The Internet of Things, or IoT, has been one of tech's biggest buzzwords the last few years, but it's not the easiest idea to conceptualize. 

At it's core, IoT involves turning everyday objects into "smart" devices through the use of embedded technology. These sensors can monitor an object and its external stimuli, and relay the data they collect to other devices and cloud storage systems to inform decision making in real time. 

But even this explanation is a little hard to get your head around. Hopefully this IoT Infographic helps.

Iot Infographic

So just how many devices are we talking?
By the end of this year, there will be 15 billion Internet connected devices, according to ABI Research. The firm estimates that total will rise to over 40 billion by 2020. That is compound annual growth of nearly 18%. While this value includes devices users are accustomed to interacting with, such as smartphones and PCs, roughly 75% of this estimated growth will come from sensor nodes and accessories. 

How do these devices interact?
One great example of the cross-platform interaction that IoT enables is the Nest home thermostat solution.

Accidentally left the air conditioning on when you left for work in the morning? No worries, users can control the system from their smartphone. But that is just a part of Nest's appeal. As owners continue to use the system, the thermostat learns user habits and preferences, storing data on the company's cloud servers. Eventually the system begins to program itself. All told, users enjoy climate control tailored to their routine ... and a lower energy bill. The system reportedly pays for itself within a year and a half.

Earlier this year, Google (NASDAQ:GOOG) (NASDAQ:GOOGL) acquired Nest for $3.2 billion, sending a strong signal that the company has IoT ambitions. 

What other applications does this technology have?
The scope of IoT extends well beyond the household. Imagine this kind of technology applied across entire cities -- public transportation could be optimized to decrease emissions and route redundancy, utilities and water waste could be dramatically reduced, even crime could be diminished through surveillance and predictive analytics.

Having trouble envisioning it? You might not have to wait long. 

Research from Frost & Sullivan estimates there could be as many as 26 "smart cities" by 2025. This includes New York, Chicago, and Los Angeles, among others domestically, and London, Paris, and Berlin abroad. All told, global investment in smart city infrastructure could reach a market value of $1.5 trillion by 2020. 

But how big is the whole pie?
It's difficult to say for sure, but analysts at McKinsey&Co have estimate IoT's annual economic impact could reach anywhere from $2.7 to $6.2 trillion by 2025. They note that the public sector could be a major driving force behind IoT, but that the technology could also be huge for the healthcare industry, due to its ability to drive down costs, and in manufacturing for its potential to help optimize processes. 

Dylan Lewis has no position in any stocks mentioned. The Motley Fool recommends Google (A shares) and Google (C shares). The Motley Fool owns shares of Google (A shares) and Google (C shares). 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.