The Unstoppable Rise of the Internet of Things

Of all the relatively new tech terms, Internet of Things (IoT) is perhaps the least understood, especially among non-techies. (This newsletter is aimed at non-techies).

I recently explored half a dozen books on digital strategy and related themes[i], and none of them had a satisfactory, or any, definition of Internet of Things. Some did mention Internet of Things or IoT a few times in the book; some had good discussions of IoT applications, but none had a definition of the term. It’s like talking about electricity; everyone knows what it is, and no definition is needed. An excellent book on digital strategy defined the term as follows:

“The IoT refers to the hyperconnectivity of objects with the internet.”

This is largely correct but does not say much about what the Internet of Things is. (The glossary at the end of the book does provide a good definition of the term taken from oracle.com).

So, what is IoT?

Is it a device? A technology? A new product category?

It’s all of them. Let me explain.

It’s a network of devices. The Internet of Things, also known as smart (or intelligent) machines, is a network of physical devices (“things”) with digital technologies (software and sensors) embedded into them and connected to the internet. IoT devices can perform a variety of physical and intellectual tasks. An important characteristic of IoT devices is that they can communicate with their network and act on commands independently of human action. Some examples of everyday IoT devices are Amazon’s digital assistant, Alexa, smart watches, autonomous vehicles, smart thermostats, and smart home security systems. And there are billions of them in existence. As of 2024, there are an estimated 17 billion IoT devices worldwide, increasing to 29 billion by 2030.

It's a technology. According to Amazon AWS, IoT is the technology that facilitates communication between devices, the cloud, and the devices themselves. Technology is what makes connected devices smart. It includes software to facilitate communication with the cloud and between the devices themselves, collect data from sensors, and perform data analysis within the IoT network in real time.?

It’s a new product category. Until recently, business scholars talked about physical products and digital products. There are, in fact, three categories of products: physical, digital, and physical-and-digital (or the IoT).

Even though the digital world has existed for a very long time, the domain of Internet of Things is a relatively recent phenomenon. The term Internet of Things itself was first coined by Kevin Ashton in 1999. The world of IoT grew slowly at first but exploded in the 2010s and 2020s.

Why distinguish between the three product categories? The economics and strategy of the three types of products are mostly different from each other.

Economic Characteristics of Physical, Digital, and IoT Products

The typical assumptions used in the economics of physical goods businesses, such as resource scarcity, decreasing returns to scale, and non-zero marginal costs, do not hold for digital goods businesses. The economic principles underpinning digital businesses include, among others, non-rivalry, network effects, increasing returns to scale, and zero marginal cost.

Rivalry, in economics, means that a product can be used by only one individual at the same time. This is true for all physical products. On the other hand, Microsoft 365, a digital product, can be used by any number of people anytime, anywhere, irrespective of who else is using it at the same time.?

A product has network effects if its value to users grows exponentially as more individuals join the network. The existence of network effects implies increasing returns to scale. This law is also known as Metcalfe’s Law and applies to products connected to a network, such as the telecommunications network and the internet. Strictly speaking, Metcalfe’s Law states that

the value of a telecommunications network is proportional to the square of the number of connected users of the system.

The marginal cost of production (and distribution) of digital products is practically zero, which implies that a digital products company can produce an inexhaustible supply of its goods and have no inventory issues. It may have cost Microsoft a billion dollars or more to develop and upgrade the 365 software over its many generations, but creating an additional copy of the software costs Microsoft practically nothing. Also, shipping an additional copy of the software to a customer over the internet costs nothing. And the quality of a digital product does not decline as more units are produced.

The core economic characteristics of digital products are: Zero marginal cost, non-rivalry, network effects, inexhaustible supply, and customizability. Physical products have none of these characteristics and IoT products have only two of these characteristics, namely, network effects and limited customizability.

Enter the IIoT

Industrial Internet of Things (IIoT) or Industrial Internet, terms coined by General Electric in 2012, refer to physical products such as industrial equipment and vehicles embedded with sensors, software, and connectivity that enable them to connect and exchange data with other connected devices over the internet.

Major industrial companies like GE and Bosch have made industrial internet a core foundation of their business through subsidiaries like GE Digital and Bosch.IO, respectively. General Electric, as a part of its digital transformation, invested over a billion dollars to restructure the company almost completely as an industrial internet business. Now, GE Digital offers digital and IIoT solutions for dozens of industries, including automotive, aviation, power generation, utilities, and pharmaceuticals. The Bosch Group offers connected products and services for both consumer and industrial markets. Bosch.IO follows a 3S Strategy—sensors, software, and services—for practically everything the company makes, with most hardware sold by the company being transformed into IoT devices.

IIoT vs. IoT

What is the difference between the Industrial Internet of Things (IIoT) and the Internet of Things (IoT)?

The Industrial Internet of Things (IIoT) refers to connected devices and machines in high-stakes industries like oil and gas, power generation, building and construction, and healthcare where unplanned downtime can be very costly, even life-threatening. In the IIoT world, machines and systems are designed to operate semi-independently with minimal human intervention—intelligently responding in real-time to changes based on information received—thus reducing the cost and risk of human error. The IIoT enables remote monitoring of equipment, predictive analysis and maintenance, and automation of a machine’s performance. (IIoT is a subset of IoT).

The Internet of Things (IoT), on the other hand, tends to apply to consumer industries such as smart home appliances, smartphones, and heart-monitoring fitness bands. The IoT devices have similar characteristics as the IIoT but do not generally create emergency situations if downtime occurs. The IoT is typically employed in business-to-consumer (B2C) situations, whereas the IIoT devices operate in the business-to-business (B2B) world. The worldwide market for IIoT is estimated at $866 billion as of 2024 and is likely to grow to $3.35 trillion by 2030. The worldwide market for IoT in 2024 is estimated at $1.39 trillion, growing at a CAGR of 12.27%? to reach $2.23 trillion by 2028. (Recall that IIoT is a subset of IoT).

IIoT and manufacturing

As the population of IoT devices reaches critical mass, manufacturing is already going through a major transformation—how products are made, delivered, and used by customers. Internet of Things, combined with AI, is improving operational efficiencies through better visibility and control of operations. For instance, if a machine breaks down, in-built sensors alert operators about the problem, even triggering a service request—without human intervention. Beyond making manufacturing operations more efficient, IoT-enabled robots can work in dangerous conditions, keeping workers safe.

Some specific uses of IIoT in manufacturing are discussed below. (Refer to Chapter 8 of my book, Global Meets Digital, for a more in-depth discussion of IIoT in manufacturing.)

Remote monitoring and diagnostics. The sensors in IIoT equipment offer continuous updates of its operating status and can remotely diagnose a system, change settings, and halt a process or activate equipment as needed.

Asset tracking. IIoT-based asset tracking systems include identifying the location of an asset and its status, thus removing the time and cost involved in manual tracking of the asset and safeguarding against human error. For instance, sensors installed in vehicles, shipping crates, or construction equipment permit the organization to continuously track the physical location of assets—whether at a job site or on the move.

Automatic fulfillment. Asset tracking throughout the supply chain permits the automation of fulfillment centers and reordering processes. Sensors help monitor stock levels in real time and trigger a reorder, without human intervention, when inventory levels become low or reach a certain level.

Compliance monitoring. Sensors in IIoT equipment not only help monitor equipment conditions (such as temperature and power consumption), but they can also be used for complying with regulations, such as occupational safety and health regulations, as well as any required guidelines.

Risks

Despite their numerous benefits, the billions of connected devices worldwide are vulnerable to hacking and misuse. The growth of IoT raises cybersecurity, privacy, and ethical concerns. Dealing with such issues is beyond the scope of this newsletter.

Key Takeaways

1. In today’s world, there are three kinds of goods: physical, digital, and goods that are both physical and digital and connected to the internet. Internet of Things refers to the network of physical devices embedded with sensors and software and connected to the internet. IoT devices can perform a variety of physical and intellectual tasks and communicate with their network. (Think what all Alexa can do!)
2. The economics of the three kinds of goods is distinct from each other, which has crucial implications for strategists. An important characteristic of IoT is that they benefit from network effects and are relatively easily customizable.
3. Industrial Internet of Things (IIoT) refers to the network of connected equipment and devices in high-stakes industries like power generation and healthcare, where unplanned downtime can be very costly in terms of time and money. With applications like asset tracking, remote monitoring and diagnostics, and automation, IIoT has literally changed manufacturing forever.
4. The growth of IoT also raises cybersecurity, privacy, and ethical issues, which require concerted action by organizations and governments.

My latest book

Global Meets Digital presents a collection of mini case studies and over 100 company examples covering cutting-edge issues like the paradox of globalization, global strategy for digital businesses, digital disruption, disruptive business models, Internet of Things, winner-take-all market dynamics, Industry 4.0, competing in the digital age, and digital strategy for global businesses.

Over a dozen critics’ reviews by top-level executives and senior academics, including:

Vinod embarks on an excellent treatise on the convergence between the physical and digital worlds. Alongside, he at once recognizes that fundamental economic principles are no longer sacrosanct; be they the concepts of scarcity and choice, or the dictates?of diminishing returns to scale. What we know from textbooks are no longer textbook!?Global Meets Digital?challenges business leaders to think differently about strategic implications of the global-digital world. ?

• Dr. Janamitra Devan, Head of Executive Office/Chief Strategy Officer, NEOM, Saudi Arabia; former Vice President, The World Bank Group; former Director, Global Strategy Practice, McKinsey & Co.

It is rare to find a book on business strategy that combines the scope and depth of Vinod's understanding of strategy with the rigor of academic?research that is as accessible in clear prose?to the multinational executive who needs to formulate a strategy that is executable.?He provides a terrific framework at the intersection of economics, strategy, and technology?for understanding the dynamic dialectical process of the global (thesis) meeting digital (antithesis) that enables one to see opportunities and exigencies in the resulting synthesis in ways far superior to vain efforts to predict the future.??

• R. Lemuel Lasher, Chairman, Leading Edge Only, Ltd., Managing Director, Boehme Eckhart LLC; former Vice President-Strategic Projects and Chief Innovation Officer, Computer Sciences Corporation

My latest article in forbes.com

Moats vs. Ecosystems: Which Model Works Best (Forbes, 1.17.2024)

Warren Buffett of Berkshire Hathaway introduced the term moats as an economic principle in 1999: Invest in businesses “that have wide, sustainable moats around them.” Elon Musk, founder and CEO of Tesla and other companies, disagreed with Buffett's economic model and argued that?“if your only defense against invading armies is a moat, you will not last long…” Read more to find out who, if anyone, won the argument.

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A blog post

How I Auctioned Off a $100 Bill for $135

It was the fall semester of 2009, and I was teaching an Industry and Competitor Analysis course to a group of part-time MBA students at the Robert H. Smith School of Business, University of Maryland, College Park. One of the topics included in the course syllabus was Game Theory, always a fun subject to teach. On the day the topic was to be covered, I asked my students if they wanted to play a game with me and, naturally, excited at the prospect, they said yes.

Little did they know!

Read more

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[i] Some of the other excellent books I explored were: Marco Iansiti & Karim Lakhani, Competing in the Age of AI (Harvard Business Review Press, 2020); Paul Leinwand & Mahadeva Mani, Beyond Digital (Harvard Business Review Press, 2022); Satish Nambisan & Yadong Luo, The Digital Multinational (The MIT Press, 2022); Eric Lamparre, Kate Smaje, & Rodney Zemmel, Rewired: The McKinsey Guide to Outcompeting in the Age of Digital and AI (Wiley, 2023); and Mohan Subramaniam, The Future of Competitive Strategy (The MIT Press, 2022).