The Internet of Things has been a hot topic for investors lately. After all, by connecting billions of smart devices to the Internet, the Internet of Things promises to make life easier for everyday people, help society run more smoothly, and aid industry in being more productive. But before salivating over Internet of Things stocks, it's important to understand the following five facts.
1. Poised for explosive growth
Cisco (NASDAQ: CSCO) estimates that 50 billion smart devices will be connected to the Internet by 2020, a more than three-fold increase from the 15 billion connected devices today. Being the networking giant that it is, Cisco wants to provide the infrastructure for the world to ingest, route, and manage all the cloud-based data these devices produce.
In dollar terms, IDC is calling for Internet of Things spending to grow 16.9% per year between 2014 and 2020, from $655.8 billion per year to over $1.7 trillion per year. About one-third of this $1.7 trillion is expected to be spent on Internet of Things connectivity and services, which could bode well for Cisco.
2. Competition is fierce
Strong growth rates and a trillion-dollar market opportunity have attracted significant competition to the Internet of Things. Virtually every major technology company, whether it's a hardware, software, telecom, or semiconductor company, has an interest in pursuing the Internet of Things to drive growth.
Generally speaking, ultra-competitive environments are more difficult for companies to differentiate their offerings from one another. When a company can no longer differentiate, its offerings run the risk of becoming a commodity in the marketplace. As history has repeatedly shown, commodity suppliers compete on price to stay differentiated, which erodes pricing power and profitability. In this type of climate, the winners usually aren't the suppliers -- the winners tend to be customers that enjoy the benefit of lower implementation costs.
To be clear, different areas of the Internet of Things will be more competitive than others, and it isn't a given that Internet of Things suppliers will struggle with differentiation. But given the highly competitive nature of the Internet of Things industry to begin with, it's enough reason to consider how a company is differentiated before investing in it.
3. There are major barriers holding back consumer adoption
The Internet of Things for consumers is currently focused on in-home technology like smart thermostats and appliances, and wearable technology like personal fitness devices and smartwatches. Even with these product categories, a 2014 survey conducted by Accenture found that 87% of consumers weren't aware of the term "Internet of Things" before the survey was conducted.
Although awareness has arguably risen some since the survey, a lack of awareness remains a huge barrier to driving wider Internet of Things adoption with consumers. The other major barrier is the lack of perceived value. Of the 13% of respondents previously aware of the term "Internet of Things," about one-third of them said that a lack of perceived value was preventing them from making an Internet of Things purchase. In other words, the use cases for the Internet of Things are currently lacking for many consumers.
4. The Internet of Things' value proposition is much clearer in industrial settings
In industrial settings, The Internet of Things promises to improve productivity by installing Internet-connected sensors across industrial sites and factories, and harnessing the power of big data analytics to unlock insights that optimize operations in real time.
For large industrial companies like General Electric (NYSE: GE), small productivity gains offer tremendous cost savings. General Electric claims that a 1% productivity improvement across its manufacturing operations translates to $500 million in annual savings. Additionally, General Electric estimates that a 1% improvement in industrial productivity will add $10 trillion to $15 trillion to worldwide GDP over the next 15 years.
Ultimately, these massive figures are the reason why General Electric is attacking the Internet of Things on two fronts -- as a customer and a supplier.
5. Interest is rising
According to Google trends, interest in the terms "Internet of Things" and "IoT" have risen dramatically over the last couple of years, which bodes well for longer-term adoption.
Putting it all together
Because the Internet of Things covers many different types of technologies working together, there are many different ways to invest in the industry. Whether it's hardware, software, services, or otherwise, it's important to focus on companies that are not only well positioned to capitalize on the Internet of Things, but also remain differentiated from the competition.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Steve Heller owns shares of Alphabet (A & C shares) and Apple, which The Motley Fool owns shares of and recommends. The Motley Fool also owns shares of General Electric Company and 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.