How to Invest Your Money in the Internet of Things

The Internet of Things is coming. Some might say it is already here.

Soon, everything from your thermostat to your household appliances and anything else you can imagine will be connected. These "smart" devices will communicate information to you, order their own repairs, and provide data that was previously unimaginable.

Picture an oven you can preheat remotely, a washing machine that orders its own replacement part (before the existing one fails), or a thermostat that can learn your behavior, maximizing efficiency. The IoT will turn nearly everything into a device with some level of computer-like functionality.

In some cases, it will be robust, and in others, it will be very narrowly defined. But, however you look at it, the amount of connected devices is set to explode, and one of the key ways to profit off that growth is to invest in the companies whose operating systems -- or at least some version of them -- will be at the heart of this rapidly expanding new field.

In some ways, the IoT turns billions of devices into limited-function computers. One of the best ways to invest in this opportunity is to own stock in the companies that make the operating systems that will power these tiny computeresque brains.

That makes the potential winners in the new, IoT-dominated world three companies that lead the current generation of computers tablets, and phones: Apple (AAPL -0.57%), Microsoft (MSFT -1.84%), and Google (GOOG 0.37%) (GOOGL 0.35%)

How big is the opportunity?
The IoT is going to be big this year, and it is going to get exponentially bigger in years ahead, according to research firm Gartner. The researcher forecasts that 4.9 billion connected things will be in use in 2015, up 30% from 2014 with the total number reaching 25 billion by 2020.

"The digital shift instigated by the Nexus of Forces (cloud, mobile, social, and information), and boosted by IoT, threatens many existing businesses. They have no choice but to pursue IoT, like they've done with the consumerization of IT," said Jim Tully, vice president and distinguished analyst at Gartner.

Those billions of devices will not come cheaply. Gartner estimates that IoT will support total services spending of $69.5 billion in 2015 and $263 billion by 2020.

Internet of Things Units Installed Base by Category (millions)

Source: Gartner (November 2014)

How will the OS makers profit?
Though not all IoT devices will have Microsoft, Apple, or Google operating systems powering them, the three companies are working on versions of Windows, iOS, and Android to power connected devices. Here is a look at how each company is preparing:

• Microsoft's new operating system, Windows 10, is being designed to integrate with IoT devices, and the company has already launched a Windows Developer Program for IoT. "Windows 10 IoT will offer one Windows platform with universal applications and driver models that will span a wide range of devices, from low-footprint controllers such as IoT gateways to powerful devices such as ATMs and industrial robotics," the company said in a press release.

• Apple has been developing its HomeKit system, which "is a framework in iOS 8 for communicating with and controlling connected accessories in a user's home." The system allows users to "discover HomeKit accessories in their home and configure them, or you can create actions to control those devices. Users can group actions together and trigger them using Siri." HomeKit already has an API and a developer's kit to allow outside companies to create apps for compatible devices to be controlled via iPad, iPhone, and Macs.
• Google is not attacking the IoT with its operating system as directly as its rivals, but because Android is open source and already on many more devices than iOS and Windows, it is going to be a major player. "The sheer number of devices that run Android hardly needs tallying; it's a lot," wrote InfoWorld's Serdar Yegulalp. "Those devices provide a universal front end for anything that could call itself IoT. Nothing needs to be written from scratch; a full stack is already there, waiting to be used."

There will be other contenders attempting to power IoT devices -- Oracle intends to be a player with its Java language -- but the three leaders of the computing world now are likely to be a major part of the next evolution.

Why will these three win?
IoT devices require some level of control and reporting. It is certainly possible to accomplish that via methods that do not involve Windows, iOS, and Android, but integrating connected devices to existing control platforms such as the billions of devices running Microsoft, Google, and Apple operating systems makes sense.

Apple. Microsoft, and Google already control your computers, phones, and tablets. Extending that control into your light bulbs, appliances, and other IoT devices is simply logical. Other companies will get a piece of the action, but it seems unlikely these three will get shut out.

That is potentially billions of new devices running Windows, iOS, and Android, leading to new sales opportunities for the three companies.