Despite the challenges ahead, the semiconductor industry considers the Internet of Things (IoT) to be one of the three biggest growth drivers in the upcoming years, according to a joint study conducted by McKinsey & Company and the Global Semiconductor Alliance. However, this means semiconductor companies may have to rethink their traditional business models, according to the report.
Based on the survey of 229 semiconductor executives at GSA member companies, the report shows that they had mixed feelings about the IoT’s potential. The report finds that 48 percent of respondents believe IoT will be one of the top three growth drivers, while 17 percent ranked it as the number one growth driver. Thirty-three percent of respondents believe it will be one of many growth factors for the industry.
The report, The Internet of Things – Opportunities and Challenges for Semiconductor Companies, reveals that semiconductor companies, in general, expect the IoT industry to grow rapidly in the long term; however, the timing and growth segments vary by company.
Despite these differences, semiconductor companies are moving forward with big investments not only in research & development, but also mergers and acquisitions to gain a faster foothold in the IoT industry. So far mergers and acquisitions in 2015 related to the IoT total $14.8 billion to purchase 39 IoT-related companies, exceeding $14.3 billion spent on 62 companies in 2014, according to a new 451 Research report.
The 451 Research report finds that semiconductor-related acquisitions were the bulk of the buys in 2015 with ARM, Intel and NXP each announcing two or more deals related to increasing their positions in IoT. The largest deal was NXP’s $11.8 billion acquisition of Freescale Semiconductor.
Other deals cited by 451 Research include Amazon, ARM, Brocade, PTC, Silver Spring Networks and British Gas. ”While the Internet of Things is still in its infancy in terms of industry adoption, the deal-making accelerates unabated, and we see no end in sight. The IT service and infrastructure leaders of the future will require broad and deep competencies in IoT, and those bets are being made now," said Brian Partridge, Vice President of the 451 Research mobility team, in a statement. “The 2015 numbers left little time to even question our prediction that market forces would accelerate deal activity beyond 2014.”
Many industry research firms, including ABI, Gartner, IDC and IHS, forecast the number of connected devices to be in the range of 20 to 30 billion by 2020. Looking at the semiconductor industry, alone, the growth potential is huge. IC Insights recently forecast that IoT-related semiconductor sales is expected to grow 19 percent in 2015, reaching $5.6 billion.
Big players, like IBM and Cisco, are also making big investments. IBM recently announced its plans to form a new IoT division and spend $3 billion over the next four years to help companies “build IoT solutions.” On the heels of this announcement, IBM teamed up with Texas Instruments (TI) “to develop a secure, cloud-hosted provisioning and lifecycle management service for IoT devices.”
In addition, there is a host of companies in the electronics industry that are collaborating and sharing intellectual property to drive IoT innovation. One example is Panasonic, which pledged to provide royalty-free access to software and patents in its product ecosystem to speed the development of IoT software and services. It will also increase its intellectual property contributions to the AllSeen Alliance, a cross-industry nonprofit open source consortium.
Last year, technology leaders, including Atmel, Broadcom, Dell, Intel, Samsung, and Wind River, formed a new consortium - Open Interconnect Consortium (OIC) - to develop an open and secure connectivity framework for the IoT to ensure the interoperability of devices.
So when should we expect a surge in demand? First, the industry has to meet three factors: “solid technology, a strong market, and a suitable ecosystem, including a sufficient number of product options, developer tools, and adequate infrastructure—for example, connectivity,” according to Mckinsey’s research in other high-tech sectors. GSA said “almost all of the executives interviewed said that IoT applications and verticals satisfied these three requirements to varying degrees.”
GSA defines “the IoT as a network containing all smart devices with some sort of sensing mechanism that can communicate via the Internet with other smart devices or the cloud, without human interaction.”
Despite the positive forecasts, there are challenges ahead. The GSA/McKinsey report identifies six key issues that could be challenges for semiconductor companies. These include security and privacy of user data, building customer demand in a fragmented market, lack of consistent standards, a fragmented market with many niche products, extracting more value from each application, and technological issues that affect the IoT’s functionality.
The report takes a look at each issue separately as follows:
- Security and privacy: While the survey respondents believe the technology is available to secure the IoT, they said the challenge is using available technology to implement end-to-end security solutions for the entire IoT stack—cloud, servers, and devices.
- Difficulty building customer demand in a fragmented market: The report finds that semiconductor companies can have an indirect role by helping developers create innovative applications or by providing assistance to businesses that want to use IoT products and services, including non-traditional clients like start-ups and businesses outside the technology sector.
- A lack of consistent standards: The study recommends that semiconductor companies focus on standards that are likely to gain widespread adoption, but plan for alternatives, and actively work with industry associations and other groups that are developing IoT standards.
- A fragmented marketplace with many niche products: Most applications don’t justify a single chip specifically targeted at them; however, semiconductor companies could generate the volumes needed “by classifying IoT devices into archetypes based on their specifications” so a single platform would cover each archetype.
- Extracting more value from each application: Many survey respondents believe that they would not extract the full value of the IoT if they only focused on silicon. They cited software, security and systems integration as the areas with the highest interest.
- Technological issues that affect the IOT’s functionality. The good news is that two-thirds of respondents believe technological issues present little to no challenge to the success of IoT. The remainder were split between those who thought technical issues were above average in importance and a major challenge. Respondents believe the most critical technological innovation is lower power consumption.
The recommendation by report analysts is that semiconductor companies “need to reevaluate all aspects of their businesses and make some radical changes.” The three key things they must do are: find the right niche, develop a strategy to seek value beyond silicon, and revisit the corporate operating model. Click here for the executive report.