number is USD 7 trillion while Cisco projects the market at USD 14 trillion by 2025. Going by even the most conservative estimates, the opportunity is truly enormous.

Figure 1: Global IoT Revenue (USD billion, NASSCOM)

While the volume of growth in IoT devices installed base is expected to be led by Consumer devices (65% in 2020), the total revenue is expected to be evenly shared between consumer and industrial devices. Key growth drivers for the Global IoT market will be growth industries such as Manufacturing, Automotive, Healthcare, Transportation & Logistics, Retail, and Agriculture. Manufacturing and Automotive are expected to see the maximum number of IoT devices deployed.

Where Does India stand?

India’s IoT journey has lagged behind that of the developed economies; however, it is catching up at a rapid pace. As per NASSCOM, The Indian IoT market is expected to reach USD 9 billion with 1.9 billion units by 2020 from the current USD 1.3 billion and 60 million connected units.
Key drivers for IoT growth in India include:
• Reducing costs of sensors, connectivity and processing
• Higher internet penetration
• Government support through policies such as Digital India and Smart Cities
• Rise of Cloud Computing
• Emergence of a large number of startups in this segment

Application vendors are expected to be the largest segment in this space, capturing ~50% share of the India IoT market by 2020. The Industrial IoT adoption is expected to be largely driven by applications in manufacturing, automotive and transportation and logistics.
Figure 2: India Industrial IOT market in 2020, USD 5 bn, NASSCOM

The IoT growth, global and Indian, will hinge on how the value chain participants tackle some key challenges.
• Unreliable connectivity
• Privacy & encryption issues
• Skillset shortage within the industry
• Enabling interoperability standards

Another major challenge so far has been, building attractive business models for financial investors. It is very difficult to illustrate ROIs for PE/ VC investors through scalable business models, for them to make significant bets. The baton of investments so far is being carried out more by corporate investors making strategic bets. This is a significant opportunity for large technology companies to pivot their business models as their revenue and margins are under pressure due to commoditization of their traditional businesses. A classic example of such a move is Cisco, which makes around 50% of its revenues from Switches and Routers as of now.

However, developments in the Network Function Virtualization (NFV) and with the emergence of Software Defined Networking (SDN); has made Cisco look beyond its traditional revenue streams to enhance recurring revenue, based on cloud-based services.

Cisco’s M&A strategy has always been a key growth engine for the company. They have made close to 200 acquisitions globally since their incorporation in 1984. This does not include the portfolio they have built through Cisco Investments and their accelerator programs. This year alone they have made acquisitions worth USD 4 billion (Viptela and AddDynamics). However, their key IoT acquisition was last year in February, when they acquired Jasper Technologies for USD 1.4 billion. Jasper was a firm that offered Industry-leading cloud-based IoT service platform which enables companies of all sizes to rapidly and cost-effectively launch, manage and monetize IoT services on a global scale. The firm has been a great fit for Cisco and has made significant progress in the last 12 months. Customer base has grown 157 percent from 3,500 to 9,000 enterprise customers. The number of devices under management has grown from 17 million to more than 40 million.
The Indian IoT ecosystem is far away from throwing up a Jasper like opportunity, at least currently. However, it would be a worthwhile exercise for all investors, entrepreneurs and global technology firms to keep a keen eye on the Indian IoT start-ups in the next decade.