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Internet of Things

The IoT opportunity – Are you ready to


capture a once-in-a lifetime value pool?
Chris Ip (叶远扬)
Hong Kong IoT Conference 21 June 2016

CONFIDENTIAL AND PROPRIETARY


Image source: https://www.lsr.com/ Any use of this material without specific permission of McKinsey & Company is strictly prohibited
THE IoT PLATFORM OPPORTUNITY

The Internet of Things (IoT) powers a whole ecosystem of


use cases and “Things” are only one part of it

Connected Home Smart


Lighting Automation Metering

Smart Hospital Health Smart


Appliances Management Monitoring Clothes

Manufacturing Preventive Enhanced


Monitoring Maintenance surveillance

SOURCE: McKinsey McKinsey & Company 1


SOURCE: Source McKinsey & Company 2
THE IoT PLATFORM OPPORTUNITY

The Internet of Things (IoT) has a potential economic


impact of 2.7-6.2 trillion USD until 2025 Range of sized potential
economic impacts
Impact from other
potential applications
(not sized)
$ trillion, annual Low High
X–Y

Mobile Internet 3.7–10.8

Automation of
5.2–6.7
knowledge work

Internet of Things 2.7–6.2

Cloud technology 1.7–6.2

Advanced robotics 1.7–4.5

Autonomous and near-


0.2–1.9
autonomous vehicles
Next-generation
0.7–1.6
genomics

Energy storage 0.1–0.6

3D printing 0.2–0.6

Advanced materials 0.2–0.5


Who will
Advanced oil and gas
0.1–0.5
capture this
exploration and recovery
opportunity
Renewable energy 0.2–0.3

SOURCE: McKinsey Global Institute analysis McKinsey & Company 3


IoT is quickly becoming ubiquitous…
Projections for world population and number of Projections for human to device and device to
IoT devices device data consumptions1
Billions ZB per year
35 100,000
Device
# of devices to device
30
10,000
25
Human
1,000 to device
20

15 100

10
Human
population 10
5

0 1
2015 2016 2017 2018 2019 2020 2015.0 2017.5 2020.0 2022.5 2025.0

Explosive growth in device to device traffic will introduce new


challenges in areas such as bandwidth, management and security

SOURCE: World Population forecast (Census.gov), IDC IoT forecast


McKinsey & Company 4
…and will unlock tremendous value across industry
verticals
Economic value creation
$ Trillions
679
563

360
275 250 237 230 209
196
157 144 112 98
60

Verticals

Infrastructure
Public sector
Automotive

Oil and gas


Agriculture
electronics
Healthcare

Aerospace
Consumer
Advanced

Banking

Mining
goods

Retail
TMT

TTL
Consumer Enterprise

SOURCE: McKinsey Global Institute IoT KIP


McKinsey & Company 5
IoT’s value creation potential is based on its ability to solve
traditionally hard business problems (1/2)
▪ ~50% adherence to recommended HC remote monitoring ▪ 60%+ of road accidents Autonomous vehicle
treatment among heart patients $0.2 – 1.1T attributed mostly to human $0.4 – 0.5T
Sample Sample
Business ▪ Non-adherence in chronic coronary artery Value at stake error; safety is top priority for Value at stake
Business
Problem patients increases risk of hospitalization car manufacturers
Problem
by 10-40% and mortality 50-80% ▪ 1/3 of new car buyers want their
car to be autonomous
▪ Treatment adherence linked to 50%
decrease in treatment costs for cardiac ▪ Power autonomous vehicles
How IoT patients with advanced ADAS modules
How IoT
solves can reduce accidents by 40%
the ▪ Early detection of complications such as solves
– Features include vehicle-
rapid gain in weight in a patient with CHF the
problem to-vehicle
can lead to prevention of acute pulmonary problem
communication, computer
edema, and cardiac arrest
vision, and machine
intelligence

679
563

360
275 250 237 196 230 209
157 144 112 98 60

Verticals
Infrastructure
Public sector
Automotive

Oil and gas


Agriculture
electronics
Healthcare

Aerospace
Consumer
Advanced

Banking

Mining
goods

Retail
TMT

TTL

Consumer Enterprise

SOURCE: MGI IoT KIP


McKinsey & Company 6
IoT’s value creation potential is based on its ability to solve
traditionally hard business problems (2/2)
▪ Poor air quality increasing health care Pollution management ▪ Condition based monitoring Asset monitoring
costs 0.3 – 0.6T needed to reduce costly $0.2 – 0.5T
Sample
– 90% of people in urban centers breathe Value at stake Business
operating costs Value at stake
Sample
air that fails to meet safety
Problem
– Equipment downtime can
Business
requirements cost up to 5% OP for
Problem
– ½ of world's urban population exposed plants/ manufacturers
to pollution over 2.5 times the WHO
recommended frequency ▪ Early detection to prioritize
and optimize maintenance
How IoT resources, and increase unit
▪ Reduce pollution by 10-20% through
solves
How IoT availability due to shorter down-
efficient energy consumption
solves the times
▪ Prevent deaths attributed to poor air quality
problem – Maintenance cost
the
through network of sensors monitoring air reduction (10%-40%)
problem
quality in real time – Downtime reduction (50%)

679
563

360
275 250 237 196 230 209
157 144 112 98 60

Verticals
Infrastructure
Public sector
Automotive

Oil and gas


Agriculture
electronics
Healthcare

Aerospace
Consumer
Advanced

Banking

Mining
goods

Retail
TMT

TTL

Consumer Enterprise

SOURCE: MGI IoT KIP


McKinsey & Company 7
Resulting in a large IoT market size, of which a significant
component is ICT

Total IoT market size 2020 ICT market size CAGR OP


$ Billion (Base case – Upside), $ Billion (%, 2015-20) (%, 2020)
1427-3781 Solution
59-176 7-20% 10-35%
services1
227-581

Security2 34-36 7-19% 10-30%

SW infra-
80-219 7-20% 15-30%
structure & apps

1200-3200 10-29
505-900 Connectivity 8-19% 0-10%
205-300
ICT Hardware 44-121 8-19% 0-10%
Other 300-600
Total 227-581 7-19% 8%
2015 2020

1 Solution services not considered technical products


2 $3-$6B is IoT security and $25-$35B is for mobile security

SOURCE: McKinsey IoT KIP, IDC, Gartner


McKinsey & Company 8
IoT ICT can be defined as a technology stack…
Tech stack Description Notable companies

Endpoint protection & ▪ Spans entire technology stack and includes multifactor identity and authentication management and
Security endpoint protection
IAM

Enterprise & ▪ Web or mobile applications that leverage IoT data and algorithms to solve specific business or
consumer apps consumer needs
Apps
Analytics and ▪ Advanced analytics solutions that can aggregate, analyze and display data from millions of nodes to
visualization extract insights

▪ API services (e.g., create, maintain and analyze) that enable integration and communication with 3rd
API management party solutions
SW
infrastru
Enablem- ▪ Libraries, algorithms and engines that makes App development on IoT cloud platform possible
ent platf- App engine
cture &
orm
apps
▪ Management tool to remotely control and manage the access, configuration and OTA updates of IoT
Device mgmt devices

▪ Management of asynchronous data collections/streams from millions of nodes as well as real-time


Data processing data processing
Cloud
infra-
structure ▪ Storage infrastructure that can accommodate Zettabytes of unstructured data
Data storage

▪ Protocols and services for long-haul communications over 4G/LTE, GPS and other networks
Backhaul
Connectivity
▪ Protocols and/or services for short-range and machine-to-machine communications
Local

Devices/ ▪ Custom packaging, particularly those designed for harsh and rugged environments
Packaging

▪ OS, SDK, and other tools that allow OEMs and developers to easily tap into the sensor’s features
Hardware On-device software and capabilities

Board-level ▪ Sensors, actuators and other components that collect and relay contextual / real-world data
components

SOURCE: Expert interviews


McKinsey & Company 9
… and each layer can be a unique control point for Sample analysis on
following pages
different verticals
Tech stack Stack components
IoT verticals
Endpoint protection & Threat Identity &
Security .Anti-virus
IAM detection access mgmt

Healthcare
Enterprise & Self-service
App store
consumer apps portal / UI
Apps Automotive
Analytics and Data Machine
Hadoop Rules engine Advanced
visualization orchestration learning
electronics
API publishing Tokenization / API analytics / Developer
API management TMT
and discovery authentication reporting tools/ portal
SW
Enablem- Consumer
infrastru Search & User Blob Algorithms
ent platf- App engine SDK goods
cture & query authentication management engine
orm
apps
Retail
Registration Policy mgt. & Configuration Patching/
Device mgmt Authentication Log tracking
and Pwd mgt Key rotation mgt Updates
Public sector
Protocol Data caching /
Data processing Data validation Data logging
Cloud normalization storing Agriculture
infra-
structure Non-relational Operational Data backup & Orchestration
Data storage Relational DB Data indexing Infrastructure
DB data stores DWH & security

2G/3G/4G Oil and gas


Backhaul LTE-U Wired
LTE
Connectivity TTL
802.15.4
Local Wifi BT NFC Infrared DSRC
(Zigbee)
Aerospace
Devices/
Packaging Banking

SDK (inc. libs. Firmware, driv Mining


Hardware On-device software HDK RTOS OS API
message bus) ers

Board-level Secure boot Data caching /


Processors Sensors / AFE Modem Actuators
components loader storing

SOURCE: Expert interviews


McKinsey & Company 10
THE IoT PLATFORM OPPORTUNITY SYMBOLIC VALUES

In the past decade, digital native players build-up “Mega


Platforms” and thus dominated the consumer industry
Player Mega platform Indicative sizing
… products
A platform for all
~470 m currently listed
physical products on Amazon.com

A platform to make … currently existing


the www searchable ~1 bn websites in the
for everyone world wide web

A platform for the … users currently


interactions between
people
~1.6 bn registered on
Facebook

A platform for the … current number of


data of Internet of
Things devices ~10 bn connected Internet
of Things devices

SOURCE: McKinsey McKinsey & Company 11


THE IoT PLATFORM OPPORTUNITY ESTIMATION

… while the IoT gives rise to the opportunity to establish a


new “Mega Platform”– who will capture that?
Estimated Platform Revenues in USD billions
IoT value pool1

100
Who will
capture this
~107 ~75 ~18 value pool
1 Assuming 10 USD revenue per connected device with 10bn IoT devices

SOURCE: McKinsey McKinsey & Company 12


IoT PLATFORM MECHANICS

Digital native players used their platforms to tap into a


huge 3rd party ecosystem and share data via open APIs
Digital native player have established a whole ecosystem Where they can attract thousands of
around their platforms (e.g. through APIs1) additional SW development resources

Number of accessible SW resources in


Player Platform function externally available Google’s ecosystem (FTEs)

▪ Access to user data for third-party


applications (e.g., songs requested Android ecosystem
over Spotify)

▪ Photo, video, and music recognition


for Amazon's Fire Phone

▪ Sensor data and thermostat


regulation (e.g., cooperation with
~400,000
Daimler to switch on heating when
driver is approaching home)
x20
▪ Development and build environments
for Android operating system
~ 20,000
1API = application programming interface

SOURCE: McKinsey team analysis; Google annual filings 2014 McKinsey & Company 13
IoT PLATFORM MECHANICS

Several players are already establishing their


platforms, both vertically and horizontally along the IoT
Stack While successful
approaches and
business models are
yet to be
identified…

… the IoT opportunity


is being pursued by
many relevant
players in the
technology space
(taking aggressive
investments)…

…creating a very
competitive and
highly dynamic
arena, and

…requiring to move
fast

Source: IDC, 2015; Press search McKinsey & Company 14


IoT PLATFORM MECHANICS

To build up the required speed, we can build on ideas


from venture capital and leading technology businesses
Run like hell
Significant benefit to fast movers, “winner takes all” dynamics
deliver superior returns

Best teams only


Bring the most talented resources on board. No second chances
to revisit the team. Senior advisor allow to learn from experience

Hyper-incentives
Nothing is sure, yet if goal is achieved, personal reward is
disproportionate

Results ahead of cash


Stage-gates for investment rounds instead of yearly budget. If
results are met, financing continues. If not, it is over

End-goal focus
Everything geared towards reaching exit value. Simple
governance

SOURCE: McKinsey McKinsey & Company 15


APPROACH TO DELIVER THE IoT PLATFORM

Delivering an IoT platform is a staged approach – with


customer-facing results early on through MVPs1
MINIMUM VIABLE
CONCEPT DEFINITION PRODUCT DEVELOPMENT SOLUTION SCALING

Platform strategy Business case Data market place

BUSINESS Use cases Monetization model Roll-out


CONCEPT
Organization Go to market strategy
Talent & capability

Tech stack MVP1 development


TECHNOLOGY
BUILDING Architecture concept Development approach
BLOCKS
Cloud environment
overview

Partners Vendor selection APIs & SDKs


ECO-SYSTEM
Ecosystem seeding Standards
1 Minimum viable product

SOURCE: McKinsey McKinsey & Company 16


APPROACH TO DELIVER THE IoT PLATFORM

Make vs. Buy: Tesla builds its automotive IoT platform


in cooperation with several technology partners NOT EXHAUSTIVE
Strategic partners

Link to other platforms

Apps and Ecosystem Link

Core services and technical


Tesla Building Blocks
Automotive
Platform Big Data and Analytics
Platform

Infrastructure and
Hosting Provider

Connectivity Layer

Head-unit

HMI and in car features

Middleware and runtime

Sen- Actu-
ECUs …
sors ators

SOURCE: McKinsey, Press releases McKinsey & Company 17


HOW TO ENTER THE IoT PLATFORM GAME

Three ways for a company to enter the IoT game

Initiate own IoT


platform build-up by
setting up minimal
platform, first use
cases, and ramp-up
Ally with other ecosystem by inviting
partners and
companies within or Join existing
customers
beyond the industry in a
ecosystems by
coopetition model defining a clear value
to jointly build-up an IoT
proposition to find a
platform focusing on
value-adding spot
the respective
products

Independently of the chosen approach, current industry dynamics


show that future leaders in the IoT game need to act now
SOURCE: McKinsey McKinsey & Company 18
IoT PLATFORM MECHANICS

A lively ecosystem is essential as consumers don’t care


about platforms, but really care about killer applications

Apple App Store

Consumer following with Consumer following with breadth of In addition to


iTunes music application book/fashion portfolio
consumer
Expansion to App Store with Expansion offering 3rd parties to sell on
pull,
iPhone launch platform
attractiveness
to developers
needs to be
ensured with
Consumer following with Google showcases android capabilities sufficient ease
initial consumer-to- to lift the bar with reference devices of use and
consumer offering Expansion of android to other phones monetization
Expansion to B2C to be the largest mobile operating
marketplace system today
options

SOURCE: McKinsey McKinsey & Company 19


IoT PLATFORM MECHANICS

Speed is critical - several players are currently building own


IoT platforms and are creating a very dynamic environment
Industrial
IoT Technology stack Smart home Healthcare automation Automotive Smart grid

Implementation
Amazon Jumps Into
Endpoint protection & Internet Of Things
Security
IAM Frenzy With New Cloud
Apps Platform For Devices
(Enterprise, consume Like Cars
Apps r)
Analytics and
visualization
Samsung launches
API management SmartThings Internet of
Things hub
Enablement
App engine & tools
platform
Device mgmt &
registration Cisco to pay $1.4 billion
for Internet of Things
Data collection &
Software firm Jasper
management
infra-
structure Data storage/ cloud
infrastructure
AT&T's plan for the
Backhaul Internet of Things goes
Connectivity way beyond the network
Local

Devices/Packaging &
software
Hardware IBM Watson Platform
Board-level Puts Algorithm-Driven
components Business to the Test

SOURCE: McKinsey McKinsey & Company 20


HOW TO ENTER THE IoT PLATFORM GAME

Key success factors for delivering the IoT platform help


to avoid common pitfalls
“Spin-in” model, start-up like incentives and speed:
nothing is guaranteed but reward is high for successful
individuals

M&A needed, yet will not come “in a box”: inorganic


moves required to build capabilities, but no single M&A
move will solve the puzzle and through-the-roof multiples
limit attractiveness

Significant talent build-up is a must, but it will take


time: different model required to bridge 12-18 months gap
Traditional “sequential” approach will not work: need
a different approach, agile and multi-front
IT is not the bottleneck: don’t aim to build everything in
house, leverage “frenemies” to accelerate and bridge
capability gaps

Passengers on the ship: IoT ecosystem battle is about to


start, need to win 3rd party players to your platform

SOURCE: McKinsey McKinsey & Company


Chris_Ip@mckinsey.com

http://www.mckinsey.com/global-themes/internet-of-things

McKinsey & Company 22