A new report from Mckinsey says that the potential value of the Internet of Things in the global economy—sensors and actuators connected by networks to computing systems - could be as much as $11.1 trillion a year by 2025, including applications in the water sector.

The report - THE INTERNET OF THINGS: MAPPING THE VALUE BEYOND THE HYPE - says that by blending physical and digital realms, the Internet of Things (IoT) vastly expands the reach of information technology, giving rise to myriad possibilities via the ability to monitor and control things in the physical world electronically.

According to McKinsey, the sweeping changes that IoT can bring to how companies manage physical assets, how consumers attend to their health and fitness, and how cities operate have also inspired visions of a very different future, as well as a good deal of hype.

The aim of the report is to determine more clearly how IoT applications create value for companies, consumers, and economies. To distinguish between the hype and the reality, McKinsey has focussed on actual “use cases” that exist today or are likely to be implemented in the next 10 years. Potential value has been estimated using a “settings” perspective—how IoT technology is used in physical environments such as cities or factories. This makes it possible to see how much additional value can be captured when IoT applications interact with one another and with other information systems, McKinsey says.

To get a broader view of the IoT’s potential benefits and challenges across the global economy, McKinsey analyzed more than 150 use cases, ranging from devices to monitor health, to sensors used to optimize the maintenance of equipment and protect the safety of workers.

The report’s bottom-up analysis for the applications it sizes estimates that the IoT has a total potential economic impact of $3.9 trillion to $11.1 trillion a year by 2025. At the top end, this level of value would be equivalent to about 11 percent of the world economy .

Resource management and infrastructure IoT tech worth up to $64bn per year globally in 2025

On resource management and infrastructure, IoT technology has already demonstrated its potential for monitoring and managing critical urban resources, such as water, sewage, and electric systems, the report says.  Operators can prevent costly failures and reduce losses by using sensors to monitor performance across their networks, operators of power and water systems can detect flaws such as leaks in water mains or overheating transformers. McKinsey estimates that these applications could have an impact of $33 billion to $64 billion per year globally in 2025.

IoT in cities worth up to $930 billion to $1.6 trillion per year in 2025

IoT in cities is among nine specific settings where IoT applications could create value. Overall, McKinsey estimates that IoT applications in the cities setting could have an economic impact of $930 billion to $1.6 trillion per year in 2025. The report says using IoT smart meters to reduce loss of electricity in distribution and sensors to detect water leaks could be worth as much as $69 billion per year globally. In water systems specifically, McKinsey estimates that IoT technology (smart meters) could provide a value of $7 billion to $14 billion per year.

Potential security issues a key risk

The report also draws attention to potential security issues from the uptake of IoT applications. Not only will organizations that gather data from billions of devices need to be able to protect those data from unauthorized access, they will also need to deal with new categories of risk that the Internet of Things can introduce, the report says.

Extending information technology (IT) systems to new devices creates many more opportunities for potential breaches, which must be managed. In addition,  when IoT is used to control physical assets – for example water treatment plants - the consequences associated with  security breaches in extend beyond the unauthorized release of information.

On intellectual property issues, the report says a common understanding of ownership rights to data produced by various connected devices will be required to unlock the full potential of IoT. Who has what rights to the data from a sensor manufactured by one company and part of a solution deployed by another in a setting owned by a third party will have to be clarified.

The report also makes the interesting point that where IoT data are being used, they are often used only for anomaly detection or real-time control, rather than for optimization or prediction – an area  which McKinsey says is where much additional value can be derived, based on its study of big data.

Water sector example highlights biggest challenge of all

On current challenges, the report says:

“The inability to capture and use relevant data from multiple streams generated by different IoT systems is the result of several organizational, technical, and commercial barriers. In some cases, a lack of understanding of the potential to use data has led to a failure to invest in deploying IoT-enabled solutions.”

“But there are also technical challenges, including finding efficient ways to transmit and store data. The most fundamental challenges are in data transmission and storage. Many IoT applications are deployed on remote or mobile equipment.”

The report uses a water sector application to highlight the biggest challenge of all once data are aggregated - analyzing the data to derive actionable information. Data being generated require sophisticated (often custom) programming and expertise in both data analysis and the machinery and processes that the sensors are monitoring.

“For example, the data from sensors in a water system pumping station could be used simply to trigger an alarm when a pump is overheating and about to fail. But to get larger benefits, the water company would want to use IoT data for condition-based maintenance—determining long before the pump begins to overheat that it is in danger of failing so that it can be repaired or replaced.

“Implementing condition-based maintenance is a far more complicated problem and might involve data from dozens of sensors and unique algorithms to interpret subtle changes in data from various sensors. In the pump example, the system may determine that traces of a certain chemical in the water picked up by a downstream sensor are an indication of a leaking seal on a pump. Data from additional sensors would then be needed to pinpoint which pump is in danger of failing.”

Interoperability between IoT systems is critical

The report’s key findings include:

• Interoperability between IoT systems is critical. Of the total potential economic value the IoT enables, interoperability is required for 40 percent on average and for nearly 60 percent in some settings.
• Currently, most IoT data are not used. For example, on an oil rig that has 30,000 sensors, only 1 percent of the data are examined. The information is used mostly to detect and control anomalies—not for optimization and prediction, which provide the greatest value.
• Business-to-business applications will probably capture more value—nearly 70 percent of it—than consumer uses.
• The IoT has a large potential in developing economies - which could generate nearly 40 percent of the IoT’s value, and nearly half in some settings.
• Customers will capture most of the benefits – McKinsey estimates that IoT users (businesses, other organizations, and consumers) could capture 90 percent of the value that IoT applications generate.
• A dynamic industry is evolving around IoT technology - as in other technology waves, both incumbents and new players have opportunities.
• The IoT is starting to have a real impact but capturing the full potential of IoT applications will require innovation in technologies and business models, as well as investment in new capabilities and talent.

The report concludes:

“With policy actions to encourage interoperability, ensure security, and protect privacy and property rights, the Internet of Things can begin to reach its full potential—especially if leaders truly embrace data-driven decision making.”

Click here to download THE INTERNET OF THINGS: MAPPING THE VALUE BEYOND THE HYPE