Many tech companies are now developing products for the Internet of Things (IoT), which connects various gadgets to each other and the cloud. Intel (INTC +13.79%) claims that the number of connected devices could surge from 15 billion in 2015 to 200 billion by 2020 -- tethering an average of 26 smart objects to every person on the planet.
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However, this fledgling industry won't grow in a straight line, and investors should understand the main issues, trends, and challenges facing the market in the coming year before buying any promises of long-term IoT growth.
Security issues
In the past, computers were often hijacked with malware to become part of "botnets" which launched attacks against certain companies or sites. As PC security tools improved, those attacks started targeting mobile devices. Once mobile security was beefed up, hackers moved on to IoT devices.
The recent Mirai botnet attack, which took down major websites across the world, turned IoT devices like unsecured routers and IP cameras into bots to carry out DDoS (distributed denial of service) attacks which flooded sites with traffic until they crashed. Security experts have also repeatedly demonstrated that attacks which were blocked on PCs years ago can still be used to hack various IoT devices.
The land grab in the IoT market is exacerbating the problem, as companies rush to launch connected products with little regard to network security. The resulting fragmentation makes it harder to protect those devices, but companies like Cisco and Symantec have been developing new security solutions for the IoT market.
New IoT chipsets
Many aging chipmakers, like Intel and Qualcomm (QCOM +8.17%), are diversifying into IoT chips. Intel, which pivoted away from high-power PC and data center chips, introduced low-power modules like the Edison and Curie over the past two years. It also focused its less powerful Atom chips on the drone and connected car markets.
Qualcomm expanded its Snapdragon line of mobile chips into SoCs for wearables (Snapdragon Wear), drones (Snapdragon Flight), and connected cars (Snapdragon Automotive). It also acquired IoT chipmaker CSR last year, and will soon close its acquisition of automotive chipmaker NXP Semiconductors. Therefore, the battle between Intel, Qualcomm, and other chipmakers will likely heat up over the coming year with new chipsets and big acquisitions.
Unified communication standards
Over the past two years, Intel and Qualcomm expanded their spheres of influence over IoT devices with opposing communication platforms. Intel led a consortium of companies called the Open Internet Consortium (OIC), while Qualcomm led another group called the AllSeen Alliance.
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The OIC used Intel's Iotivity standard for device discovery and communications, and the AllSeen Alliance used Qualcomm's AllJoyn standard. This caused headaches for IoT device makers and consumers, who had to ensure their gadgets worked with both frameworks.
That's why Intel and Qualcomm finally teamed up in February to create the new Open Connectivity Foundation (OCF), which will use Iotivity as the common standard for IoT communications. Investors should see if this long-awaited unification will reduce the fragmentation of IoT devices while improving overall security and mainstream appeal.
Ecosystem growth
On the software front, companies like Alphabet's (GOOG +0.44%) (GOOGL +0.66%) Google, Apple (AAPL +2.08%), Samsung, and Amazon (AMZN +0.55%) all want access to their users' connected devices.
Google's Home and Nest devices are aimed at making home automation easier with "hubs," and Android Auto is extending its mobile ecosystem into connected vehicles. Apple made its iOS devices compatible with HomeKit-compatible smart home devices, and has also expanded into cars with CarPlay.
Amazon has linked its Echo/Alexa/Dash ecosystem to smart appliances which automatically re-stock consumables, and tethered Ford's connected cars to its Alexa ecosystem. Samsung, which sells SmartThings home automation devices, recently agreed to buy connected car and audio giant Harman to link up its mobile, smart home, and smart car ecosystems. The battle between these tech giants should heat up in the coming year as consumers buy more connected gadgets.
But it's all about mainstream adoption
Many tech companies have high hopes for the IoT market, but it all boils down to mainstream acceptance. Concerns about privacy, security, and higher prices could prevent shoppers from replacing all their traditional appliances with connected ones. Key IoT markets like wearables and drones could also struggle to grow beyond their initial niches.
If those factors hold the IoT market back in 2017, bullish forecasts like Intel's 200 billion device estimate could be revised. As a result, companies which are betting heavily on the IoT market might then need to rethink their long-term plans.
