What Is the Internet of Things?

If the idea of the Internet of Things -- aka, the IoT -- is something you're having a bit of trouble getting your head around, consider this.

There was a time not so long ago when most people didn't "get" the Internet. Today, most do: What is the internet: It's just vast numbers of computers talking to each other. But now, with processors being added to all manner of formerly dumb technology, the definition of "computer" has broadened, too. Add a tiny, cheap modem to one of those chips, and voila! -- connectivity for stuff. And that, by definition, is all the Internet of Things is: ordinary items -- from bikes to watches to thermostats to cars -- that weren't connected to the internet before, but now are.

Such IoT devices are used to collect data for analysis, like a fitness tracker that sends your workout information to your phone. This allows systems to be automated in new ways; some connected cars, for example, can communicate with the IoT thermostat in your house, and turn the air conditioning down when the GPS says you're getting closer to home. 

Image source: Getty Images.

But generally speaking, if you add an internet connection to something so you can control it, get data from it, or both, then it's part of the Internet of Things. 

Sounds simple enough, right? It is, and it will bring some huge benefits. 

What does the Internet of Things mean for you?

The IoT is already bringing significant changes to the way we grow food, use fuel,  driver out cars, and monitor our health. 

Monsanto (MON) and other agriculture companies are using the IoT to make planting and harvesting food easier, faster, and more efficient. 

In a New York Times article last year, Steve Lohr wrote: "The third stage ... is just getting underway and involves exploiting data from many sources -- sensors on farm equipment and plants, satellite images and weather tracking. In the near future, the use of water and fertilizer will be measured and monitored in detail, sometimes on a plant-by-plant basis."

And Monsanto is already there. The company uses sensors to collect data in real time from combines, measuring crop yields, soil quality, and moisture in order to increase food production. The company also uses sensors to track the temperature and location of seed shipments, so it can adapt routes in extremely hot conditions to reduce seed loss. 

But the IoT is doing much more than changing how our food is grown. General Electric (GE -0.69%) has been using IoT sensors, software and its own analytics to save its customers massive amounts of money. 

The company's operational technology allows it to help liquefied natural gas (LNG) plants decrease their downtime, by pinpointing potential problem areas before they become major issues. This is saving LNG companies up to $150 million a year, according to MIT Sloan Management Review.

GE began moving toward what it calls the Industrial Internet (essentially, a subset of the IoT) because it saw an opportunity to benefit from collecting and analyzing data on how industrial equipment is used. The company now believes that revenue from its software solutions will reach $15 billion by 2020. 

On a more personal level, the IoT is changing how we drive, and even our health.

Semiautonomous cars (which can drive themselves around, mostly just on freeways) are already on the road, and they're paving the way for much more autonomy.

Intel, BMW, and Mobileye (MBLY) recently partnered to bring driverless cars to fleet vehicles by 2021. Israel-based Mobileye is using sensors on cars to send location-based map data to the cloud, so that other cars can learn from it. It's called Road Experience Management (REM), and it'll help driverless cars know where they are by sharing information with each other. 

Mobileye will pair REM with its current EyeQ chips, which process the images around a car in order to give the vehicle its own situational awareness. Around 90% of automakers are already using Mobileye's technology, and the company expects its fifth generation of EyeQ chips to be the central computer sensors for fully autonomous cars starting in 2020. 

And don't think driverless cars are mere science fiction. IHS Automotive estimates that 10% of all light vehicles sold in 2035 will be fully autonomous. 

Finally, the IoT has begun to transform our health. While fitness trackers and smart watches get much of the wearable-technology attention these days, medical-grade wearable devices and software are already on the market.

Microsoft makes software that works with wearable devices and allows doctors to monitor a patient's health in real time. Not only does this have the obvious benefit of providing immediate access to care if something goes wrong with the patient, but it also decreases time spent diagnosing health problems and increases time spent with doctors.

And Alphabet's Verily Life Sciences is developing nanoparticles that can identify cancer and other diseases, then send their findings to a wearable device on a user's arm. The idea behind the moonshot is that these particles will eventually catch diseases in their early stages.

These devices and software could save huge amounts of money, in addition to making us healthier: GE believes that just a 1% increase in healthcare efficiency could save $63 billion in annual healthcare spending.

How can investors benefit?

It's clear from just these quick examples that plenty of companies, across many industries, are diving into the IoT.  

The first step for investors getting in on the Internet of Things is to understand the opportunity. There will be nearly 50 billion things connected to the internet by 2020, and IDC expects the IoT market size to reach $7.1 trillion that same year.

The next step is to identify which type of IoT investment you're most interested in. You've already seen that companies as large as GE and as small as Mobileye are betting on the IoT in some way; if you're looking for a few IoT stock ideas, go here, here, and here.

Semiconductor makers, conglomerates, smartphone makers, sensor companies, and data-center companies are all focusing their attention on the IoT -- and that means tech investors should do the same.