The excitement surrounding the Internet of Things, or IoT, is based on the idea that connecting billions of devices to the internet will dramatically improve many facets of society. Cisco (NASDAQ:CSCO) estimates that 50 billion devices will be connected to the internet by the end of 2020, which represents an over threefold increase from the 15 billion devices connected today.
Among other things, these devices will help factories become more efficient, cell towers more reliable, and hospitals safer. Essentially, the IoT is bringing many industries and fields into the 21st century, by converging the physical and digital world.
As the IoT industry grows, the demand for networking infrastructure increases. According to industry insights company IDC, annual global IoT spending is expected to reach $1.7 trillion, a significant increase from the $656 billion the industry spent in 2014. Of the $1.7 trillion, about one-third, or $566 billion, is expected to be spent on connectivity and services. Although this entire amount will not be spent on networking hardware -- Cisco's core business -- the company's leading position in networking infrastructure could make it a major benefactor thanks to the IoT driving increased hardware spending.
GE is both a supplier and a user of IoT technologies. As a supplier, GE has developed a suite of cloud-based software that enables users to improve an industrial site's operations. Its Predix platform can be thought of as a cloud-based operating system and app store that allows real-time monitoring and analytics of industrial sites. Being that GE is the only company that has developed a commercially available IoT software suite for industrial users, the company has a first-mover advantage in a marketplace that it estimates could one day be worth $225 billion.
As a user, GE employs the IoT in its factories to improve productivity. A 1% improvement in productivity across GE's manufacturing base equates to $500 million in annual savings. In other words, the IoT could help GE improve its profitability prospects.
Without reliable and ubiquitous internet connectivity, the IoT would simply not reach mass adoption. Big Red's expansive wireless network gives IoT users dependable wireless access and confidence that any IoT deployments will function properly in the field. Additionally, in remote locations, such as wind farms, wireless network access can save greatly on implementation costs. After all, if wireless networks are available, remote sites don't have to install expensive internet infrastructure.
Not only does Verizon boast the most subscribers in the U.S., it's ahead of the competition when it comes to introducing next-generation technology, with plans to begin rolling out ultra-fast 5G connections next year. Verizon claims that 5G speeds are 30 to 50 times faster and far more responsive than its current 4G network. In its "State of the Market: Internet of Things 2016" report, Verizon said that 5G wireless "will provide the ecosystem to enable a fully mobile and connected world."
The IoT backbone
Given their size and slow historical growth rates, Cisco, GE, and Verizon may not offer tremendous upside to investors. However, it's clear that these giants are vying to become the backbone of the IoT. Cisco is focused on hardware, GE is focused on software for industrial users, and Verizon is focused on services.
Sometimes, there's a difference between dominating an industry and being a home-run investment.
Steve Heller has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Verizon Communications. The Motley Fool owns shares of General Electric. The Motley Fool recommends Cisco Systems. 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.