The Internet of Things (IoT), which connects everyday objects to each other and the cloud, is often hailed as the next "mega trend" in tech. Cisco (NASDAQ:CSCO) claims that the number of connected devices worldwide will double from 25 billion in 2015 to 50 billion by 2020. Intel (NASDAQ:INTC) is even more optimistic, declaring that 200 billion devices will be connected by 2020. Research firm IDC claims that global spending on IoT devices and services will surge from $656 billion in 2014 to $1.7 trillion in 2020.

Image

Those big growth estimates convinced many tech companies to jump aboard the IoT bandwagon. However, investors should also understand why the IoT market might fall short of the industry's lofty expectations, and which companies could be burned by investing too heavily in IoT products and services.

Security and privacy issues abound

The first major concern about the IoT is security and privacy. A recent Disrupt New York 2016 panel warned that IoT devices pose serious privacy risks because data could be intercepted via sensors, cameras, and microphones and delivered to criminals, hackers, or law enforcement agencies. Electronic Frontier Foundation senior staff attorney Nate Cardozo warned that the IoT industry had a "field of dreams problem," because "if you collect the data, they will come."

Researchers at Microsoft and the University of Michigan recently demonstrated how easy it was to mount such attacks by poking holes in Samsung's SmartThings smart home platform. The researchers hijacked smart locks, smoke detectors, and other appliances by uploading malicious apps to SmartThings' dedicated app store.

Samsung claims that such malicious apps couldn't pass its approval process, but that reassurance might not allay the fears of mainstream consumers. A recent poll by BI Intelligence found that 44% of all Americans were "very concerned" about a smart home data breach leaking out their personal data, while 27% were "somewhat concerned."

Home How It Works Home Monitoring

Samsung's SmartThings. Image source: SmartThings.

Conflicting standards and silly devices

Meanwhile, the IoT market is being fragmented by various consortiums promoting their own communication standards. The two biggest consortiums are Qualcomm's (NASDAQ:QCOM) Allseen Alliance and Intel's (NASDAQ:INTC) Open Interconnect Consortium (OIC).

Qualcomm is trying to pull companies into its ecosystem, so it can leverage its mobile-based tech to expand into the IoT. Intel is trying to do the same by leveraging its data center and IoT modules. As long as these companies keep pulling vendors in different directions, there's a chance that certain smart appliances won't be compatible with certain smart hubs -- which greatly reduces the "universal" usefulness of the IoT.

Many IoT critics note that even though universal remotes were introduced three decades ago, most homes still have a "basket of remotes" for various devices. Therefore, if companies were unable to convince consumers to use universal remotes for all their home appliances, it seems unlikely that they can convince them to use smartphones for the same purpose.

Meanwhile, silly devices like Internet-connected belts, wine bottles, pans, socks, and app-tethered pregnancy tests all threaten to turn the IoT market from a megatrend into a joke. Products like these indicate that a bubble needs to burst first to flush out the useless devices -- just as the dot-com crash killed off weaker websites.

Which companies could get burned?

Intel, Qualcomm, and Cisco believe that expanding into the IoT market can help them respectively offset slower sales of PC chips, mobile chips, and networking hardware.

Intel launched a dedicated IoT unit in 2013, Qualcomm bought IoT chipmaker CSR for $2.4 billion in 2015, and Cisco spent $1.4 billion on IoT platform provider Jasper Technologies earlier this year. If concerns about security, privacy, communication standards, and practicality throttle the IoT market's growth, all three companies could see disappointing returns from their IoT investments.

Amazon and Alphabet's Google -- which are both trying to tether smart homes to their ecosystems with always-on speakers -- could experience niche sales instead of mainstream growth. Sierra Wireless, the world's largest vendor of 2G, 3G, and 4G LTE embedded modules and gateways for IoT devices, could also see demand decline in certain industries.

Reasons to stay optimistic

There are definitely reasons to be skeptical about the Internet of Things, but there are also plenty of reasons to stay positive. IDC reports that worldwide wearable shipments rose 172% in 2015 to 78.1 million units, indicating that demand for useful wearable devices like fitness trackers remains healthy. A recent survey by iControl Networks also found that 50% of respondents planned to buy a smart home device within the coming year, suggesting that privacy fears could be overblown.

These figures indicate that demand for connected devices is rising. Nonetheless, investors interested in the IoT industry should do their homework and weigh the strengths and weaknesses of this market before believing a company's ambitious plans for growth across the Internet of Things.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon.com and Qualcomm. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon.com, Qualcomm, and Sierra Wireless. The Motley Fool owns shares of Microsoft. The Motley Fool recommends Cisco Systems and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.