The Internet of Things (IoT) -- which entails essentially "connecting" the world around us -- was a seemingly far-fetched idea just a couple of years ago, but has quickly become a legitimate, fast-growing new market. In fact, some pundits have predicted it could become a $1.7 trillion market in just five years. Other predictions aren't quite so lofty, but most agree the opportunity is mammoth.
The burgeoning IoT market is often associated with the billions of devices expected to be sold in the coming years, and that's certainly a significant opportunity for providers including Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), with its Nest "smart" hub.
One conservative estimate from research firm Gartner suggests that nearly 6.5 billion IoT "things" will be in use worldwide next year, a 30% jump from 2015. That's great news for the Alphabets of the world, but tells only part of the IoT story. Gartner also said it expects IoT-related services will garner $235 billion in sales in 2016, and "are the real driver of value in IoT." On the services side of the IoT fence is where IBM (NYSE: IBM) lands, and it's fully vested in leading the charge.
Devices vs. data
The market for devices is expected to account for nearly 32% of the entire IoT market in five years, with the balance consisting of solutions including data storage, security, and software-as-a-service (SaaS). Already Alphabet boasts nearly $2 billion in "Other revenue," an 11% improvement over last year, and that could rise thanks to IoT.
If its Nest hub hits the mark with consumers -- Alphabet recently unveiled a Nest three-pack smart camera deal for $497 -- nabbing a piece of the estimated IoT device pie could really jump-start its non-advertising revenue. But as the market matures in the coming years, data storage, SaaS, analytics, and security solutions will rule the IoT revenue roost, and it's in these key areas IBM has placed its bet.
Rolling the dice
As the market matures, enterprise -- think business rather than consumer-solutions including IBM's suite of IoT services -- is where the most revenue will be generated. It seems IBM has read similar predictions which would help to explain why it announced a whopping $3 billion investment over the next four years to establish and grow a distinct IoT business unit.
That kind of commitment isn't for the faint of heart, particularly when it's combined with the billions IBM has spent to expand its cloud, big data, and analytics offerings. But its IBM's far-reaching capabilities in these key areas that positions it so well to gain a foothold in the fast-growing IoT market. Why? Because an ancillary benefit to IoT devices is the unprecedented amount of data collected.
Take Alphabet's Nest hub as an example: Not only will Alphabet benefit from the actual sale of the device, but one thing the search king is undeniably good at is tracking, storing, and utilizing user data. Now imagine the world around us -- homes, cars, and even cities -- all inter-connected. The amount of information will become enormous, and IBM is betting enterprises are going to need a hand in sifting through all that data to securely store and formulate actionable results. And based on the predictions, IBM's IoT efforts are spot on.
In addition to IBM's IoT investment, it's announced a string of acquisitions and infrastructure investments in its cognitive computing wonder Watson to crunch formerly unheard of volumes of data. Cloud computing and big data are also critical areas of CEO Ginni Rometty's "strategic imperatives," and both play integral roles in securely storing and analyzing IoT-related data.
Folks like Alphabet can, and likely will, benefit from the sale of Nest and similar devices, but it's not exactly a do-or-die situation for the online ad king. But with so much invested -- both money and human capital -- IBM needs its IoT and related strategic imperatives to succeed, and there are inklings that it's making some inroads.
As of last quarter, Rometty's combined strategic imperatives accounted for 27% of total revenue and plans are to increase that figure to 40% in the next few years. For that to happen, IBM's IoT unit must show a return on the time and billions of dollars invested. Can Rometty and team do it? Considering its depressed stock price and nearly 4% dividend yield, IBM's push to lead the IoT services wars is worth the bet.