This article is part of a series called The Future is Smart: How the Internet of things is changing business
Follow the series at tgam.ca/internet
The "Internet of Things" – it's big. As years go by, there will be billions more devices connected to the Internet, gathering data for better decision-making and creating trillions of dollars for the companies that stand to benefit.
Certainly, some of the winners will be small, entrepreneurial concerns that haven't even listed their stock on a public exchange. But many of the companies poised to profit are already giants of industry. Apple and Google, to be sure, but also Cisco Systems Inc. and International Business Machines, General Electric Co. and Siemens. Some are farther ahead than others: GE already books more than $1-billion (U.S.) annually in its "Industrial Internet" business, while IBM, which has $90-billion in sales per year, is investing $3-billion over the next four years to launch its Internet of Things unit.
What they have in common, however, is their epic size: They measure their sales in the tens of billions of dollars. That means their sales from the Internet of Things, while important, will move the needle slowly. And that means investors should see the trend, in part, as a means of helping some already-great companies even greater – if they pull off the transition successfully.
To reiterate: The Internet of Things is so all-encompassing, and so broadly defined by some, that dozens of companies are set to participate. (When analysts at Deutsche Bank produced their Internet of Things report last year, they named more than 60 stocks.)
General Electric, though, represents a familiar name – the company is more than a century old – that is betting a fair amount of the future on the Internet of Things, or, as GE calls it, "the Industrial Internet." The company said in 2011 it would invest $1-billion in the effort; by 2013, CEO Jeffrey Immelt told investors, "every industrial company will become an analytical company."
Of course, not every industrial company has roughly $1-trillion of its equipment in use by customers around the world. What GE did, says William Blair & Co. analyst Nicholas Heymann, is write software to collect data from its equipment – from locomotives to jet engines – and develop algorithms that help its customers make better plans, like a railway predicting where to add capacity based on port traffic, or where an airline should develop a hub for travel in 2020.
The business already generated $1.4-billion in revenue in 2014, with an EBIT margin (earnings before interest and taxes) of 50 per cent, well above the company's overall EBIT margin in the low teens. (GE posted nearly $107-billion in sales companywide in 2014). Mr. Heymann says Industrial Internet contributed 4.5 cents to GE's $1.52 in 2014 earnings per share, but if the business grows to $5-billion in revenue in 2017, as Mr. Immelt has suggested, it could contribute 15 cents in EPS. If it tops $15-billion in revenue in the early part of next decade, he says, that could mean 75 cents to 80 cents in new EPS.
Some investors may have overlooked the Industrial Internet effort because they have been focused on GE's attempts to sell off major parts of its business, particularly the financial-services unit that was a boon for nearly two decades but a millstone in the financial crisis. "Basically, GE is bringing this to the forefront to take off at the same time it's accelerating the exit from its financial-service business," Mr. Heymann says. "Just like [former CEO Jack] Welch said in the early 1990s [that] the sky's the limit for financial services, today, in a different context, the sky's the limit for GE's data analytics software."
Cisco, like GE, hosts an annual Internet of Things conference each year to promote its attempt at leadership in the space. Its IoT World Forum in Chicago last October drew roughly 2,000, with keynote addresses by executives from such companies as Shell, Rio Tinto, Rockwell Automation and IBM, reports UBS Securities analyst Amitabh Passi.
Cisco's efforts are more than talk: Mr. Passi estimates Cisco, the global leader in the routers that allow computer networks to communicate, has spent $1-billion setting up six global "Internet of Everything" data centres and committed $100-million to an innovation fund. It's promoting app development in developer communities and is working to create technical standards for the industry. It's deployed Internet of Things offerings at several major customers, including Shell and Harley-Davidson, already, Mr. Passi says. (Cisco posted nearly $49-billion in sales over the past 12 months.)
There is some skepticism about Cisco's ability to embrace the trend, given how younger companies like Amazon, with its Web Services business, have taken the lead in so-called "cloud" computing: remote, software-driven hosting services. But Mr. Passi and his UBS colleague Steven Milunovich argue that cloud computing has really just served "the Internet of People," which has only affected 20 per cent of global gross domestic product.
By contrast, the UBS analysts say, the Internet of Things "will boost efficiency for the other 80 per cent, including industrial automation, transportation, and energy." And, "it is becoming clear that IoT requires a different computing architecture. … Just as the Internet of People requires a cloud foundation, the Internet of Things will need a new underpinning, which is being called Edge Computing or Fog Computing." (Cisco, they say, coined the "fog computing" term by noting that clouds close to the ground create fog. Why people would want fog is left unclear.)
"Cisco is one of the few vendors with the ability to offer networking, compute, and storage solutions extending from cloud to Fog," they say, as the company is building out its Fog offering, including software, hardware support, and services. "The network should grow in importance with more devices connected, benefiting Cisco."
And others, too, certainly. But probably not too many companies for whom the Internet of Things can add billions of dollars to the billions they already have.