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  • SiliconValleyLondon

    2015WoodsideCapitalPartners

    March2015

    THEINTERNETOFTHINGS

    Smart Products Demand a Smart Strategy Using M&A for a Competitive Edge

    Investment Banking Research

    Kirk Bloede, Greg Mischou, Amar Senan Ryan Koontz

  • SiliconValleyLondon

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    ContentsExecutiveSummary.......................................................................................................................................3

    1.AnOverviewoftheInternetofThings......................................................................................................5

    2.AFrameworkforAnalyzingIoTMergers&Acquisitions........................................................................17

    Home/ConsumerIoTSelectedM&ATransactions..............................................................................20

    TheIndustrial&Business/EnterpriseInternetIoTSelectedM&ATransactions.................................27

    Semiconductor/SensorIoTSelectedM&ATransactions.....................................................................40

    Networking/ComputingIoTSelectedM&ATransactions....................................................................44

    ServiceProvider/SystemsIntegratorIoTSelectedM&ATransactions................................................50

    3.Standards,RegulationsandProjections.................................................................................................57

    StandardsortheTowerofBabel............................................................................................................59

    RegulatorsandIoTWeighingPrivacyandOtherIssues.......................................................................62

    ASamplingofForecasts..........................................................................................................................65

    TheIndustrialInternetPowerof1%....................................................................................................70

    SensorsAVitalComponentinConnectedThings.............................................................................71

    TheSmarthomeFinallyhere?.............................................................................................................73

    ConsumersandWearablesTheConnectedPerson.............................................................................76

    TheSmartandConnectedAutomobile...................................................................................................78

    CreatingSmartCitieswithIoT................................................................................................................81

    IoTRevolutionizingHealthcare............................................................................................................84

    SmartConnectedProductsandCorporateStrategy..............................................................................87

    ConcludingRemarks....................................................................................................................................90

    Appendix.....................................................................................................................................................92

    Companiesmentionedinthereport......................................................................................................92

    RecentM&AtransactionsintheIoTspace.............................................................................................93

    RecentprivateplacementsintheIoTspace...........................................................................................96

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    ExecutiveSummaryAgreatdealhasalreadybeenwrittenaboutthephenomenonbeingcalledTheInternetofThings,orTheInternetofEverything.

    ThisreportexaminestheInternetofThings(IoT)fromthreedistinctvantagepoints.First,weexaminethestrategic,corporateM&Aperspective,analyzingtransactionscompletedforcluestowhereadditionalactivitycanbeexpected.WesegmentthemarketforIoTintoseveraldifferentcomponentswhichwebelievebroadlycorrespondtothecoreelementsoftheIoTValueChain,andwhichwebelievewillhavequitedifferentstrategiesandM&Aoutcomes.ThenwetakealookattheissueofstandardsandregulationsandsomeoftheimplicationsforthedevelopmentandadoptionofIoTtechnologygoingforward.Fromthere,wetakeastepbacktoexaminepotentialmarketsizeestimatesforvariousendmarkets,consideringthesemarketsfromthestandpointofbothinformationtechnologyvendors(broadlyspeaking,suppliersincludingeverythingfromsilicontosoftware)andendcustomers,betheyconsumerorindustrialendmarkets.

    ThroughtheanalysisofM&Aactivity,weidentifyvariousstrategiesalreadybecomingvisibleandcontrastthechoicesbeingmadebyvariousparticipantscomingfromdifferentmarkets,skillsetsandresources.Bylookingatthebroadertechnologyandmarketconsiderations,webelievewecangainabetterunderstandingofboththeopportunitiesandchallengesthatwillariseoverthenextseveralyearsascompaniesadapttothesenewtechnologiesandtheirimpactonrelativecompetitiveadvantage.Wehaveconstructedaframeworkforexaminingtransactionsthathavealreadytakenplacethatwebelievewillalsohelppredictpotentialfutureactivity.Webaseouranalysisonemergingtrendsandthecapabilitiesandneedsofnotonlythemostactiveplayersbutalsoseveralintriguingnewentrants.

    Aswelookatvariouspredictionsofmarketsizewenotearatherlargedisparityinthesepredictionsamongsomeofthesourceswevefound.Webelievethatwhiletheprecisemagnitudeoftheopportunitymaybesomewhatelusive,theconclusionthatitwillbealargeopportunitythatwilldisruptmanymarketsandhaveextensiveandlonglastingramificationsinmultipleindustriesisindisputable.

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    Finally,weexploretheimplicationsforlongertermcorporatestrategythatarisefromthesedisruptions.Manyimportantandfarreachingdecisionswillneedtobemadeandwinnersandloserswillshakeoutoverthenextseveralyearsbasedonchoicesmadebothinanticipationofandinresponsetocompetitivestrategiespursuedbyothermarketparticipants.Manyofthesecompetitivestrategieswillinvolvemergers,acquisitionsanddivestitures.

    Youcanreachusat:

    InvestmentBanking ResearchKirkBloede+16505132761kirk.bloede@woodsidecap.com

    RyanKoontz+16505132778ryan.koontz@woodsidecap.com

    GregMischou+16505132768greg.mischou@woodsidecap.comAmarSenan+16506563374amar.senan@woodsidecap.com

    Cover:Theparableoftheblindmenandtheelephantillustratesthatpeoplecanperceivecomplexthingsdifferentlybasedonperspective.

    ItoriginatedinancientIndiasome2,000yearsagoandbecomewellknownintheWestwhenAmericanpoetJohnGodfreySaxewroteapoemcalledTheBlindMenandtheElephant.(Fortheentirepoem,pleaseseepage99intheappendix.)WethoughtitwasanaptdiagramtoillustratethecomplexitythatsurroundstheInternetofThings.

    WewouldalsoliketothankRonHellerforhisassistanceandinvaluableinput.

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    1.AnOverviewoftheInternetofThings

    WehavearrivedatacriticaljunctureintheevolutionoftheInternet.By2020,expertsforecastthatbetween2050billiondeviceswillbeconnectedtotheInternetwithonlyonethirdofthembeingcomputers,smartphonesandtablets.Theremainingtwothirdswillbeotherdevicessensors,terminals,householdappliances,thermostats,televisions,automobiles,productionmachinery,urbaninfrastructureandmanyotherthings,whichtraditionallyhavenotbeenInternetenabled.

    ThisInternetofThings(IoT)representsaremarkabletransformationofthewayinwhichourworldwillsooninteract.MuchliketheWorldWideWebconnectedcomputerstonetworks,andthenextevolutionconnectedpeopletotheInternetandotherpeople,IoTlookspoisedtointerconnectdevices,people,environments,virtualobjectsandmachinesinwaysthatonlysciencefictionwriters(andGeorgeOrwell)couldhaveimagined.

    MichaelMandel,ChiefEconomistfortheProgressivePolicyInstitute,says,TheInternethasmostlytransformedinformationintensiveindustrieslikejournalism,entertainment,communication.ItbecomesmuchhardertousetheInternettotransformphysicalindustries;it'smuchmorecomplicated.Youneedalotofsensors,bigdatacapabilitytoprocessit,waysofgettingittopeopletomakedecisions.Physicalindustries,likemanufacturingandtransportation,haventbeenaffectedthatmuch.Weagreewiththisopinionandnotethe(largelystillunrealized)potentialofIoTtotransformmanymoreindustriesandboosteconomicactivity.

    BecausemuchhasalreadybeenwrittenaboutIoTbyavastnumberofresearchers,investors,journalists,andvisionaries,wewillattempttodistilltheIoTuniversedowntoaframeworkandseriesofkeysalientpointsfromwhichbusinessleadersandinvestorscancontemplatestrategicalternatives.

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    AfairquestiontoaskatthispointishowIoTdiffersfrommachinetomachine(M2M),whichhasbeenaroundfordecades.IsIoTsimplyM2MwithIPv6addressesorisitreallysomethingrevolutionary?M2M,builtonproprietaryandclosedsystems,wasdesignedtomovedatasecurelyinrealtimeandmainlyusedforautomation,instrumentationandcontrol.Itwastargetedatpointsolutions(forexample,usingsensorstomonitoranoilwell),deployedbytechnologybuyers,andseldomintegratedwithenterpriseapplicationstohelpimprovecorporateperformance.

    IoT,ontheotherhand,isbuiltwithinteroperabilityinmindandisaimedatintegratingsensor/devicedatawithanalyticsandenterpriseapplicationstoprovideunprecedentedinsightsintobusinessprocesses,operations,andsupplierandcustomerrelationships.IoTistherefore,atoolthatislikelytobecomeinvaluabletoCEOs,CFOsandGeneralManagersofbusinessunits.

    TheexcitementaroundIoTarisesfromacombinationofmultiplesupportingelements:(a)faster,smallerandbettermicroprocessors,sensorsandcameras;(b)ubiquitousandlowcostcloudandwirelessnetworks;and(c)powerfulandinexpensivecloudcomputingandfast/bigdataanalyticstools.

    TherearealmostasmanydifferentforecastsfortheeconomicimpactoftheIoTopportunityasthereareforecasters.Thisisunderstandablegiventheimmaturityofthespaceandbroadrangeofindustriesandeconomicsectorsthatcouldbeimpacted.Wehavestudiedmanyofthemandpresentsomeofthemoreinsightfulforecastsandsurveysinthefollowingpages.

    IsIoTsimplyM2MwithIPv6

    EconomicimpactofIoT

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    Consultantsperspective:

    AMcKinseyGlobalInstitutestudysuggeststhattheInternetofThingshasthepotentialtocreateeconomicimpactof$2.7trillionto$6.2trillionannuallyby2025.

    Theyhaveanalyzedseveralindustriesandthinkthatthelargestimpactwouldbeinhealthcareandmanufacturing.WehavetabulatedsomeoftheirfindingsinFigure1.

    Figure1:ImpactofIoTonHealthcareandManufacturingin2025

    Source:McKinseyGlobalInstitute

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    Industryperspective:

    TwostudiesconductedbyCiscoConsultingServicesfindthatthereisacombinedtotalof$19trillioninIoTvalueatstakeintheprivate($14.4trillion)andpublic($4.6trillion)sectors.Valueatstake,accordingtoCisco,isthepotentialbottomlinevalue(higherrevenuesandlowercosts)thatcanbecreatedbasedoncompaniesandindustriesabilitytoharnessIoT.

    Figure2captureswhereCiscobelievesthe$14.4trillionvalueatstakeintheprivatesectorwillcomefrom.(IoTwillbothcreatenewvalueandredistributevalueamongwinnersandlaggards.)

    Figure2:SomeKeyDriversofIoTValue

    Source:Cisco

    $19trillionValueatStake

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    Industrysurvey:IDC,togetherwithTelus,aCanadiannationaltelecommunicationscompany,surveyed209largeandmediumsizedorganizationsacrossCanadainearly2014tounderstandwhatIoTsolutionshavebeenimplemented,theirbenefitandimportanceanddeploymentcharacteristics.Theresultsofthesurvey(showninfigures35)mayprovideinsightsintoIoTsentimentsinotheradvancedeconomies.

    Somebackground:Canada,amemberoftheOECDandtheG7,hasthe11thlargesteconomyintheworld.Theeconomyisdominatedbytheservicesindustry,whichmakesup72%ofGDPandemploys78%ofCanada'sworkforce.Manufacturingrepresents13%ofGDPandemploysjustover10%oftheworkforce.Thenaturalresourcessector,whichincludesmining,forestry,agriculture,fisheries,oilandgasmakesuproughly7%ofGDPandemployescloseto4%ofCanadians.(Source:StatisticsCanada.)

    Figure3:IoTSolutionbyApplicationCanada(IDC/TelusSurvey)

    Source:IDC/Telus

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    Figure4:TopIoTSolutionsbyCanadianIndustry SummaryoftheIDC/Telussurvey:

    Surveyed209largeandmediumsizedorganizations

    MostIoTdeploymentsconsideredtacticalor

    strategic;only13%areviewedastransformational

    Averagenumberofdevicesdeployed:5,220

    54%ofprojectsusedbothwirelineandwireless(mainlyWiFiand4GLTE)connectivity;wirelessonlysolutionsfoundin28%ofIoTprojects

    Mainplatform/applicationdevelopedinternally

    Cloudorhostedsolutionsusedin28%ofcases

    Source:IDC/Telus

    Figure5:BenefitsofIoTSolutionsCanadianIndustry

    Source:IDC/Telus

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    DuetothegreatbreadthinthenumberofindustrieswhichhavebeguntobeorsoonwillbeaffectedbyIoT,wedonotthinkthatitisrighttodefineIoTasaunifiedmarket.Rather,weviewIoTinanabstractsenseasatechnologywavethatwillsweepacrossmanyindustriesatdifferentpointsintime.Liketheparableoftheblindmenandtheelephant,whatIoTisdependsononespointofview,andincompleteperspectivesandhypewillleadtocostlyandunrewardingstrategies,aswellasmanypoorinvestmentsbothatthecorporateandtheventurelevels.

    AsillustratedinFigure6,theIoTvaluechainisbroad,extremelycomplexandspansmanyindustriesincludingthoseasdiverseassemiconductors,industrialautomation,networking,wirelessandwirelineoperators,softwarevendors,securityandsystemsintegrators.Becauseofthiscomplexity,veryfewcompanieswillbeabletosuccessfullysolvealloftheassociatedproblemsorexploitthepotentialopportunities.

    Figure6:TheIoTValueChainBroad,extremelycomplexandspanningmanyindustries

    Source:WCP

    Things:Thislayercoversthesensorsandsensorrelateddevicesthatareusedtocapturedatafromtheenvironment,automobiles,trucks,airplanes,trains,machines,machinery,buildingsandpeople.ThesemiconductorvendorsareamongthekeysuppliersofsophisticatedIoTsensortechnologies,whicharethenusedbyotherstobuildconsumer,businessandindustrialIoTdevices.Fromasystemsperspective,thislayeralsocoverstheplatformsthatareusedtospecify,designandbuildIoTdevices.

    IoTvaluechain

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    Gateways/NetworkingInfrastructure:IoTdevices(includinghomeconsumer,enterpriseorindustrial)communicatewithcommunicationsnetworksviathislayer.Thenetworkequipmentmanufacturersprovidethegatewaysandphysicalinfrastructurefortransportingsensor/devicedataoverwirelessandwiredtelecommunicationsnetworks.GatewaysarealsousedtoallowIoTdevicestocommunicatewithotherIoTdevices.

    Wireless/WiredCommunicationsServices:Ubiquitousand

    inexpensivewirelessandcloudservicesformthebackbonesfortransportingsensor/devicedatatocollectionandanalyticssystems.Weexpectthatserviceproviders,whilecentraltotransportingthisdata,areanglingtobecomemorevalueaddedplayersintheIoTvaluechainbytryingtoofferanalyticsandalsolookinghardforotherwaysofmonetizingthisdataorotherwisecapturingvalue.

    FastData/BigDataAnalytics:TheseaofdatageneratedbyIoT

    deviceswillneedtobecollected,storedandanalyzedhere.Thesheervolume,datarateandtherealtimenatureofIoTdatapresentschallengesfortraditionalRDBMSsystemswhichweredesignedforstaticdatasets.Weareseeingboththeestablishedcompaniesandmanynewstartupsbuildsystemsthatcanmanagedynamicrealtimedatasets.

    EnterpriseApplications:ThesearetheCRM,BI,supplychain,

    billing,procurementandotherapplicationsthatareindispensabletorunningabusiness.IoTcreatesatleastanorderofmagnitudemoreinformationthanthesesystemsareaccustomedto,whichpresentsanopportunityforinnovatorstochallengeincumbentsintheenterpriseapplicationspace.

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    Unfortunately,therearealsodownsidestothistypeofempowerment.TwoprominentonesarethesecurityriskstocriticalITsystemsandinfrastructureandsignificantlossofindividualprivacy.WehavealreadyseentheharmfulconsequencesofcyberattacksontheInternet,butbelievethatthemuchlargernumberofconnectedIoTnodesposesanevenmoreseriousthreatthatcoulddamageorshutdowninfrastructureandpotentiallyevenimpactGDP.

    ConsumershavesofarbeenwillingtosharetheirInternethabits(browsingandmobiledataaswellasphotographsandpersonalinformationlikebirthdays,asanexample),andcompaniessuchasGoogleandFacebookhaveminedandexploitedthesenuggetsofdatatobecomejuggernautswithmarketcaps/cashofaround$362B/$60Band$208B/$11Brespectively(asof02/09/15).IoTwillgenerateevenmoreprivateandintimatedata,andwebelievethattheInternetgiantswillbeeagertogather,mine,andmonetizethisdata.ItisverypossiblethatGovernments(atleastintheEU)maystepuptolimittheseprivacysensitiveactivities.

    IoTintheindustrialspacewillresultintangiblebenefits,buttheinherentopennessofanIPbasednetworkisfraughtwithsecurityrisksthatarepotentiallycatastrophic.Imaginethepowergridorhospitalsystemsbeinghijackedandtheconsequencesontheeconomyandhumanlife.WereferskepticstoreadabouttheStuxnetworm,whichpurportedlyruinedonefifthofIransnuclearcentrifuges.ChevronhasfoundStuxnetinitssystemsandthemalwarewasbelievedtohaveinfectedaRussianNuclearPlant.So,wewouldnotbesurprisedtoseeindustrialautomationvendorslookingtoacquirevaluablesecurityexpertisefromtheIPindustrytothwartsuchattacks.

    AsearchenginethatthathascausedconsternationisShodan,whichtrawlstheInternetlookingforanythingconnectedtotheInternetincludingrouters,servers,aswellasIoTsystemssuchasbabymonitors,trafficlight,securitycameras,andhomeheatingsystems.Googlecrawlsforwebsites.Icrawlfordevices,saysJohnMatherlywhoreleasedShodanin2009.Figure7isaShodanmapwhichshowsexposedroutersthatcontainabackdoor.Wedreadtothinkofthenumberofbackdoorsthatwillexistoncetheprojected2050billionIoTdevicesaredeployed.

    Security&Privacy

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    Figure7:ShodanMapsGloballyexposedroutersthatcontainabackdoor

    Source:https://shodanio.wordpress.com/2014/02/18/introducingshodanmaps/

    Besidesindustrialsystems,individualsarealsoatriskasevidencedbytherecentcybertheftofhealthrecordsof80millionpolicyholdersofAnthemBlueCross/BlueShield(includingnames,birthdates,socialsecuritynumbers,addressesandemploymentinformation).TheWallStreetJournalisreportingthatAnthemchosenottoencryptsensitivepersonalinformationbecausedoingsowouldhavemadeitharderforemployeestotrackhealthcaretrendsorsharedatawithstatesandhealthproviders!

    WefearthatcompaniesadoptingIoThavelittleincentivetosecuredatageneratedbyconsumershomes,cars,andwearablesunlesscompelledtobyregulators.TheregulatorsappeartobewakinguptotheseissuesandinSection3wehighlightinitiativesbyCongress,theFTC,theEUandUKsOFCOM.IoTcompaniesthatdonotconsidertheprivacyandsecurityimplicationsoftheirstrategydosoattheirperil.

    Averygoodexampleoftheissuesinvolvedrelatestotheautomobileindustry.AreportreleasedthismonthbySen.EdwardMarkey(DMass.)raisesanumberofquestionsaboutthesecurityofdatacollectedbyautomobilesandtransmittedwirelesslytobothautomakersandthirdpartyvendors.Whilevariousalliancesofautomakersincludingthe

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    AllianceofAutomobileManufacturersandtheAssociationofGlobalAutomakershavebeguntoaddresstheissuebypublishingvoluntaryprinciplesforuseofthesedata,Markeysstafffoundmultipleinstancesofautomakersrecordingdatasuchasphysicallocation,lastlocationparked,anddestinationaddressesfedintoGPSsystems,aswellasvehiclediagnosticdata,andthentransmittingthisdatatothemselvesorthirdparties.Markeyisseekingfederallevelregulationonthecollectionanduseofthesedata.

    WehaveallbecomeawareofthehighvelocityofchangebroughtaboutbyInternettimeandthenumerouslosersandthehandfulofwinnersthathavenowemerged.WebelievethatIoTtimewillleadtoequallysignificantstructuralchangesinallindustriesrangingfromagriculture,tomanufacturing,services,retailandgovernment.MostaspectsofsocietyitselfwillbeimpactedbyIoTasaresultofthenumerouswaysthatpeoplecannowconnectandcommunicatewithotherhumans,machines,organizationsandtheirenvironments.This,combinedwithnewwaysformachinestoconnecttoeachother,willbetransformativeoverthenextseveralyears.

    Overall,however,wetendtoagreewiththeviewsexpressedinarecentpaperintheHarvardBusinessReview.(JHeppelmannandMPorterHowSmart,ConnectedProductsareTransformingCompetitionHBR,November2014.)

    Thispaperintroducesthenotionofsmartconnectedproducts(SCP).Inourview,theauthorshaveavoidedalotofthehypeandtechnicaljargonthatsurroundstheInternetofThings,andhaveputforwardanumberofcriticalquestionsthatBoards,CEOsandinvestorsneedtoconsidercarefully.(WediscusstheirthoughtsonIoTstrategyinSection3,laterinthisreport.)Atpointsofmajorstrategicinflection,suchaswherewestandtoday,companiesmustassesshowtheywillleverageapotentiallytransformativedevelopmentliketheInternetofThings.Inmultipleindustries,companiesareanalyzingtheirexistingproductsandservicestoseehowtheycanbeenhancedthroughIoTanddevelopingplansforhowtheycanaddvalueanddifferentiatetheirproductsfromcompetitors.

    IoTtime

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    ToremaincompetitivetheywillneedtoevaluatethecapabilitiesrequiredtocompeteinIoT.Theywillthenbefacedwiththedecisionofwhethertodevelopwhateverisrequiredinternally,orseektoacquiretheappropriateskillsorproductstobecompetitiveinanewIoTenabledworld.Importantfactors,suchasTimetoMarketandinternalskillswillneedtobeweighedcarefullytopositiontheorganizationforsuccess.

    Figure8:EnablingtheIoTValueChainRequiresamyriadofequipmentandsoftware

    Source:WCP

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    2.AFrameworkforAnalyzingIoTMergers&Acquisitions

    Inthissection,weidentifysomeofthebellwetherIoTtransactionsthathavebeencompletedbytheleadingsuppliersofIoTsolutionsinthetechnologyandInternetmarketspace.Tofacilitateouranalysis,wehavecategorizedtheindustrysectorsinto:

    Home/ConsumerSolutionssoldtoconsumersforpersonalorinhomeuse,andthecompanieswhichsupportthem.

    TheIndustrialBusiness/EnterpriseInternetIoTtechnologiesthattargetindustrialcustomers,includingminingandextractionindustries,manufacturing,andgenerallyanythingsoldtobusinesscustomersasendusers.

    Semiconductors/SensorsIoTrelatedsemiconductorsandassociatedcomponentsincludingsensors,microcontrollers,SoCs;allthebuildingblocksofthephysicaltechnologiesthatsupportIoT.

    NetworkingComputingThephysicalnetworkinggear(wiredandwireless)thatcarriesthedatagenerated,storedandprocessedbyIoT.Plusthesoftwareandcomputersystemsneededforbigdataanalysisandbusinessintelligence.

    ServiceProvider/SystemsIntegratorThewholesaleandretailnetworkoperatorsthatrunthephysicalwiredandwirelessnetworks.Andthesystemsintegratorsthathelpcompaniesbuild,adaptandmonetizetheirproductsusingIoTnetworks.

    TherehasalreadybeenaconsiderableamountofIoTrelatedM&AactivityascompaniespositionthemselvestocompeteonanIoTenabledlandscape.GooglehasalwaysbeenveryeffectiveatusingM&Aasmeansofgainingcompetitiveadvantageandexpandingintonewmarkets.AgoodexampleofthisisGoogle'soriginalacquisitionofAndroidwhichallowedtheCompanytobecomeamajorplatformplayerinsmartphones,whichhaveevolvedtobebothanIoTsensorcluster(GPS,accelerometers,etc.)andremotecontroldevice.

    UsingM&Atoleapfrogcompetitors

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    GoogleisextendingitsAndroidPlatformfranchiseintowearablesandacquiredWIMMLabstoenhanceitscapabilitieshere.WIMMLabswasapioneerindevelopinganAndroidbasedplatformforwearables,suchasSmartWatches.Morerecently,GooglehasturneditsattentiontoSmartHometechnologiesthroughtheacquisitionsofNest(smartconnectedthermostats),Revolv,andDropcam.GooglehasalsobeenactiveontheindustrialsideofIoTwithitsacquisitionofBostonDynamics,aroboticsdesigncompanythatisbestknownforthedevelopmentofBigDog,aquadrupedrobotdesignedfortheU.S.military.InadditiontoBostonDynamics,Googlehasalsoacquiredanumberotherroboticsandartificialintelligencestartups.WearenotsurprisedbythesemovesasrobotscouldmimicthesmartphoneIoTrelationshipsnowbeingobservedintheconsumerworldandbecometheroboticsmartphonefordeliveringindustrialIoTappsandservices.WethinkthatthiscouldbeawayforGoogletouseitsIPanddataanalyticsexpertisetoentertheindustrialIoTmarketandunseatexistingvendorswhohavetosupportlegacynonIPM2Msystems.WealsobelievethatGoogle,muchlikeApple,wouldliketopositionitstechnologytobeafundamentalplatformforconnectedcars.WebelievethismightexplainsomeoftherationaleforitsacquisitionofWaze.Finally,webelievethatGoogleisalsointerestedinSmartCities,buthaspursuedamoreorganicapproachviaitsbroadbandandMetroWiFiinitiativesaswellasGoogleMaps.TheInternetofThingswillallowGoogletoexpandintonewmarketsaswell,providingavaluablestreamofadditionaluserdatathatcanbeleveragedinitscorebusiness.Wedon'tbelievethatGoogleisalonewhenitcomestotheInternetofThingsandseecompetitors,suchasApple,Oracle,IBM,Cisco,andMicrosoftdevelopingsimilarstrategies.

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    SemiconductorsareavitalcomponentoftheIoTpuzzle,andmanyofthecompaniesinthisindustryhavebeenattheforefrontofdevelopingcomponentsforIoTapplications.Semiconductorvendorshavebeenamongthemostactive(andearly)playersintheIoTM&Aspace.Severalhavebeenactivelybuyingtargetswithnewcapabilitiesinprocessing,sensingandcommunications,allofwhichareIoTsegmentsthatareprojectedtogrowat30%through2020versustheoverallsemiconductormarketgrowthofaround7.5%.Wethinkthatthebuzzaroundconnectedhome,wearables,andGooglegenerally,tendstoovershadowtheenormouspotentialofIoTproductsintheindustrial,manufacturingandretailworlds.Theglobalindustrialautomationmarketisextremelylarge,amountingto$170billionin2013andprojectedtogrowat7%forseveralyears.Companiesinthisspace,suchasGEandZebra,havebeenquietlyaddingIPcapabilitiesthroughinternaldevelopmentandacquisitionsandweexpectthistoaccelerateinthecomingyears,asvendorsadapttheirM2MsystemstoIPbasedIoTnetworks.Inthetablethatfollows,weshowaframeworkformappingthesetransactions.Insubsequentsectionsandtables,weanalyzetherationalebehindanumberofkeyM&Adealsthathavetakenplacewithinthesesectors.Intheappendixtothisreport,welistmanyoftheotherIoTM&Atransactionsthathaveoccurredinrecentyears.Weexpectthislisttokeepgrowing.

    Notestotheframework onthenextpage:1. Efficiencies:Drivenbyfinancialmetrics,increasemarketshare,expandreach2. Incremental:Desiretoaddnewfeaturestoexistingproductsandsolutions3. BraveNewWorld:Boldattempttoenternewmarketsegmentthatisunrelatedto

    currentbusiness

    Semiconductorsareleadingtheway

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    Sector/Goal EFFICIENCIES1 INCREMENTAL2 BRAVENEWWORLD3

    Echelon/Lumewave(ND) Google/BostonDynamics(ND)

    GE/Wurldtech(ND)

    Lockheed/IndustrialDefender(ND)

    PTC/ThingWorx($130M)

    PTC/Axeda($175M)

    Zebra/MotorolaEnterprise($3.5B)

    Cypress/Spansion($4B) ARM/Sensinode(ND) Intel/BasisScience(ND)

    ARM/Offspark(ND)

    Atmel/Newport($170M)

    Freescale/Xsens($61M)

    Freescale/Zenverge(ND)

    Intel/Lantiq(ND)

    NXP/Quintic(ND)

    Qualcomm/CSR($2.5B)

    SiliconLabs/Bluegiga($61M)

    SiliconLabs/EnergyMicro($170M)

    SiliconLabs/Ember($72M)SiliconLabs/Touchstone($1.5M)

    Cisco/JouleX($107M) Belden/Tripwire($710M)

    Cisco/TailF($175M)

    Citrix/Octoblu(ND)

    DigiInt'l/Etherios($20.5M)

    Ericsson/TelenorM2M(ND)

    Gemalto/SensoLogic(ND)

    Huawei/Neul($25M)

    LogMeIn/Ionia($25M)

    LogMeIn/Pachube($15M)

    Kore/Raco(ND) Comcast/PowerCloud(ND)

    SiriusXM/Agero($530M)

    Telit/ILSTechnology($8.5M)

    Telit/MotorolaM2M($24M)

    Verizon/HughesTelematics($737M)

    Verizon/nPhase(ND)

    ViaSat/LonoCloud($2M)

    Vodafone/CobraAutomotive($269M)

    SERVICEPROVIDER

    HOME/CONSUMER

    Facebook/Oculus($2B)Google/Nest($3.2B)Google/Nest/Dropcam($555M)Google/Nest/Revolv(ND)Google/Waze($996M)Google/WIMMLabs(ND)UnderArmour/Endomondo($85M)UnderArmour/MyFitnessPal($475M)

    Samsung/Quietside(ND)Samsung/SmartThings($200MEst)Jawbone/BodyMedia($100MEst)Jawbone/MassiveHealth(ND)

    NETWORKING/COMPUTING

    SEMICONDUCTOR/SENSOR

    INDUSTRIALBUSINESS/ENTEPRISE

    AFrameworkforM&AAnalysisSelectedTransactionsintheIoTSpace

    Buyer/Seller(Pricepaid).ND=Notdisclosed

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    Home/ConsumerIoTSelectedM&ATransactions

    Thesmarthomehasbeendiscussedfordecades.HoneywellintroduceditsclassicT86roundthermostatin1953,anditisoneoftheworldsmostrecognizableindustrialdesignsandisstillavailabletoday.ItisprobablynotacoincidencethattheNestthermostat,thoughtbymanytohaveinitiatedthecurrentwaveofinterestinconsumerorientedhomeautomation(asaresultofGoogles$3.2billionacquisitionalittleoveroneyearago)issimilarinshapeandappearance.Butthefunctionalityunderneathrepresentsthebeginningofadifferentera.And,aswehavealreadybeguntosee,GooglesambitionswithrespecttoIoTmayinfactextendacrossmultipledomains.

    TheNestdevicesalsoconnectwitheachother(aswellasotherenablednodessuchasyourcarorotherrelevanthomeequipment),andyourutility,tomakeyourhomemorecomfortableandyourenergyconsumptionmoreefficient(andthuspresumablylesscostly).Beyondthat,GooglesacquisitionsofDropcam(simplifiedinhomevideoandsecuritymonitoring)andRevolv(anearlystagedeveloperofauserfriendlyhomeautomationhub)illustratetheirstrategywithrespecttothehomeautomationspace,usingthesmartphoneastheprimaryuserinterfaceandofferingavarietyofusefulfunctionsunderoneunifiedproductumbrella.

    Whileitisstillveryearlyinthedevelopmentofthesenewtechnologies,themarketconfrontationbetweenAppleandGoogleisalreadyclear.ApplehasannouncedHomeKitandHealthKit.HomeKitisitshomeautomationframeworkfordevelopers,runningonitsIOSmobileOS,whichaimstointegratemultiplevendorsofhomeproductsunderoneunifiedcontrolframeworkthatcanbecontrolledfromtheApplesmartphoneortablet.HealthKitisasimilardevelopmentframeworkforhealthandfitnessapplicationdevelopment.

    Fromtheusersperspective,thesesolutions,ifsuccessful,willunifythecontrolofallsortsofdisparatehomeenvironmentelementsintoone(hopefullyeasytooperate)userinterface.

    ThecomparativelyhighdollarvaluationpaidforNestLabs,andthescaleoftheopportunityintermsofthesheervolumeofdevicesinconsumerhouseholdsthatmightbetouchedbyanIoTorientedtechnology,has

    Buildingtheoperatingsystemfortheconnectedhome

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    generatedalotofexcitement.Thereisstill,however,quiteabitofexperimentationgoingonastohowbesttoapproachthisopportunityanddosoprofitably.

    Forexample,Cisco,acompanywhoseinterestinconnectingthingsisglaringlyobvious,hashadafewstumbles,havingpaidabout$600millionforPureDigital(makeroftheFlipvideocameras)andthenshuttingitdownonlytwoyearslater,andhavingacquiredLinksysfor$500millionandthensellingitofflastyeartoBelkin,presumablyforalotlessmoney,therebyessentiallyexitingtheconsumerbusinessandreturningtoitsmorefamiliarturfintheB2Bandserviceproviderworlds.(AconnectedPureDigitalcamerawouldbesimilartoDropcamacquiredbyGoogle/Nest,andtheLinksysrouterscouldhavebecomehubssimilartoSmartThingsacquiredbySamsung.)CiscosHomeEnergyController,whichwasannouncedtomuchfanfareinJune2010,wasquietlywithdrawninJuly2011.Theproduct,whichsupportedbothWiFiandZigbee,wasdesignedtocommunicatewithothersmarthomeappliances.Itisnotcleartouswhethertheseeffortsweresimplytooearlyorsuffereredfromothermorefundamentalissues.

    Figure9:ThermostatsandHomeControlUnitsEstablishedvendorslikeHoneywell,butGooglesNesthascapturedtheimagination

    Honeywell GooglesNest CiscosHomeEnergyController

    Broadlyspeaking,theIoTisaboutthedigitalizationoftheworldaroundusandtheaccumulationofdataforanalyticalpurposes.GoogleandFacebooksellusergeneratedcontent(UGC)theyacquireinexchangeforfreeapps.Appleusesdataaspartofitsoverallstrategytobuildhighmarginproductsthatpeoplecovetthatjustwork.Otherplayersarraythemselvesacrosstheecosystemeitherfacilitatingthese

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    strategiesorworkingwithnontechnicalplayerstohelpthemenableandconnecttheirproductstotheIoT.SomecompaniesanglingforaroleinthehomeincludeGE(inpartnershipwithQuirky),Wink,Belkin,Honeywell,andLutron.

    BothJohnsonControlsandEatonCooper,longtermplayersinbuildingandenergymanagement,arescramblingtooffersmarthomeandsmartbuildingcontrols.EatonCooperrecentlyreleasedasmartphonebasedapptocontrolitsxComfortlineofRFbasedwirelesshomeautomationtechnologies.JohnsonControlshasrolledoutthePanoptixcloudbasedbuildingefficiencyplatformthatconnectswithitsexistingbuildingmanagementtechnologiestoofferenhancedanalyticcapabilitiestoenablemoreefficientbuildingmanagement.

    InadditiontoitsacquisitionofSmartThings(anopenIoTplatformtechnologyplayer),SamsunghasalsoacquiredQuietside(HVACdistributor),andclaimstheseacquisitionsarepartofitsIoTstrategy,whichaimstoconnecteveryelectronicdeviceSamsungmakestotheInternet,buttheyhavenotyetconvincinglymadethecaseforwhythisisnecessaryordesirable.

    Companieshavetoabletoleveragetherapidlydecliningcostoftechnologyandthenearubiquityofinternetconnectivitytoimproverelationshipswiththeconsumer,findnewsourcesofrevenue,andgaindifferentiatedcompetitiveadvantage.TheInternetofThingsallowsthemtotakethistoanotherlevel.

    Forexample,inareasasmainstreamasWhiteGoods(refrigerators,washers,anddryers),weestimatethatforlessthan$20perunitmajormanufacturers,suchasWhirlpool,GE,BoschandHaierwillbeabletoembedWiFiconnectivitysolutionsfromcompaniessuchasGainSpan,Marvell,Murata,RedPineSignalsandSiliconLabsthatwillallowcustomerstoconnecttheirappliancestotheInternet.

    Whatisthebenefitofconnectedappliances?Acloserrelationshipwiththecustomer,theabilitytoinstilldeeperbrandloyaltyandtheopportunitytoinfluencefutureappliancepurchases,abetteruserexperienceforthecustomer,theabilitytoremindcustomerstoreplaceconsumables(filters,etc..)andtoalertthemtothepotentialneedforservice.

    Connectedappliance

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    Webelievethatoverthelifeofagivenproduct,throughthesaleofhighmargin(>80%)aftermarketconsumablesandservice,theOEMhasanopportunitytocaptureapproximatelythesamelevelofgrossmargindollarsasontheinitialsaleoftheappliance,whichtendstocarryrelativelylowgrossmargins.WebelievethesefactorsprovidestrongmotivationforWhiteGoodsOEMs(aswellasothermanufacturerswhocanexploitsimilarbusinessmodels)toembracetheInternetofThings.

    Apartfromthehome,anotherareaofstronginterestandactivityontheconsumersidehasbeeninwearabledevices.WCPadvisedWiMM,amakerofanAndroidbasedwearablewristcomputer,initssaletoGooglein2012.ApplehasrecentlyannouncedtheAppleiWatch,whichwillleveragebothHomeKitandHealthKitforwearableapplications.

    AsAppleandGooglemovetoconsolidatetheirholdonthedevelopercommunity,JawbonehasalsoattemptedtobuildonitsexistinghardwarestrengthswiththeacquisitionsofMassiveHealthandBodyMedia,extendingtheirabilitytousebiometricdatatohelpusersimprovefitnessandhealth.

    Aninterestingphenomenoninthehome/consumerIoTspaceistheabilitytostartacompanyusingfoundersfundsorcrowdsourcing.Duetothereadyavailabilityofsophisticatedcommunicationsandcomputingsystemsonachip(SoC),thecostofdevelopinghardwarehasfallendramatically,whichallowsentrepreneurstorapidlycomeupwithsellableproducts.Crowdfundinghasbeenresponsibleforanumberofproductsforthesmarthome,includinglightingcontrol,bulbs,locks,andenergymanagement.Wehavealsoseensimilarproductsemergeinthewearablesarenaincludingthosethattrackhealthorimproveperformanceatcertainsports.

    NestLabs(PaloAlto,CA)andSmartThings(Washington,DC)aretwoexamplesofcompaniesthatbeganthiswayandthenwentontobeacquiredbyGoogleandSamsungrespectively.ThecrowdfundedphenomenonisnotconfinedtoUSbasedcompanies.Forexample,LIFX,whichmakessmartbulbs,beganinAustraliabeforemovingtoSiliconValleyandraisinga$12millionSeriesAfromSequoiaCapital.Anotherexampleisthewearablescompany,ActiveMindTechnologies,whichwasbootstrappedinIreland,butlatermovedtoSanFranciscototryandsellitsgolfwearable.

    Crowdfundingasasourceofinnovation

    Wearables

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    Giventhecomplexitiessurroundingdistributionandpostsalessupportintheconsumer/homespace,weexpecttoseethefewsuccessfulcompaniestobeacquiredoncetheyhaveprovenproduct/marketviability.Wealsoexpectmanyofthecrowdfundedconsumer/homecompaniestofailandsimplyfadeaway.

    OneofthemorehighprofilecrowdfundedprojectswasPebbleTechnology,makerofthePebblesmartwatch,whichraisedmorethan$10millionfromaround69,000people.TheproductnowsellsonAmazonfor$140.ItwillbeinterestingtoseehowPebblefaresonceApplereleasesitiWatch.WethinkthatthethreatofcompetitionfrombiggercompanieswasamajorfactormotivatinginvestorsinBasisSciencetosellthatcompanytoIntel.

    Figure10:PebbleSmartwatchAnearlyentrant,butnowfacingcompetitonfromApple,Swatch,Samsungandothers

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    Acquirer Date Target Price Product Rationale

    Facebook Jan15 Wit.ai ND

    VoicerecognitiontechnologyforwearabledevicesandInternetconnectedappliances

    VoicerecognitiontechnologywillsimplifyentryofdataintomobiledevicesawhichhavesmallkeyboardsTobettercompeteagainstmobiledevicesfromApple(Siri)andMicrosofta(Cortana)Naturallanguagecontrolforkeyboardlessdevices(e.g.settopbox)

    Facebook Mar14 OculusVR$2B/$400Mincashplusstock

    Virtualrealitygoggles

    PartofFacebooksstrategyofconnectingpeopleacrossdevicesandmodesofcommunications.CombiningVRandsocialmediaPutsFacebookintothehardwarebusiness

    Google/Nest

    Oct14 Revolve NDSmarthubthatcontrolslights,speakers,locks

    AcquiredRevolveforitssmarthomedeveloperplatformTalentacquisition:expertsinhomewirelesscommunicationsystems

    Google/Nest

    Jun14 Dropcam$555M/cash

    WiFiwebcamsandcloudbasedstorage

    AllowsGoogle/NestintothehomevideosurveillancemarketComplementsthermostatsandsmokedetectorsCompetitionfromtraditionalhomeautomationvendorssuchasHoneywell.

    Google Jan14 NestLabs $3.2B/cashSmartthermostatsandsmokealarmsforhomes

    NestthermostatsprovideinsightsintoconsumerenergyuseGoogleplanstosellthisdatatoenergyproviderstohelptheminfluenceenergyusage.GainfootholdintheemergingmarketforInternetconnectedhouseholdaappliances.ThwartcompetitionfromApple,Microsoft,Amazonandothersforcontrolofthesmarthome

    Google Aug13 WIMMLabs ND Smartwatch/wearables GoalofmakingAndroidtheleadingplatformforwearables

    Google Jun13 Waze(Israel) $966M

    Israelimappingandnavigationcompany.Afreesocialtrafficandnavigationappthatallowsuserstosharerealtimetrafficandnavigationinformation(45Musersattimeofpurchase.)

    PlanstoenhanceGoogleMapswithWaze'strafficupdatesfeaturesandimproveatheWazeappwithGoogle'ssearchcapabilitiesBattleforconsumerloyaltytomobiledevicesFacebookandApplewereapotentialbuyers.PersonalizedmapstousersneedsGlobalfootprint:usedin190countries

    Jawbone Apr13 BodyMedia $100M/EstWearablehealthtrackingdevices

    ComplementsJawbonesexistingwearablestechnologywithaddedexpertiseainbodymonitoringandhealthandfitness

    Jawbone Feb13 MassiveHealth ND

    Eateryappforthenutritionconscious.Expertiseinusingdatatohelppeopletracktheirhealth

    CombineJawbonehardwarewithMassiveHealthssoftwaretohelpusersagatherandquantifydatarelatedtoeatinghabits.

    Samsung Aug14 SmartThings $200M/EstSmarthomehub.CompetitortoRevolv.

    AhubcomponentforSamsungsconnectedhomestrategy

    Samsung Aug14 Quietside NDLeadingHVACdistributorforSamsunginUSAandCanada

    Partofthesmarthome/smartofficestrategy

    UnderArmour

    Feb15 MyFitnessPal $475M HealthTrackingappWillcomplementthecompanyscurrentsoftwareGivesUnderArmor120millionusersLockincustomerswithtechnologyandservicesratherthantshirtsandshoes

    UnderArmour

    Feb15 Endomondo $85MSocialSportsandfitnessnetwork

    GeneraterevenuewithpremiumversionsandadvertisingCompeteagainstNikeactivitytrackingGotomarketfasterwithacquiredtechtalent

    SelectedM&ATransactionsHome/ConsumerIoT

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    TheIndustrial&Business/EnterpriseInternetIoTSelectedM&ATransactions

    WethinkthebuzzsurroundingIoThassofarbeenmorefocusedonthehome,consumerandwearablesmarkets,andtendstoovershadowtheenormouspotentialofInternetProtocol(IP)connectedproductsinindustrialandbusiness/enterpriseworlds.IoTintheconsumerworldiseffectivelyagreenfieldopportunitywithnoinstalledbaseandnodominantvendors,whereastherearemanyexamplesofconnectedproductsinthisarena.

    OurdefinitionoftheIndustrialandbusiness/enterpriseInternetforIoTpurposesreferstoallnonconsumerapplicationsoftheInternetofThings,rangingfromsmartcities,smartpowergrids,connectedhealth,retail,supplychainandmilitaryapplications.Thetechnologiesandsolutionsneededforcreatingsmartconnectedproductsandprocessessharemanycommonattributesacrossindustrialandbusinessverticals.

    Figure11:IoTMarketSegmentsPotentialtopositivelyimpacteveryindustryandeconomicactivity

    Source:ChipDesign

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    ThepredecessortowhatwenowrefertoasIoTintheindustrialbusiness/enterprisesectorsisM2M,ormachinetomachinetechnology.Thisencompassesawidevarietyofdifferentproprietarycommunicationsandnetworkingprotocols,typicallydevelopedandmaintainedbyasinglevendororaprimaryvendorwithagroupoflicensees,alladdressingoneormorespecificindustryverticals.SCADA(SupervisoryControlandDataAcquisition)andDCS(distributedControlSystem)areexamplesofcommunicationssystemsthatarewidelyusedandwellestablished.

    Intheindustrialandbusiness/enterpriseworlds,incontrasttotheconsumerdomain,billionsofdollarsworthofinvestmentinconnectivityandcontrolsystemshasalreadybeenmadeandthesesystemshavebeenoperatingreliablyinproductionenvironments,insomecasesformanyyears.ItishighlyunlikelythattheseinvestmentswillsimplyberippedoutandreplacedwithInternetProtocol(IP)enabledIndustrialInternet.Instead,vendorsandtheircustomersarelikelytotakeamoreevolutionaryapproachusingnewproductstocreatebridgesandoverlaysbetweentheoldandnewworlds.

    Also,incontrasttoconsumerorientedstrategies,industrialandbusiness/enterprisevendorstendtobeveryfocusedonreliabilityandaremorelikelytogiveupopenstandardsinfavorofthehigherfunctionalityadedicatedtechnologystackcanprovide.Overtime,however,thismaychange,asopenstandardsbecomemoreubiquitousandrobust,andendusersincreasinglytrytoavoidlongtermlockinandpursuecompetingsolutions.Industrialbusiness/enterpriseplayersalsotendtobemuchmoreawareofandsensitivetoissuesofownershipofthedata,anddatasecurity/intrusionprevention.

    TheminingindustryisgoodexampleofhowIoTcanoffersignificantandcosteffectiveoperationalimprovements.IoTcanimprovesafety,streamlineoperations,anddramaticallyenhancedatacollection.Itisanindustrythatoperatesinhostileenvironmentsmostlyinisolatedareas,oftendeepunderground,andtypically24hoursaday,usingenormousandpotentiallyverydangerousequipment.IoTcanbeusedinanumberofwaysincluding:

    IndustrialIoTisdifferentthanconsumerIoT

    Example:Mining

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    Minesafety:locationandproximitysensorscanbeusedtotrackequipmentandminerstominimizethechancesofeitheronebeingatthewrongplaceatthewrongtime

    Autonomousoperationofexpensivetrucksandtrains:remotelyconnectedtrucksandtrainswithhundredsofsensorsonthemandguidancesystemscanoperate24hoursadaywithouttheissueofhumanfatigue

    Datacollectionandvisualization:sensorscancollectrealtimegeologicalandequipmentdatathatcanbeusedonsitebyoperators,aswellasinoperationcentersthatcanbelocatedindistantcitiesorevenothercountriestostreamlineminingoperations

    Maintenance:sensorscanfeedpredictivemodelswithdatathatcanthenbeusedtodopreventativemaintenanceonexpensiveequipment.

    AnotherbusinesssegmentthatshouldbenefitfromIoTisthebrickandmortarretailindustry.Thisindustry,whichhasbeendisruptedbyecommercegiantssuchasAmazon,willhavetolookforcreativewaystocompetewithonlinecompetitorsbyloweringcosts,improvingefficienciesandprovidinggreatervaluetotheircustomers.AnareawhereIoTcouldhavethegreatestimpactisinthemanagementofsupplychainsandwarehouses,whereitcouldreduceinventoryholdingcostsandoptimizefulfilmenttimes.IoTcouldalsochangethewayretailersinteractwiththeircustomers.Acombinationofsmartphones,instoresensorsandoptincustomerdatacouldbeatreasuretroveforfinetuningpromotionsandengagingcustomersinnovelways.

    Example:Retail

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    Relatedtotheoverallindustrialbusiness/enterprisespace,"smartcities"hasemergedasanareaoffocus,particularlyforCisco.ThereisgoodreasontobelievethatcitiesandotherlocalgovernmententitieswillbeearlyadoptersofIoTtechnologies,becausethebenefitsareclearandthecustomershavelongtimehorizons.Althoughcitiesworldwideoperateunderseverebudgetconstraints,theirlongtermtimehorizonpermitsthemtomakecalculatedbetsonnewfunctionalityifthebenefitsarecompelling.

    Figure12:SmartCitiesCombinationsofSensorsandWirelessNetworks

    Source:Libelium

    Forexample,streetlightingoffersmanyintriguingpossibilities.Notonlycancitiesmanagetheirlightingmoreefficiently,reducingtheirpowerconsumptionandtherebythecostofoperation,theycanalsousethelightpoleasalocusforsensingdevices,connectthemintoameshnetwork,andselectivelyactivateordeactivatelightingforpublicsafetyreasonsswitchingonbrightilluminationatanaccidentscene,forexample,andswitchingoffilluminationinterroristsituationswhereatacticalteambenefitsfromdarkness.SomeM&Aactivityislikelyastraditionalplayerspositionthemselvesforthenecessarytechnicalsophisticationtocompeteinthisspace.

    SmartCities

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    Theglobalindustrialbusiness/enterpriseautomationmarketisextremelylarge,amountingto$170billionin2013andprojectedtogrowat7percentforseveralyears(source:IHS).IHSalsoforecaststhattheindustrialautomationsectoraccountsfornearly75percentofallIPconnecteddevices.

    Figure13:GlobalRevenueForecastforIndustrialAutomationEquipment

    Source:IHSTechnology

    Thecompaniesinthisspacesupplyawidearrayofprocessandcontrolequipmentandservicestoabroadspectrumofindustriesincludingenergy,automotive,aerospace,utilities,retailandhealthcare.Thesecompaniesandtheircustomersarecontinuallylookingforwaysofimprovingefficiencies,loweringcostsandincreasingproductivity.IoTwithitssophisticatedsensors,ubiquitousIPconnectivity,andadvanceddataanalyticshasthepotentialtoprogressivelytransformthesecompaniesproductsandtheircustomersofferings.

    Thefigureonthenextpagerepresentsacrosssectionoftheleadingsuppliersofindustrialautomationcompaniesworldwide.

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    Figure14:RevenuesofSelectedIndustrialAutomationGiants

    Largemarketstendtoattractcompetitors,andwethinkthattheindustrialautomationmarket,alreadycompetitive,couldattractnewcomersfromoutsidetheindustrythathaverequisiteskillsinInternetProtocolanddataanalyticsbothessentialtoIoT.Alikelyscenarioherecouldbegleanedbyeventsthattransformedthetelecomequipmentworld,where,fornearly100years,ahandfulofcompaniesLucent,Nortel,Alcatel,Siemens,NokiaandEricssonsuppliedproprietaryTDM/PSTNequipmenttotelecommunicationscarriersworldwide.These(mostlyregulated)telecommunicationscarrierssoldtheirservicestocaptivecustomers.

    However,industryderegulationandtheshiftfromtraditionalTDM/PSTNnetworkstoIPpacketsystemsallowedtheentryofnewcarriers,whodrovepricesdown,andnewequipmentvendorssuchas

    Company LTMRevenues MarketCap Solutions

    ABB(Switzerland/Sweden) $39B $46B Robotics ,powerandautomation

    BorgWarner(USA) $8B $13B Automotive industrycomponents andparts

    Bosch(Germany) $52B NA Automotive,industria l ,energy,bui ldingproducts andconsumergoods

    Emerson(USA) $25B $39B Products andservices forindustria l ,commercia l andconsumermarkets

    Fanuc(Japan) $5B $32B Robotics andcomputernumerica l control systems

    GE(USA) $148B $242B Infras tructure services andindustria l equipment.

    Honeywell(USA) $40B $78B Divers i fiedtechnologyandmanufacturingcompany

    JohnsonControls(USA) $43B $31B Bui ldingefficiency,automotive efficiencyandpowersolutions

    Omron(Japan) $7B $8B Control equipment,factoryautomationsystems andrelated

    SchneiderElectric(France) $27B $44B Energymanagementtechnology

    Schlumberger(USA) $48B $107B Services andtechnologytothe oi l andgas industries

    Siemens(Germany) $82B $90B Engineeringconglomerate broadIndustry,energy,heal thcare solutions

    UnitedTech(USA) $65B $107B Techandservices tothe bui ldingsystems andaerospace industries

    source: CapIQ, as of 02/06/15

    Incumbencymaynotofferprotection

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    CiscowhowereexpertsinIPnetworks.Theaddedcompetitionandthechangesintechnologytransformedthetelecommunicationslandscapeintowhatweseetoday,dominatedbydigitalwirelessandwiredservices,andgenerallymuchlowerprices.Ontheequipmentfront,theentryofChinesevendorsHuaweiandZTEhasputadditionalpressureonmoreestablishedvendors.Intermsoftheoriginalvendors,Nortelwentbankrupt,AlcatelmergedwithLucentanddozensofotherssimplyfadedaway.IntermsofthenonChinesevendorsonlyCiscohasmaintaineditsdominance.

    Figure15:Top5TelecomandDatacomVendorsin2014BasedonTotalRevenue

    Source:Infonetics

    Similarly,wethinkthatintheindustrialworld,theshift(albeitgradual)fromproprietarycontrolsystemsandsensorstowardsopenIPbasedIoTsystemscouldresultinamorecompetitiveenvironmentwithlowerpricesandprofits.Themoreprescientindustrialbusiness/enterpriseautomationvendorswilladaptbyacquiringtechnologiesfromsmallercompaniestobolstertheirphysicalproducts.BecauseinthenewIoTworldalotoftheeconomicvalueliesinanalytics,weexpecttoseethesecompaniesbuildinguptheirbigdataanalyticscapabilitiesbothviaacquisitionsandthroughdirectinvestmentsandpartnershipswithestablishedbigdatasoftwarevendors.

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    USmilitaryplannersandthoseelsewherehavepublicallytoutedthebenefitsofIoTinallarenas,includingnationalsecurity,thebattlefield,uniforms,supplylinesandweaponssystems.TheUSDefenseInformationSystemsAgency(DISA)includesIoTonitslistoftechnologiestowatch.

    Intelligentuniformsandwearableswouldimprovethesafetyofsoldiers,andtheabilitytoembedsophisticatedsensorsthatcanproviderealtimeinformationtoprovidebetterinformationtobattlefieldcommanders.

    Thevastamountofinformationgeneratedbymilitaryassetsneedtobesecured,andweexpecttoseestronginterestinsystemsthatencryptandprotectdevicesandtransmissionnetworks.Wealsoexpecttoseethedevelopmentoffastdataandbigdatasystemstailoredfordefenseandnationalsecurityapplications,suchasthosefromPalantirandNarus(recentlysoldbyBoeingtoSymantec).

    WehaveseensomeinterestingindustrialIoTsolutionsemergefromsmallerorstartupcompaniesandhavelistedsomeofthembelow.SomeofthesecompanieshavereceivedinvestmentsfromlargervendorssuchasGEandCisco.

    AnexampleisGEsinvestmentof$105millioninPivotal,abigdataspinofffromVMware.Tofurtherbolsteritsindustrialinternetcredentials,GEhasalsoannouncedpartnershipswithAT&T(communicationsservices),Cisco(networkingequipment),AmazonWebServices(cloudcomputing),andAccenture(systemsintegration).InadditiontothePivotaldeal,GEhasalsoinvested$15millioninMocana,whosecryptosecuritytechnologycanbeembeddedinmedicaldevices,consumerelectronicsandindustrialautomation.

    In2013,Cisco,togetherwithNXPSemiconductors,announcedaninvestmentinCohdaWireless,adeveloperofhardware,softwareandchipsetsforconnectedcarsthatallowvehiclestoformadhocmeshnetworkstocommunicatewitheachotherandwithinfrastructuretopreventcollisionsandimproveroadsafety.CiscowilllicenseCohdassoftware,whileNXPwithlicensethecompanys802.11pradiodesigns.

    DefenseandIoT

    AselectionofIoTvendors

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    IoTalsohasthepotentialtoconnectrailroadswithrealtimeinformationthatimprovessafety,efficiencyandcustomersatisfaction.NomadDigitalisoneexampleofacompanythatprovidesremotemonitoringandmaintenancesolutionsforoptimizingrailindustryfleetmanagementandoperationalperformance.Thecompany,with50customersworldwide,planstoofferafullrangeofrealtimesolutionstorailandtransportoperators.

    Figure16:IoTandTransportationOffersinnovativewaystoimproveefficiencyandsafety

    Source:Cisco

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    PlatformplayerssuchasAylaNetworks,Arrayent,andElectricImparebuildingtechnologysolutionsthatwillenablewhitegoodsmanufacturerstoaddconnectivityandfunctionalitytotheirexistingconsumerproductswithoutneedingtodevelopextensiveinternalexpertisefarremovedfromtheircorebusinessstrengths.Whitegoodsrepresentjustoneearlyusecase;theseplatformtechnologiescanaddconnectivitytoanythingthatmightbenefitfromit,forrelativelylowcost.

    JapanesecloudbasedmobileapplicationdevelopmentcompanyKiiisextendingitsexpertiseintotheIoTspaceandisaplatformthatfeaturesdevicemanagement,analyticsandamobilebackend.ArduinoisaflexibleopensourcehardwareandsoftwareplatformthatcanbeusedtocreateIoTdevices.Veedims,acompanywithexpertiseindeliveryofpoweranddatathroughasinglecableoffersIoTplatformstoOEMSandODMs.

    Bsquare,anestablishedvendorofembeddedsolutions,hasdiscoveredopportunitiesintheIoTspacewithcustomerssuchasFord,Honeywell,MicrosoftandCocaCola.AnotherlongtimeM2Mvendor,DigiInternational,hasevolveditsproductsandservicestosupportIoT.AndwithitsacquisitionofEtherios,DigicanofferitsIoTcustomersacloudcomputingplatformforintegratingmachinesandthingsintobusinessprocessesviatheSalesforceServiceCloud.EchelonsolditssmartmeterbusinesstofocusonIoT,andinAugust2014,acquiredLumewave,adeveloperofnetworkcontrolsandsoftwareplatformsforoutdoorlighting.

    Newtraxofferswirelessnetworkconnectivitynodesthatareusedinmorethan35undergroundminesaroundtheworld.Thesebatterypowerednodeslastmorethanthreeyearsandcanbedeployedbyregularminers.Thepaybackofthesesystemsistypicallymeasuredinweeks.SineWavehasasoftwareplatformtailoredtoIoTapplicationsandthecompanyhasworkedwithArgonST/Boeingtobuildminersafetysystems.LibeliumhasteamedupwithIBM(MoteRunner)tooffera6LoWPAN/IPv6starterkitforapplicationsinsmartcities,healthcareandretail.

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    Percolata,fundedbyGoogleVenturesandAndreessenHorowitz,offersretailerstheabilitytodetectinstoretrafficanddeliverdataaboutthehabitsofconsumersatphysicalstores.Percolatachargesaonetimefeetoinstallwirelesssensorsandamonthlyfeetoanalyzethedatagathered.AnearlycustomerisUniqlo,withstoresintheUSandJapan,andthesystemwillinitiallybeusedtobetterschedulestafftomatchestimatedstoretraffic.

    Inthelightingindustry,weareseeingsomeinnovativesolutionsemergingfromsmallercompanies,includingDigitalLumens,DaintreeNetworks,Enlighted,andRedwoodSystems,whichwasacquiredbyCommScope.AduraTechnologies,aSiliconValleybaseddeveloperofRFmeshnetworkingtechnologythatallowslightfixturestocommunicatewithswitches,sensorsandsystemsmanagementsoftwarewasacquiredbyAcuityBrands(Marketcap:$6.5B.LTMrevenues:$2.5B).OsramSylvaniaacquiredEnceliumforitsexpertiseinenergysavingsystemsandsoftwareusedincommerciallightingsystems.Legrand,anotherestablishedenergy/lightingcompanyinthisspace,hasbeensystematicallyacquiringcompaniesoverthepast30years.

    PTC'sacquisitionofThingWorxisagoodexampleofapureplatformplayforindustrialbusiness/enterpriseIoT.ThingWorxhadalreadyachievedsuccessacrossmultipleindustryverticals,includingmining,agriculture,processmanufacturing,andfoodandbeverage,aswellasavarietyofconsumersectors.PTC,alreadyaplayerinindustryandmanufacturing,extendsitsreachtomanynewverticalsaswellasserviceproviderswiththisacquisition.

    PTCthenaddedtoitsalreadystrongpositionwiththecomplementaryacquisitionofAxeda,bringingIoTconnectivityservices,softwareagents,andtoolkitstoenablecompaniestoconnecttheirproductstothecloud,andthenremotelymonitorandservicethoseproducts,allwithrobustandreliablesecurityandperformance.

    AsThingsareincreasinglyconnectedtotheInternetformonitoringandcontrol,however,theybecomeincreasinglyvulnerabletothesametypesofsecuritybreachesthatwe'vealreadybeenexperiencingintheconsumerinternet.Thepeoplewhodesign,build,installandoperate

    Notableacquisitions

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    thisequipmenthavenothistoricallyneededtobeIT/networkingsecurityexpertsandweexpecttoseecombinationsofacquisitions,partnershipsandinternaldevelopmentactivitiestofillholeshere.

    AnexampleisGE'sacquisitionofWurldtech,whichwasmotivatedbyGE'sdesiretoimprovethesecurityofsensornetworksassociatedwithitsmajorinfrastructureequipmentsuchaswindturbinesorpowerplantgear.ByaddingWurldtech,GEisabletosellsecurityservicesandsolutionsalongsideitstraditionalindustrialequipment,addressingthesenewrequirementsforitsexistingcustomerbase,andextendingitsreachintotheIoTfortheindustrialspace.

    AnothersetofacquisitionsisthatbyFrancebasedsecurityvendorGemaltoofSafeNetinAugust2014for$890million.SafeNetoffersauthenticationandencryptiontechnologiesthatcanbeusedtoprotectnetworktransactionsaswellclouddataandsoftware.SafeNet'stechnologyprotects80%oftheworld'sintrabankfundtransfersandthecompanyhas25,000customersincludinggovernmentsandcorporationssuchasBankofAmerica,Cisco,DellandHewlettPackard.Earlierin2011,GemaltoacquiredSensorLogicforthatcompanyscloudbasedM2Mservicedeliveryplatform.

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    Acquiror Date Target Price Product Rationale

    Echelon Aug14 Lumewave NDWirelesssolutionsforcontrolandmonitoringofoutdoorlighting

    Expansionintothewirelesslightingcontrolsspace

    GE May14 Wurldtech NDCybersecurityforinfrastructureforoperationstechnology(OT)

    CybersecurityproductsthatprotectbigindustrialsiteslikerefineriesandpowerplantsfromcyberattacksSystemstoprotecttheOperationsTechnologythatconnectspeople,dataandmachinesMaximizingsystemuptimeandmitigatingexposuretovulnerabilities

    Google Dec13BostonDynamics

    NDRobotsformilitaryandindustrialapplications

    RobotsarebecomingdatadrivenandbasedaroundsophisticatedsensorsRobotscouldmimicthesmartphoneIoTrelationshipintheconsumerworldandbecometheplatformfordeliveringindustrialIoTproductsandservicesAwayforGoogletouseitsIP/dataanalyticsexpertiseandentertheindustrialIoTmarketandunseatexistingvendorswhohavetosupportlegacyM2MasystemsInadditiontoBostonDynamics,Googlehasacquiredanumberofroboticsandartificialintelligencestartups

    Lockheed Mar14IndustrialDefender

    ND

    Cybersecuritysolutionsforcontrolsystemsintheoilandgas,utilityandchemicalindustries

    Protectcriticalinfrastructure,suchaselectricpowergrids,chemicalfacilities,andoilandgaspipelinesIndustrialDefender'sexpertiseincybersecurityforcriticalinfrastructureisanaturalextensiontoLockheed'scommercialcybersecuritybusiness

    PTC Jul14 Axeda$175M/cash

    CloudbasedIoTplatformforapplicationsthatprovidessecureconnectionsbetweendevicesandpeopleMorethan150customersincludingAT&T,GE,Medtronic,MicrosoftandSiemensAround$30Minrevenues

    AccesstoAxedascustomerbasethatincludesmobilenetworkoperators,edgeadeviceanddesignindevicemakers,systemsintegrators,andbusinessasystems/analyticsproviders

    PTC Dec13 ThingWorx

    $112M/cash+earnoutofupto$18M

    PlatformfordevelopingapplicationsforconnectedworldExpertiseinM2M

    Acquireanapplicationdevelopmentplatformforconnectingpeople,systems,anddevicesTobettersupportmanufacturerscreatingandservicingsmart,aconnectedproductsAccesscustomersinawiderangeofindustriesseekingtoleveragetheIoT,includingtelecommunications,utilities,medicaldevices,agriculture,andtransportation,aswellasanemergingpartnernetworkofIoTenabledserviceprovidersPositioningitselftobecomeamajorplayerinIoT/M2Mplatforms

    Zebra Apr15

    MotorolasolutionsEnterprisebusiness

    $34BRuggedmobilecomputers,tabletsandWLANproductsforbusinesses

    MotorolaSolutionsmobileplatform($25Binrevenuesin2013)capturesrealtimedataaboutphysicalassets,people,andtransactionsacrosstheenterpriseZebrasenablingtechnologies(barcodelabelsandradiotags)providevisibilityintobusinessoperationsfordeeperinsightsandsmarterdecisionmakingBycombiningwithMotorola,ZebracanbettercompeteagainstcompetitorssuchasHoneywellBroadensZebrasportfolioofpatentstoaround4,500

    SelectedM&ATransactionsIndustrialBusiness/EnterpriseInternet

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    Semiconductor/SensorIoTSelectedM&ATransactions

    WebelievethatthesemiconductorindustrywillbeamajorbeneficiaryofthegrowthoftheInternetofThings.Theindustrywillbeakeysupplierofthebuildingblocksusedbyalloftheindustrysectorsshownthefollowingdiagram:computingandstorage,communicationsandnetworking,theThingsorconnecteddevices.

    Figure17:TheIoTValueChain

    Source:WCP

    InthecaseofComputingandStorage,webelieveIoTwillaccelerategrowthformanyofthesemiconductorcompaniesthathavebenefitedfromthemovetocloudcomputingbyprovidingprocessorsandDRAMforservers,FlashMemorytoenableSolidStateStorage,andotherchipsetsandcommunicationICsthatareusedindatacenters.WeviewIntelascontinuingtobeadominantbeneficiaryinthisdomain,provideditcancontinuetofightoffchallengesfromcompaniestryingtodriveARMbasedprocessorsintothedatacenter.

    OnevitalrequirementassociatedwiththeshifttoIoTistherealtimeelementthatiscriticaltocreatinganacceptableuserexperience.Whencontemplatingfunctionslikeprocesscontrolintheindustrialdomainorrespondingtosomebodyringingyourvideoenableddoorbell,networkswillneedtobeverydynamicandrealtimeinnature.Thisrealityisdrivingasubtlerearchitectingofnetworkinfrastructuretopushsomeoftheprocessingandanalyticsouttowardstheendofthenetworkratherthancentrallyprocessingeverythinginthecloud.(CiscocallsthisapproachFOGcomputing.)Weseeopportunitiesforsemiconductorcompaniestobenefitfromthisshiftaswell.Thereareanumberof

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    companies,suchasIntel,Freescale,Marvell,andTexasInstrumentsthatarearchitectingsolutionsforgateways.TraditionalCommICproviders,suchasBroadcom,Cavium,AMCC,andPMCSierrashouldalsoseeopportunitiestoimprovenetworkperformance.EverincreasingbandwidthofopticalcommunicationswillalsobeadriverforcompanieslikeAvago.Insomecases,thesecompaniesmayalreadybewellpositioned,butwebelievethatmanywilluseM&Aasatooltopositionthemselves.

    WebelievethattheThingsintheInternetofThingsrepresentamajoropportunityforinnovationandwilldrivealotofM&Aactivity.Manyofthe50billionThingsorconnecteddevicesthatindustryanalystsforecastwillultimatelybeconnectedtotheInternetarerelativelylowcostsensors(video,temperature,pressure,audio,GPS,accelerometers,etc.).ManyofthesedeviceswillbewirelesslyconnectedbyLTE,WiFi,Zigbee,andBlueToothlowenergy.Tomeetcustomerrequirements,semiconductorcompanieswillberequiredtoprovidelowpowersolutionsthatincludemicrocontrollers,memory,analogcircuits,powermanagement,andwirelessconnectivity.Thishasbeenalongtermtrendforleadingmicrocontrollercompanies,suchasTexasInstruments,Microchip,andSiliconLabswhohavebeenawareofthistrendandhavebeenacquiringassetstoenhancetheircoreposition.

    SiliconLabs,forexample,hasbeenveryactiveontheacquisitionfronttopositionitselffortheInternetofThings.Recently,SiliconLabsacquiredBluegiga,aleaderinBluetoothandWiFiconnectivitysolutions.ThecompanyacquiredTouchstoneSemitoenhanceitspositioninpowermanagementandlowpoweranalog.ThroughitsacquisitionofEnergyMicroAS,SiliconLabsgotaccesstolowpowerARMprocessorsandRFsolutions.SiliconLabsalsoacquiredEmberCorporationforleadingsilicon,softwareanddevelopmenttoolsfor2.4GHzwirelessmeshnetworkingsolutionsbeingdeployedinsmartenergy,connectedhome,security,lighting,andmanyothermonitoringandcontrolapplications.TheCompanyalsoacquiredSiliconClocks,thedeveloperofaMEMSprocesstechnologythatallowsforthefabricationofMEMSresonatorsandothersensorstructuresdirectlyontopofstandardCMOSwafers.Finally,SiliconLabsacquiredChipSensorsLimited,anearlystagetechnologycompanycreatinginnovativesinglechipCMOSsensorsdesignedtodetecttemperatureandhumidity.WCP

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    representedSiliconClocksandChipSensorsintheiracquisitionbySiliconLabs.

    Withthisseriesofacquisitionscombinedwiththeirowninternaltechnologydevelopment,SiliconLabshasassembledanenviableportfoliooflowpowerprocessors,analog,powermanagement,wirelesstechnology,andsensorsthatcanbeusedtodeveloplowpowerIoTdevices.

    Webelievethatinadditiontoassemblingastrongsuiteofmicrocontrollers,embeddedmemory,analog,sensorandwirelesstechnologiesthatsemiconductorcompanieswilllooktoenhancetheirembeddeddevelopmenttoolofferingeitherthroughacquisitionorviapartneringwithcompanies,suchasIS2T,thatoffersaverycompact,highperformanceIoTapplicationdevelopmentenvironment.

    PoweringtheInternetofThingswillbeanotherareaofinnovation.Wefinditdifficulttoimagineaworldof50Billionconnecteddevices,manywireless,thatwillbepoweredbytraditionalbatteries.Inthisarea,webelievethatinnovativeenergystoragetechnologiesfromcompanies,suchasCymbet,aswellasenergyharvestingtechnologyfromcompanies,suchasMicroGen,EnOcean,andPerpetuumwillbeimportantenablingtechnologies.

    TherehasbeenafairamountofSemiconductorrelatedIoTacquisitionsandweexpectthistrendtocontinueascompaniespositionthemselvestocapitalizeonthismarketopportunity.ThefollowingtablehighlightsanumberofrecentIoTM&Atransactions.

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    Acquiror Date Target Price Product Rationale

    ARM Feb15Offspark(Netherlands)

    NDSSLsecurityforIoTapplications

    Offspark'sSSLtechnologyisembeddedinsensorandcommunicationmodulesandsmartphonesAllowsARMtoaddcrytographytoitsIoTplatform

    ARM Aug13Sensinode(Finland)

    ND6LoWPANandCoAPstandardsforlowcost,lowpowerdevices

    AddingSensinodestechnologywillenabledeveloperstoeasilycreateIoTapplicationsrunningonARMhardwareLicensingmodeltochipvendorsthatissimilartoARMs

    Atmel Jul14 NewportMedia

    $140M+$30Mearnoutover2yrs

    Highperformance,lowpowerWiFiandBluetoothchips

    TogainaccesstochipswithwirelessradiocapabilitiesIntegratedwithAtmelsultralowpowermicrocontrollerforindustrial,buildingautomationandconsumerproductsrequiringsmallformfactorsandlongbatteryalife

    CypressSemiconductor

    Dec14 Spansion$4B/Stockswapmerger

    Spansion:microcontrollersforautoandindustrialapplicationsCypress:ConsumerelectronicsandIoT

    Operatingefficiencies,scaleandbetterreachinkeymarketssuchasJapanMicrocontrollersforIoT,car,communicationandindustrialmarketsMorethan$135Mincostsavingswithinthreeyears,andthedealtobeaccretivetononGAAPearningswithinayear

    Fairchild Mar14 Xsens $61M3DmotiontrackingproductsbaseduponminiatureMEMSinertialsensortechnology

    Entryintonewmarket:XsenstechnologyhasbeenusedbyHollywoodfor3Dcharacteranimation,sportsscience,androbotandcamerastabilization

    Freescale Dec14 Zenverge NDFablesssemideveloperofHDcontentprocessingICs

    EnhanceFreescalescontentprocessing,storageandinteroperabilitycapabilitiesforarangeofVideoIoTapplicationsandmarkets

    Intel Feb15Lantiq(Germany)

    NDButbelievedtobearound$280M

    DSLandcommunicationschipset/patentsforbroadbandgateways

    TodevelopresidentialroutersandgatewaystailoredforsmarthomeapplicationsTobettercompeteagainstQualcommsmarthomeofferings

    Intel Mar14 BASISScience ND WearabletechnologyWillbecomepartofIntelsnewdevicesgroupEntryintothemarketwithaleaderinhealthtrackingforwearabledevices

    NXPSemiconductor

    Oct14 Quintic NDWearableandBluetoothLowEnergy(BTLE)ICbusiness

    CreatesecurityandconnectivitysolutionsforfastgrowingIoTapplicationsinhealth&fitnesswearables,mobiletransactions,smarthomeandautomotiveBringscustomertractionwithitsbluetoothlowenergysolutions,especiallyinatheChineseecosystemAbletorangelowpowerconnectivitystandardsforIoTNFC,ZigbeeandBTLE

    Qualcomm Oct14 CSR $25B/cashBluetoothchipsforM2Mandsmartphonecommunications

    HelpsbothcompaniesintheconnecteddevicesspaceProvidesopportunitiesintheareaofconnectedandhightechautomobilesandatrucksAllowsQualcommtorapidlyaddanewsegmentoutsidemobile

    SiliconLabs Feb15Bluegiga(Finland)

    $61M/cashLowpowerbluetooth,andWIFimodules

    AccesstoultralowpowerBluetoothandWiFimodulesanddevelopmenttoolsforIoTapplicationsBluegigaisexpectedtocontribute$2528Minrevenuesin2015andtobeaccretiveto2015earnings

    SiliconLabs May14TouchstoneSemi

    $15M/assetpurchase

    LowpoweranalogICproducts

    AddsvaluableenergysavinganalogtechnologyandaproductsToenhancecompanysembeddedportfoliofortheIoT,includingMCU,wirelessICs,sensorsandpowermanagementtechnologies

    SiliconLabs Jun13 EnergyMicro $170M

    RF/lowpowerchipsforIoT,smartenergy,homeautomation,securityandportableelectronicsmarkets

    CombinestwoleadersinnanopowerMCUandwirelessSoCdesigntoacceleratethedeploymentofenergyfriendlysolutionsacrosstheInternetofThingsandsmartenergyindustries

    SiliconLabs May12 Ember $72M

    LowpowerZIgbeeandchiptechnologytocreatesensornetworksandtheInternetofThings

    AcquisitionofateamwithprovenwirelessmeshnetworkingexpertiseAddZigbeeandrelatedtechnologiestolowpowerRFandmixedsignalICsforahighvolumemarketsAcceleratescompanysabilitytooffercompleteIoTsolutionstocustomers

    SelectedM&ATransactionsSemiconductorIoT

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    Networking/ComputingIoTSelectedM&ATransactions

    ThenetworkingandcomputingsegmentsprovidethedevicesandsoftwarethatareusedtobuildtheInternetandtheemergingInternetofThingsnetworks.Thesebitsandpiecesconsistofmanyvarietiesofroutersandswitchesthatsitatdifferentpointsinthecommunicationsnetwork,dutifullymovingbitsgeneratedbysensors,actuatorsandcomputersandstoredinserversanddisks.Italsoincludesanalyticalsoftwareusedforbusinessintelligence,aswellasbigdataschemasanddatabasesystemsusedtocaptureandmanipulatethehugevolumesofdatageneratedbyIoT.

    Thenetworkingindustryhasbeengoingthroughsignificantconsolidationinthepastdecade,withCiscoretainingitspositionastheleadingsupplierofInternetplumbinggear.OnthesoftwaresideoneofthemainconsolidatorshasbeenOracle,whichhascompletedaroundonehundredacquisitionsincludingseverallargeonessuchasPeoplesoftandSiebel.

    CiscoisanunabashedproponentofIoT,andwethoughtthatitwouldbeusefultoexamineIoTthroughthiscompanysactions.Ciscostraditionalnetworkingcompetitorsarestrugglingwiththeirownproblemsandhavebeenmoremutedintrumpetingtheseopportunities.However,CiscosChinabasedcompetitor,Huawei,lastyearacquiredNeul,aCambridge,EnglandbasedcompanythatitplanstoturnintoacenterforIoTdevelopment.

    CiscoisnotnewtotheIoTbusiness.ItsacquisitionsofLinksysin2003andPureDigitalin2009wereearlyattemptsatextendingitsbusinessintotheconsumerelectronicsmarkets.Today,thesetransactions(totalingmorethan$1billion)wouldhavebeentoutedasIoTdeals,asLinksysissimilartothesmarthomehubsacquiredbyGoogle/NestandSamsung,andthePureDigitalcamera,withnetworkingadded,wouldhavecompetedagainstGoogle/NestsDropCam.

    InJuneof2010,Ciscoannouncedaportfolioofproductsdesignedforenergymanagementbyutilities,consumersandbusinesses.TheCiscoBuildingMediatorprovidedanetworkbasedframeworkthatinterconnectedbuilding,IT,energysupplyandenergydemandsystems.TheCompanyalsoreleasedadevicecalledtheHomeEnergyController,

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    designedtoallowhomeownerstocommunicatewithpowerutilitiesandmanagetheirenergyconsumption.InAugustof2011,Ciscoquietlyshutdowntheseprograms.

    Thedeviceslayer(Thingsinourrepresentationalmodel)includessensorsandactuatorswhichbridgethegapbetweenthephysicalandthevirtual(data)environments,networkingdevicesusedtotransmitthisdata,andplatformsusedtobuilddatasensingdevicesandapplications.NetworkingequipmentvendorssuchasCiscoprovidethegatewaysfortransportingsensor/devicedataovercommunicationsnetworks,andwerepresentthisactivityinourmodelasGateways/NetworkingInfrastructure.

    Ciscohasprovenitselftobeverygoodatsupplyingnetworkingequipmenttoenterpriseandtelco/serviceprovidercustomerstobuildandoperatetheirnetworksreliably(asshowninthechart.)Ithasdonethisatgoodgrossmarginlevelsandverysteadyprofitability,andtodayhasmarketsharesbetween50%and70%oftheswitching,routinganddatacentermarkets.

    Figure18:IoTandDNA

    WethinkthatCiscosexperiencewithPureDigitalandLinksysholdsvaluablelessonsformanyoftheotherplayersinthenetworkingandcomputingindustrieswhentheymoveintoareasthatmaynotcoincidewiththeircoreDNA.WecommendCiscoforhavingthecouragetoexplorenewunrelatedareas,butalsoforthewillingnesstorapidlyabandonstrategiesthatfailtodeliver.

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    TheopportunitiesaroundIoTaretoobigtoignore,andCiscohassincerefocuseditsIoTeffortsonsmartcitiesandotherindustrialtypesofapplicationsthroughaseriesofpartnershipswithcompaniessuchasGE,IBM,AT&TandIntel.TosupportIoT,Ciscowillhavetoaddadditionaltrafficgroomingandmanagementtoitsproductofferings.Itwillalsohavetooffernetworkperformancemanagement(NPM)andapplicationperformancemanagement(APM)toolstostreamlinetrafficflowsfromThingsovercommunicationsnetworks.

    Asanexample,CiscohasaddedsupportforGEsPredixplatformtoitsindustrialrouters.PredixisasoftwareplatformdesignedtoaddintelligencetoIoTendpoints.ThecombinationofGEsPredixandCiscosIOSframeworkwillenablethecollectionandanalysisofassetperformanceandoperationaldataanywhereinthenetwork.

    Itisuncleartouswhatrolenetworkequipmentmanufacturerscanplayinthefastdataorbigdataspaces,i.e.otherthangettingthedatathere.Cisco,however,hasbeendevelopingthenovelconceptofFogComputing,amodelthatextendscloudcomputingandservicestotheedgeofthenetwork,reducesservicelatency,improvesQoSandpermitsrealtimeanalytics.Wewillbewatchingdevelopmentshereclosely.

    Googlegivesawayitsdevices(atleasttheAndroidOS)andthenmonetizestheAnalytics(AdWords)andServices(PlayStore,YouTube,GoogleApps).Facebookisagnosticastodevice,anditsmarketcapitalizationisbasedonminingandanalyzingitslargepoolofusers(>1billion).BothGoogleandFacebookhavebeenmintingmoneyintheircorebusinessesandthestockmarkethasnotpenalizedthemfortheirexpensiveIoTrelatedacquisitionsofNestandOculusVR,respectively.IncontrasttoGoogleandFacebook,wedonotthinkthatCiscooritsbrethrencanconvincethestockmarketthattheycanrealisticallyexpecttomonetizeanalyticaldataalaGoogleandFacebook.

    Wethinkthatourobservationsaboveholdtrueformostoftheothernetworkingandcomputingvendors.Huaweissolutionswillbecloudedbyperceptionsofsecurityrisks,atleastinseveralWesterneconomies,andweexpectitwillbesometimebeforetheHPshipisstabilized.Wealsothinkthatthecomputingandstoragevendors(Dell,EMC,NetApp,Lenovo)willbeconstrainedbytheirrespectiveDNAsandwillremain

    Moversofdatavs.marketersofdata

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    focusedonnetworking,storageandcomputingdevicesratherthanbranchingfurtheroutintoIoTrelatedspaces.

    IftheprojectionsforthenumberofIoTsensors/devicesholdtrue(20to50billionby2020),wethinkthedatageneratedcouldbecomeoneofthebiggestgrowthdriversforbigdataanalytics.Ford'sEnergilineofpluginhybridcarsgeneratesabout25gigabytesperhour,whichcouldincreaseto250gigabytesinfuture.(IstheTeslaModelSanautomobileoraThingwithfourwheels?)

    WefoundthisexamplecitedbyIBMofapowerutilitycompanyonthechallengesposedbyIoTfordatastorageuseful:

    Apowerutilitycompanywithonemillioncustomershistoricallymayhavestoredonereadingpermonthpercustomerforbillingpurposes,whichtranslatesto12millionreadingsperyearandcaneasilybestoredinarelationaldatabase

    Ifthepowerutilitywantstounderstandusageforloadbalancing,itwillhavetosamplecustomerdatamorefrequently,say10timesperhourorevery6minutes

    Thismeansthateachmetersendsdataout87,600timesperyear(10/perhourx24/hoursperdayx365/daysperyear).

    Thedatasizepermeterhasgrown7,300times(87,000/12=7,300)

    ThisisstoredasarowinatraditionalRDBMS Ifonemillionmeterssendindata,thats87.6billionnewrows

    peryear Loadingandqueryingthatmuchdatawouldtaketoolongand

    makethesystemunworkable

    Thevolumeandvelocityofdatawillrequiresoftwareandsystemscapableofdoingrealtimeanalysisofthisdataandthenexpertiseinarrivingatinsights.ToaddressthisrealtimeandvolumechallengeposedbyIoT,severalcomputingsoftwarevendorssuchasIBM,Oracle,SAP,andSplunkhavebeenrollingoutrealtimedataanalysissystemsthatcomplementtheirtraditionalDBMSsolutions.Softwarevendors,manyofwhomhavetransitionedtheirbusinessmodelsfromonetimelicensingtoaSaaSandrecurringrevenuemodel,willalsobelookingforwaysofmonetizingthedataintheIoTvaluechain.

    BigDataandFastData

    IoTisreallynotaboutThingsitsaboutData

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    Oraclemaybeoneofthecompaniesbestpositionedintheevolvingdatacenter,cloudcomputingandfast/bigdataworlds.ThroughitsacquisitionofSunMicrosystems,OraclegainedcontroloverJavaaswellasserverhardwarefordatacenters.Andsincethen,OracleacquiredseveralnetworkingequipmentcompaniesincludingAcmePacketandTekelec.Italreadyoffersasuiteofanalyticsandbusinessintelligencetoolsandhasbeenwillingtodoacquisitionstofillholesorgetaccesstoinnovativesolutions.

    IBMhaslaunchedtheartificialintelligencebasedWatsoncloud,whichcanalsobeadaptedtoIoTmodelingandanalysis.IBMhasgrandgoalsforWatson:$10billioninannualrevenuesin10yearsbutresultsasoflastOctoberhavebeenunderunderwhelmingatlessthan$100million.InFebruary2014,IBMformedanalliancewithAT&Ttohelpcitiesandutilitiesintegrateandanalyzevastquantitiesofdatafromassetssuchasmasstransitvehicles,utilitymeters,andvideocameras.Thecompanieswillcombinetheiranalyticplatforms,cloud,andsecuritytechnologiestogainmoreinsightsondatacollectedfrommachinesinavarietyofindustries.PerhapspartnershipslikethesemightstimulateIBMsanalyticsbusiness.

    Avarietyofnewtechniquesfordealingwiththespecialchallengesoflarge,realtime,unstructureddatasetsisrequiredinthefastdata/bigdataworlds.Thisincludesaunifiedanalyticsplatform,adistributed,massivelyparallelprocessingdatabasearchitecture,andgeodistributedanalyticstoallowanalyticstooccuratthedatasourcewhendatatransportisimpracticalduetosizeorcost.SeveralstartupssuchasActian,Cloudera,ParStream,Platfora,SpliceMachineandSqrrlhaveemergedtooffersolutionstailoredtotheneedsoffastdata/bigdatademandsofIoT.

    GEinvested$105millionfora10%stakeinPivotal,abigdatasoftwarecompanyinAugust2014.Thoroughthispartnership,GEisworkingtodevelopasoftwareplatformthatthecompanycandeliverasaservicetoindustrialcustomersinaviation,transportation,healthcare,energyandmanufacturing.

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    Toaddressrealtimecapabilities,MapRtechnologieshaspartneredwithDatabrickstobringinmemoryApacheSparktechnologytoitsHadoopproduct.MongoDB,whichcanbe1/10ththecostofrelationaldatabases,isbeingusedbyBosch,SilverSpringandMcAfee(Intel)tobuildIoTenabledapplications.

    IoTdevicessuchascarsandoilrigsareoftenoutsidetherangeofwirelessnetworksbutstillhavevaluabledatathathasbeencollectedbysensors.CouchbasesMobileNoSQLdatabasegivesdevelopersnewtoolsforbuildingapplicationsthatstoreandprocessdataforsuchsiuations.ThecompanyisworkingwithaEuropeanautomanufacturertocaptureandstoresensordatathatcanbeusedformaintenancepurposes.

    IrishstartupDavraNetworksoffersacloudbasedplatformtargetedatsystemsintegratorsandnetworkingVARsthathelpthemturnIoTrawdataintousablebusinessintelligence.Dataisgathered,filteredandmanagednearthesourcebeforebeingsenttothebigdata/businessintelligenceclouds.

    OneapplicationthathasbeenannouncedistheintegrationofDavrassuitewithCiscosservicesrouterforfleetmanagement.DavrassoftwarecommunicateswithCiscosrouterslikethe819ISRwhichprovidesrealtimemonitoring,trackingandmanagementoflargeandsmallfleets.Vehicletelematicscaptureandsenddatasuchasfuellevel,tirepressure,andmaintenancedetailstoimprovesafetyandkeepmorevehiclesinservice.GPStrackingprovidesmoreefficientrouting,fasterdeliverytimesandreduceddriverfatigue.

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    Acquiror Date Target Price Product Rationale

    Belden Dec14 Tripwire$710M/cash

    Cybersecurityandcompliancesoftware

    Belden,traditionallyasupplierofcableandwires,planstooffercybersecuritysolutionsviathisacquisitionAprimarygoalistohelpcustomerssecuretheenterpriseandindustrialIoT

    Cisco Jul14TailFSystems(Sweden)

    $175M/cash

    Provisionandmanagementtoolsforserviceprovidercloudandvirtualizationapplications

    TosupportarangeofNMS/OSSneedsincludinglayer2and3VPNs,NFVandIoTapplications

    Cisco May13 JouleX $107MSoftwarefortrackingenergyusebydevices,datacentersandbuildings

    LetscustomersmonitorenergyuseofalldevicesattachedtoanetworkPartCiscoservicesstrategyforITenergymanagementneedsofalltypesofdevicesconnectedtothenetwork

    Citrix Dec14Octoblu(Skynet)

    NDIoTcloudbasedplatformDesignedtorunonameshofIoTnetworks

    Accesstoanopensource,crossprotocolplatformAPIsupportforHTTP,REST,Webscokets,MQTTandCoAP

    DigiInt'l Nov12 Etherios $205M

    CloudbasedplatformforintegratingmachinesintocorebusinessprocessesviaSalesforceServiceCloud

    NewskillsandtoolsforhelpingcustomerstointegratemachinesintoCRMsystems

    Ericsson Apr11TelenorConnexionM2M

    NDPlatformthatenablesnetworkoperatorstotoprovideM2Mservices

    ExpandEricsson'sofferingsbygettingaccessexpertiseandacloudbasedM2Mplatform

    Gemalto Dec11 SensorLogic ND

    CloudbasedPaaSforM2Mapplicationslikeassettracking,telematics,andequipmentmonitoringandservice

    PlantousetheSensorLogicplatformtotakecomplexityoutofM2Mdeployments

    Huawei Sep14Neul(England)

    $25MNetworkingtechnologyforIoT

    EstablishanIoTcenterinCambridge,EnglandAccesstoNeulsIoTchipsets,basestationandcloudmanagementsystems

    LogMeIn Apr14 Ionia$12M/cash

    Asystemsintegratorspecializinginconnectedsolutions

    AccesstoconnectivityexpertiserelatedtoSalesfocecomandHerokuAtemplateforbuildingoutanecosystemofsystemintegrators

    LogMeIn Jul11 Pachube $15M

    Databrokerageplatformthatenablesuserstostore,shareanddiscoverrealtimesensor,energyandenvironmentdatafromobjects

    AcquisitionallowsLogMeIntoextenditsreachbeyondcomputersandsmartphonestoIoTdevices

    SelectedM&ATransactionsNetworking/ComputingIoT

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    ServiceProvider/SystemsIntegratorIoTSelectedM&ATransactions

    TheadventoftheInternethasbeensomewhatunkindtoserviceproviders,whohavespentenormousamountsofmoneybuildingbroadbandandmobilenetworks,onlytoseehighervaluationsassignedtocompaniesthatusethosenetworkstodeliverinnovativeinternet,socialandecommerceservices.(Seetablebelow)

    CompaniessuchasWhatsApp(ownedbyFacebook)offerfreeorextremelycheapoverthetop(OTT)messagingservicesthatareeatingintoserviceprovidersonceprofitableSMSproducts;andSkype(onceownedbyeBay,andnowpartofMicrosoft)hasbeensystematicallycannibalizinginternationalvoicetraffic.(TeleGeographyestimatedthatin2013,Skypetrafficwasalmost40%thesizeoftheentireconventionaltelecommarket.)Internetbellwethers,suchasGoogle,Facebook,NetflixandAmazon,areheavilydependentontheexpensiveandsophisticatednetworksbuiltbyserviceproviders,butitisthey,nottheserviceproviders,whoarebeingrewardedbythestockmarket.

    Figure19:ServicesProvidersversusInternetBellwethersselectedfinancialmetricsOTTvendorsbeingdisproportionatelyrewardedbyinvestors

    TheproblemfacingserviceprovidersiswellsummarizedbythecommentsofSingTelsCEO,Ms.ChuaSockKoong,whoinaspeechinAustralia,pleadedwithregulatorstogiveserviceproviderstherighttochargeWhatsApp/FacebookandSkype/Microsoftfortheuseofitstelecommunicationsnetworks.SingTelownsAustraliasOptusandin2013investedalmostA$1billioninitswiredandmobilenetworks.

    Verizon AT&T Google Facebook Netfl ix Amazon

    MarketCap($B) $198B $179B $358B $210B $27B $173B

    LTMRevenues ($B) $127B $132B $66B $12B $5B $89

    MarketCap/LTMRevenues 1.5x 1.3x 5.4x 17.5x 5.4x 1.9x

    Gross Margin% 61% 54% 61% 83% 32% 29%

    R&D/Capex($B)(2014) $17,191 $21,433 $10,959 $1,831 $69 $4,893

    Source:CapIQ,as of02/06/15

    ServiceProviders InternetBellwethers

    TheriseofOTTapps

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    Ms.ChuawarnedthatsuchinvestmentswouldbereducedunlessregulatorsallowedSingTel/OptustostartchargingoverthetoprivalssuchasWhatsAppandSkypeforusingthenetwork.Themainproblemwehaveasanindustryiswehavebeenunabletomonetizethisincreaseddemand.averagerevenueperuser(ARPU)hasfallen.westandtheriskofbeingtotallydisintermediated.

    WethinkserviceprovidershavelearnedpainfullessonsandaretryingtobecomemorethandumbpipesfortheIoTecosystembyprovidingmanagedsolutionsforIoTappcreation,management,monitoringandbigdataanalytics.

    Someexamples:

    AT&TlaunchedM2XDataServiceIoTmanagedservicesfordevelopersandtoolsforenterprisedeveloperstocreatenewIoTsolutions,plusacarriergradeclouddatastoreforcollecting,analyzingdatafromIoTdevices.

    VerizonsConnectedServicesofferswirelessservicesandcloudcomputingservicestohelpbusinessesmanagedatafromsensorsandM2Mcommunications.InJanuary2015,VerizonlaunchedanenterpriseportalformanagingdigitalcertificatecreationforlargescaleIoTdeploymentsrangingintothetensofmillions.(Verizonannouncedthatits2014revenueswere$127billionofwhich$585millioncamefromIoT/telematics.)

    VodafoneteamedupwithhealthsensorvendorLivelytooffermonitoringservicestargetedatolderpeople.

    TheKOREWirelessacquisitionofRacoWireless,fundedbyABRYPartners,aprivateequityfirm,isanexampleoftwotraditionalM2MvendorscombiningforscaleandadaptingtotheemergingIoTservicesworld.

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    Intheirquesttodiscoverprofitablebusinessmodels,weexpectserviceproviderstoinvestintheirIoTofferingsthroughacombinationofM&Aandinternalinvestmentinanumberofareas,including:

    IncreasingscaleandfootprintviaacquisitionofM2M/IoTorientedserviceprovidersandsystemsintegrators

    Enteringnewverticalssuchasautomotive,healthtrackingandpremisesmonitoring

    Technologyacquisitionsspecifictomanagement,monitoringandbillingofcloudbasedIoTservices.

    Whilewethinkthatthesetypesofofferingswillenableserviceproviderstogrowconnectivityandservicerevenues,theywillstillstruggletobecometheGooglesoftheIoTworldi.e.collectorsandmonetizersofvolumesofdata.Foronething,theirbusinesscustomersareunlikelytorelinquishcontrolofproprietarydatageneratedandwouldbehesitanttorisksharingthatwithcompetitors.Moreover,inareaslikehealthcare,strictregulationssuchasHIPAAmayforceserviceproviderstoremainsolelytransportersofdata.

    VerizonhasbeenheavilycriticizedforusingadvertiserfriendlyUniqueIdentifierHeaders(UIDH)orsupercookiestotracksubscriberactivityonthewebtobuildapatternofinterests,whichitthensharedwithadvertisers.Theuseofthesesupercookies,whichcannotberemovedbyusers,hascomeunderfirefromgroupssuchasConsumerWatchdogandtheElectronicFrontierFoundation(EFF),whohavepetitionedfederalagenciestopenalizeVerizonanditspartner,Turn,forfailingtodisclosetheirtrackingpractices.Underpressure,Verizonhasrelentedandwillofferuserstheoptionofoptingoutfromtracking.PrivacyadvocatesarepressingfurtherforVerizontobeforcedtoswitchtooptinasthedefaultsettingandareplanningtokeepupthepressureonVerizonandtheothermobilenetworkoperators.

    ThisiswhattheUSSenatesCommitteeonCommerce,ScienceandTransportationsaidinalettertoVerizonsCEOWhileVerizonallowscustomerstoaffirmativelyprohibitthesharingofinformationcollectedbythesesupercookies,itdoesnotallowcustomerstoremovethesupercookiesaltogether,doingnothingtostopthirdpartiesfrom

    Monetizingdata

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    exploitingtheirexistence.Becauseofthethreatstoconsumerprivacy,AT&Twiselydiscontinuedtheuseofsimilarmobiletrackers,whileVerizonhaschosentocarryon.

    ThetypeofdatageneratedbyIoTregularburstsofsmallpacketsmakesituneconomicaltousethe3Gand4GnetworkswhichweredesignedtosupportbandwidthhungrysmartphonesthatsupportHDvideo.ConnectingIoTdevicestothesetypesofnetworkscanbeexpensiveandamajordrainonthebatteriesusedtopowermanyIoTdevices.

    Toaddresstheseshortcomings,weareseeingtheemergenceofseveralnewserviceproviderswhohavebuiltwirelessnetworksdedicatedtocarryingM2M/IoTtraffic.SomeofthemodelslookverysimilartotheISPsof1990s,whoofferedsimpleconnectivity,butotherslookmorelikecombinationsofanISPandtheAmazonWebServicesmodelforIoT.

    SomeoftheinterestingonesareLinkLabs,StreamTechnologies,OnRampWirelessandSigfox,acompanywithnetworksinFrance,theNetherlands,Spainand(soon)SiliconValley.WethinkthatthelistofM2M/IoTserviceproviderswillkeepgrowingandthestructureoftheindustrywillparallelthehistoryofthecommercialISPmarketcharacterizedbytheentryofmanycompanies,growth,andthenconsolidation,inordertoextractefficienciesandtoservetheneedsofindustrial/businesscustomerswithdispersedoperations.

    AnotherM2Mvendor,Aeris,inpartnershipwithTechMahindra(anITandBPOsystemsintegrator)announceditsJumpstartIoTsolutiondesignedtohelpmobileoperatorsbuildscalableandprofitableIoTbusinesses.Theircombinedserviceofferingsincludepackagedapplicationslikefleettelematics,healthcare,pointofsaleandutilitycommunications.WeexpectTechMahindrascompetitorssuchasInfosys,TCS,Wipro,CSC,AccentureandHPEnterpriseSolutionstoannouncesimilarplans.

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    DuetothecomplexityofIoT,manyproductandservicescompaniesarewilllooktooutsidepartiessuchasIoTsystemsintegratorsforhelpindeployingandmanagingtheIoTvaluechain.JasperTechnologies,basedinSiliconValley,providesacloudbasedsoftwareplatformtohelpenterprises,automotivecompaniesandmobileoperatorslaunch,manageandmonetizethedeploymentofIoTonaglobalscale.BostonbasedXively,adivisionofLogMeIn,offersdevelopmenttools,aplatformasaservice(PaaS),andprofessionalservicestoenablebusinessestoconnectproductsandoperationstoIoTnetworks.OthersincludeArrayent,AylaNetworksandElectricImp,allofwhomofferconnectivitysolutionsandservicestohelpcompaniesconnecttheirproductstothecloud.

    AGTInternational,basedinZurich,Switzerland,offersIoTanalyticsandapplications,cloudsolutionsandprofessionalservicesforabroadrangeofactivitiesincludingmanufacturingoperations,trafficflow,hospitaladministration,schoolconnectivity,citymanagementandthesafetyofseniorcitizensathome.Inearly2014,AGTandCiscoformedasmartcityalliance.ThesetwocompanieshavebeenselectedbytheCityofHamburgtoimplementsmartcitypilotprojectsaswellasportoperations.

    AscompaniestransitionfromhardwarebusinessmodelstoaserviceorsubscriptionmodeltheymayalsolooktotheirtraditionaldistributorssuchasArrowElectronics,Avnet,IngramMicro,TechDataandSynnexforhelp.ToremainrelevantintheIoTworld,thesedistributorswillhavetoofferhelpinconnectivity,cloud,analytics,securityandbusinessmodeldevelopmentskillsthataretypicallyfoundelsewhereatorganizationssuchasAccenture,IBMandAT&T.

    WecannotleavethissectionwithoutmentioningGoogle(thenemesisofsomanytraditionalindustries)anditsactivitiesintheserviceproviderspace.ThecompanyoperatesGoogleFiberinKansasCityandhaschosen34othercitiesascandidatesforfutureexpansion.ThenewsthatGooglemayofferwirelessservicestoconsumersasanMVNO(usingSprintsandTMobilesnetworks)couldfurthercomplicatebusinessforthelikesofAT&TandVerizon.

    SystemsIntegrators/PaaS

    IsthereanythingGooglewonttry?

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    ThisstrategywouldincreaseGooglesabilitytocollectevenmoreconsumerdata,whichitcanthenmonetizeviaadvertising,somethingwhichneitherAT&TnorVerizoncandoatpresent.Furthermore,suchanetworkcouldalsobeusedtodeployM2M/IoTservicesdirectlytoconsumers,industrialandenterprisecustomers.

    Figure20:WhereGoogleFiberisGoingNext

    Source:WSJ

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    Acquiror Date Target Price Product Rationale

    ABRYPartners(PEfirm)

    Nov14KoreWirelessGroup(Telematics)

    Majorityownership$117M

    ManagedservicesforM2M/IoT

    AplayontheM2M/IoTmarketNetworkfootprintandcustomerbase:15millionwirelessdevicesand800+acustomersRollupstrategyviatheacquisitionofRacoWireless

    Comcast Jul14 PowerCloud

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    3.Standards,RegulationsandProjections

    Oneofthepredictablebattlegroundsinanynewinformationtechnologymarketrelatestothestandardsthatwillbefollowedtoallowvariousproductstointeroperatewithoneanother.Inadditiontothestandardsthatevolveoutofmarketplacecompetitionandeventualdominancebyoneormorepowerfulsuppliers,additionalconstraintsareplacedonproductdesignandperformancebygovernmentregulations.Inthissection,webeginwithaverybriefreviewofthecurrentstateofstandardsintheIoTspaceaswellastherapidlydevelopingawarenessofIoTonthepartofgovernmententities,whoarealreadymakingthemselvesfelt,particularlyintheareasofsecurity,privacyandwirelessspectrumusage.

    LaterweexploresomeofthemanyforecastsmadebyvariousanalystsandprognosticatorsaboutthesizeofthepotentialmarketopportunitypresentedbythisIoTphenomenon.WhilemuchhasalreadybeenwrittenaboutIoTincludingratherwildpredictions,wehavefoundthatthereissomeconsensusaroundthenumberofconnecteddevicesthatcanbeexpectedbetweennowandsay2020or2025,andweexaminesomeofthesubmarketforecaststobetterunderstandthescalepeopleareexpectinginvariousindustryverticals.

    Source:http://xkcd.com/927/

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    StandardsortheTowerofBabelCompetingStandards

    CDMA,TDMAandGSMinmobilephones VHSandBetamaxinvideorecording BlurayandHDDVDinhighdefinitionDVD WiMAXandLTEinwirelessbroadband iOSandAndroidinsmartphones

    ThetechnologyindustryhaswitnessedmanystandardswarsanditappearsthattheInternetofThingswillnotbeanydifferent.Companiesbeginwithaviewthatiftheycanonlycontrolasignificantpartofthetechnologystack,theycan(i)ensuresmoothandreliableperformanceoftheirproductsandservices,and(ii)protectattractivemarginsforthemselves.

    Astechnologymatures,overallreliabilityimproves,andcustomersbegintofocusmoreonbestofbreedproductsandforcevendorstointeroperatemoreseamlesslytoavoidsinglevendorlockin.Vendorstodayofferadiversearrayofcommunications,analyticsanddataprotocolsoptimizedfortheirsmartdevicesbutpotentiallylackingtheabilitytocommunicateeffectivelywithsmartdevicesfromsomeoneelse.Insomeways,theloTspacecontinuestobeawalledgarden.

    Webelievethereareatleastsevendifferentindustrygroupsworkingonstandardsandthemostoptimistictimeframecurrentlyforastandardtoemergeis2017.Below,wediscusssomeofthemoresignificanteffortstocreateanIoTstandard.

    AllJoyn/AllSeenAlliance

    Developedin2011byQualcomm,whothensignedoverthesourcecodetotheLinuxFoundationin2013

    TargetapplicationsConnectedhome.SmartTVs,audio,andgateways.Automobiles

    PlatformssupportedAndroid,iOS,Linux,OpenWRTWindows,andOSX

    Around100memberfirms TransportlayeragnosticandsupportsWiFI,WiFiDirect,

    EthernetandPowerline.OthertransportssuchasBluetoothLE,6LowPan,ZigBeeandZWavecaneasilybeadded

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    ConsumerbrandswhichsupportAllJoynElectrolux,Haier,LG,Panasonic,Sharp,Sony

    OthersupportersincludeCisco,Microsoft,BoschandSymantec

    OpenInterconnectConsortium/IoTivity(OIC)

    PromotedbyIntel,BroadcomandSamsung.OtheroriginalsupportersincludedAtmel,Dell,andWindRiver,undertheIoTivitymoniker

    SeenasacountertoQualcommsAllJoyn However,Broadcomquitafterthreemonths,allegedlyovera

    disagreementaboutOICslicensingpoliciesthatincludeaRANDZprovision(RANDwithzeroroyalty)inwhichacompanypromisestolicensetheintellectualpropertyatnocharge

    InresponsetheQualcomminspiredAllSeenprojectaddednewlanguageinJanuary2015pledgingnottosueovertheirpatents

    Around30members

    IndustrialInternetConsortium

    FoundedbyIntel,Cisco,AT&T,GEandIBMinMarch2014.MicrosoftjoinedinJune

    BringstogethervendorsfromtheindustrialandITsectors Approximately100members,includinguniversities Thegoalistoimproveaccesstobigdatawithimproved

    integrationofthephysicalanddigitalworldstounlockbusinessvalue

    MorepolicyorientedthantheeffortsbytheotherIoTstandardsgroupslikeAllSeen,OICandThread

    ThreadGroup

    DrivenbyGoogle/Nest,Samsung,ARM,Freescale,SiliconLabs,BigAssFansandYaleLocks

    Designedtosupportawidevarietyofproductsforthehome,includingappliances,accesscontrol,climatecontrol,energymanagement,lighting,safetyandsecurity

    Around50members Uses6LoWPANIpv6overpowerefficient802.15.4MAC/PHY AESencryption

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    Supportsover250devicesonanetwork Shortmessagingconservesbandwidthandpower

    Apple

    PerhapsnotsurprisinglyApplehaschosenaslightlydifferentcourse,proposingitsownHomeKitstandardinSeptember2014.ItremainstobeseenhowHomeKitwillinteroperatewithAllSeen,OICorThread.Appledoes,however,havesomestringentguidelinesforcompaniesthatwishtoworkwithHomeKit:

    AppsmustnotusedatagatheredfromtheHomeKitAPIsforadvertisingorotherusebaseddatamining

    AppsusingdatagatheredfromtheHomeKitAPIforpurposesotherthanimprovingtheuserexperienceorhardware/softwareperformanceinprovidinghomeautomationfunctionalitywillberejected

    Asweveseenwithpasttechnologystandardswars,industryheavyweightswilllikelylineupbehindeachdifferentapproach.Overanextendedtimeframe,oneeffortwillbegintogainleadershipandeventuallythingswillcoalesce,hopefullyleadingtoanoutcomeinwhichallIoTdeviceswillbeabletotalktooneanother.

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    RegulatorsandIoTWeighingPrivacyandOtherIssues

    TheInternetofThingswillimpactcitizensandeconomiesinmuchdeeperwaysthaneventheoriginalInternet,andlawmakersandpolicymakersarestartingtotakenotice.OnJanuary13,2015,theUSCongresscreatedaCongressionalCaucusontheInternetofThings.ChairedbyReps.SuzanDelBene(DWA)andDarrellIssa(RCA),theIoTCaucuswillseektomonitorpublicpolicyconcernsofIoT,includingtheimpactofelectronicconnectivityonindividuals,aswellasbusinessesinthehealthcareandtransportationsectors.

    Rep.DelBene,Policymakerswillneedtobeengagedandeducatedonhowwecanbestprotectconsumerswhilealsoenablingthesenewtechnologiestothrive.

    Rep.Issa,Technologyisrevolutionizingthewayconsumersusecars,homes,workspaces,andeverydayitems.EmergingusesofInternetconnectivitytothesedevicesraisebothopportunitiesandquestionsaboutregulatorypolicy,spectrumspace,privacy,andmore.ItscriticalthatlawmakersremaineducatedaboutthefastpacedevolutionoftheInternetofThings,andhaveinformedpolicydiscussionsaboutthegovernmentsroleinaccessanduseofthesedevices.

    OnJanuary29,2015,theFederalTradeCommissionreleasedareportoutliningrecommendationstohelpprotectconsumersastheybuyanduseIoTdevices.Securitywasoneofthemaintopics,andthereportincludesthefollowingrecommendationsforcompaniesdevelopingIoTdevices:

    Buildsecurityintodevicesattheoutset,ratherthanasanafterthoughtinthedesignprocess

    Trainemployeesabouttheimportanceofsecurity,andensurethatsecurityismanagedatanappropriatelevelintheorganization

    Ensurethatwhenoutsideserviceprovidersarehired,thatthoseprovidersarecapableofmaintainingreasonablesecurity,andprovidereasonableoversightoftheproviders

    Whenasecurityriskisidentified,consideradefenseindepthstrategywherebymultiplelayersofsecuritymaybeusedtodefendagainstaparticularrisk

    USCongress

    TheFTC

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    Considermeasurestokeepunauthorizedusersfromaccessingaconsumersdevice,data,orpersonalinformationstoredonthenetwork

    Monitorconnecteddevicesthroughouttheirexpectedlifecycle,andwherefeasible,providesecuritypatchestocoverknownrisks

    TheFTCalsorecommendedthatcompaniesconsiderdataminimizationthatis,limitthecollectionofconsumerdata,andretainthatinformationonlyforasetperiodoftime,andnotindefinitely.Thereportnotesthatdataminimizationaddressestwokeyprivacyrisks:that(i)acompanywithalargestoreofconsumerdatawillbecomeamoreenticingtargetfordatathievesorhackers,andsecond,(ii)consumerdatawillbeusedinwayscontrarytoconsumersexpectations.ThegeneralfeelingamongpolicymakersintheUSisthatanyIoTspecificlegislationwouldbeprematureatthistimegiventherapidlyevolvingnatureofthetechnology.

    OurdiscussionswithlawyersfromFieldFisher,amultinationallawfirmheadquarteredintheUK,hasshedsomelightonhowtheEuropeanUnionandtheUnitedKingdomplantoaddresstheissuessurroundingIoT.TheEUregulatorymindsetis:theIoTcanrevealintimatedetails;sensordataishighinquantity,qualityandsensitivityandtheinferencesthatcanbedrawnaremuchbiggerandsensitiveespeciallywhenseenalongsidecloudcomputingandbigdataanalytics.

    OnJanuary27,2015,Ofcom,theUKscommunicationsregulatoridentifiedseveralpriorityareastofocusoninordertosupportthegrowthoftheIoT,including:

    Privacy:OfcomconcludesthatacommonframeworkthatallowsconsumerseasilyandtransparentlytoauthorizetheconditionsunderwhichdatacollectedbytheirdevicesisusedandsharedbyotherswillbecriticaltofuturedevelopmentoftheIoT.Networksecurityandresilience:OfcomholdstheviewthattherewillbegrowingdemandsbothintermsoftheresilienceofthenetworksusedtotransmitIoTdataandtheapproaches

    TheEuropeanUnion

    Ofcom

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    usedtosecurelystoreandprocessthedatacollectedbyIoTdevices.Spectrumavailability:OfcomconcludesthatexistinginitiativeswillhelpmeetmuchoftheshorttomediumtermspectrumdemandforIoT,butrecognizesthat,asIoTgrowsandthesectordevelops,theremaybearenewedneedtoreleasemorespectruminthelongerterm.

    Overall,itseemstherewillbecompetitivetensionbetweencompaniesthatemphasizeprivacyprotectionandcompanieswhosestrategyisdirectlyaimedatcollectinginformationandmonetizingitthroughadvertisingandothermeans.TheheavyhandofregulationwillcertainlybeafactorinbuildingoutbusinessmodelsinIoTanditmustbeanintegralpartofanysuccessfulIoTstrategy.

    Recentexperienceoflargescaledatabreaches(TargetCorporation,SonyPictures)hascertainlyraisedawarenessofinformationsecurityissues,butwenotethatthemajorityofsecuritybreachesgounreportedandunnoticed,andthedegreeofvulnerabilityofourentireeconomytomalwareandcyberespionageincreasesgeometricallyasweconnectmoreandmoreofourinfrastructuretolargescalepublicnetworks.Itisalsoimportanttoconsideruseandmisuseofinformation.Evenoutsideofthecontextofsecuritybreaches,largeamountsofpersonaldatacollectedbywearablehealthmonitoringdevicescouldbeusedbyinsurancecompaniesindiscriminatorywayswithoutappropriateregulation,forexampledenyingcoveragetocertainindividualsorclassesofindividualbasedondatacapturedfromtheirwearabledevices.

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    ASamplingofForecasts

    Aswevealreadynoted,therearealmostasmanydifferentforecastsforthesizeoftheIoTmarketopportunityasthereareforecasters.Withthatinmind,wehavechosenasmallselectionofvoicestoillustratetheimmensescopeofwhatisatstakewithIoT,aswellasthebreadthofopinionandthevarietyofviewpoints,whichillustratetheimmaturityofthespaceandtherealriskofmisdirectedefforts.Inshort,hugeopportunityrarelyarriveswithoutbringingrealrisksaswell.

    Figure21:IoT MarketSizeEstimatesby2020Widelyvaryingforecastsbutallpointrapidgrowthandlargeopportunities

    (a) Numberofconnecteddevices(billions) (b) IoTEconomicValueAdded*

    Source:Cisco,IDC,Gartner.*Economicvalueadd=benefitsderivedbybusinessesthroughthesaleanduseofIoTtechnology

    CiscoAccordingtoCisco'sConnectionCounter,thereareapproximately10,700,000,000"people,processes,data,andthings"currentlyconnectedtotheinternet.IoTisthereforealreadycomprisedofover10billionseparateparts.Therewillbeabout15billiondevicesconnectedby2015,andaround50billionby2020,accordingtotheCiscoInternetBusinessSolutionsGroup.Despitealltheseconnections,howeverCiscoestimatesthatmorethan99percentofallphysicalobjectsthatmayonedayjointhenetworkarecurrentlystillunconnected.

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    CiscosanalysisindicatesthatIoTispoisedtogenerate$19trillioninValueatStake(thecombinationofincreasedrevenuesandlowercoststhatiscreatedorwillmigrateamongcompaniesandindustriesfrom2013to2022)fortheprivatesectoroverthenextdecadeand$14.4trillionforthepublicsectoroverthesameperiod.McKinseyAnalystshavepredictedthattheinstalledbaseforInternetofThingsdeviceswillgrowfromaround10billionconnecteddevicestodaytoasmanyas30billiondevicesby2020anincreaseofabout3billionnewdevicesperyear.Eachofthesedeviceswillrequire,ataminimum,amicrocontrollertoaddintelligencetothedevice,oneormoresensorstoallowfordatacollection,oneormorechipstoallowforconnectivityanddatatransmission,andamemorycomponent.McKinseyGlobalInstitutereportsthattheIoTbusinesswillhavepotentialeconomicimpactbetween$2.7trillionto$6.2trillionby2025.IDCThepredictionsfromtheIDCFutureScapeforInternetofThingsinclude:

    IoTandtheCloud.Withinthenextfiveyears,morethan90%ofallIoTdatawillbehostedonserviceproviderplatformsascloudcomputingreducesthecomplexityofsupportingIoT"DataBlending".

    IoTandsecurity.Withintwoyears,90%ofallITnetworkswillhaveanIoTbasedsecuritybreach,althoughmanywillbeconsidered"inconveniences."ChiefInformationSecurityOfficers(CISOs)willbeforcedtoadoptnewIoTpolicies.

    IoTattheedge.By2018,40%ofIoTcreateddatawillbestored,processed,analyzed,andacteduponcloseto,orattheedgeofthenetwork.

    IoTandnetworkcapacity.Withinthreeyears,50%ofITnetworkswilltransitionfromhavingexcesscapacitytohandletheadditionalIoTdevicestobeingnetworkconstrainedwithnearly10%ofsitesbeingoverwhelmed.

    IoTandnontraditionalinfrastructure.By2017,90%ofdatacenterandenterprisesystemsmanagementwillrapidly

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    adoptnewbusinessmodelstomanagenontraditionalinfrastructureandBYODdevicecategories.

    IoTandverticaldiversification.Today,over50%ofIoTactivityiscenteredinmanufacturing,transportation,smartcity,andconsumerapplications,butwithinfiveyearsallindustrieswillhaverolledoutIoTinitiatives.

    IoTandtheSmartCity.Competingtobuildinnovativeandsustainablesmartcities,localgovernmentwillrepresentmorethan25%ofallgovernmentexternalspendingtodeploy,manage,andrealizethebusinessvalueoftheIoTby2018.

    IoTandembeddedsystems.By2018,60%ofITsolutionsoriginallydevelopedasproprietary,closedindustrysolutionswillbecomeopensourcedallowingarushofverticaldrivenIoTmarketstoform.

    IoTandwearables.Withinfiveyears,40%ofwearableswillhaveevolvedintoaviableconsumermassmarketalternativetosmartphones.

    IoTandmillennials.By2018,16%ofthepopulationwillbeMillennialsandwillbeacceleratingIoTadoptionduetotheirrealityoflivinginaconnectedworld

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    GartnerGartner,Inc.forecaststhat4.9billionconnectedthingswillbeinusein2015,up30percentfrom2014,andwillreach25billionby2020.TheInternetofThingshasbecomeapowerfulforceforbusinesstransformation,anditsdisruptiveimpactwillbefeltacrossallindustriesandallareasofsociety.WeagreewithGartnersviews(seefigure22below)thatanalyticsandserviceswillcomprisethebiggercomponentofIoTrevenues.TheIoTwillbringintothedigitalsecurityarchitecturedozensofnewplatformoptions,hundredsofvariationsonhybridIT/IoTintegration,newstandardsperindustry,andanewviewofanapplication.ITleaderswillhavetoaccommodatethedifferencesintechnologiesacrossthoseareasanddevelopamultifacetedtechnologyapproachtoIoTriskandsecurity.Inaddition,withsomemachinesproducingenormousamountsofdataandothersensorssendingahandfulofbitsperdayorweek,ITleaderswillneedtobalancedigitalbusinessrequirementswithdigitalsecurityrealities.

    Figure22:IoTMarketOpportunitiesExtendWellBeyondThings

    Source:Gartner

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    ABIResearch

    ABIResearchreckonstheInternetofThingscontainssome10billion+wirelessconnecteddevicestoday.Butitspredictingthisfigurewilltripleinsizetomorethan30billiondevicesinanInternetofEverythingby2020,asmoreandmoreobjectsarepluggedintothenetwork.

    Thechartsthatfollowrepresentyetanothersetofforecasts.Whiletheprecisenumbersandtimingmaybeopentodebateandrefinement,theydopointtoenormouspotentialofIoT.ThecombinationofbigdataanalyticsandIoTwillpositivelyimpactawiderangeofindustries,withthebiggestimpactinitiallyontheindustrial/manufacturingsectors.

    Figure23:M2M/IoTValueChainProjectedRevenues

    Source:ABIResearch

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    TheIndustrialInternetPowerof1%

    GEestimatesthata1%improvementinefficiencyinfiveselectedindustriescouldaddupto$276billionover15years.

    OilandGas:Bycuttingfuelandoperatingcosts,andbymakingequipmentmoreavailableandproductive.

    PowerGeneration:Bymonitoringequipmentbetterandpredictingotherpotentialnetworkproblems.

    HealthCare:Byhelpinghealthcareworkslocateandusemobileequipmentmoreefficiently.

    Aviation:Byplanningmoreefficientflightpathsandusingsmarterenginesthatinformcrewswhenmaintenanceisneeded.

    Rail:Optimizesoperatorresponsethroughrealtimeoverviewsofnetworkoperations.

    Figure24:GEandthePowerof1%

    Source:GE

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    SensorsAVitalComponentinConnectedThings

    WithrespecttoIoTdevicecomponents,sensorsrepresentoneofthekeyenablingtechnologiesdrivingthismarket.Sensorsfundamentallyconverttheanaloginformationofanenvironmentintothedigitalbitsthatcanbetransmitted,storedandprocessedbycomputers.Figure25forecaststhedemandforIoTdrivensensortechnologyin2020.

    Figure25:IoT EnabledSensorsProjectedtogenerate$10billioninrevenuesin2020

    Source:Gartner

    Theenvironmentweinhabitisfundamentallyananalogenvironment.TheIoTrequiresthatweacquireanddigitizedatafromouranalogenvironment(sensors),andthentransmit,analyze,storeandforwardthedata.Thisrequiresmemory,microcontrollers(MCUs),networkingchipsets,andthepowertooperatethemall.

    WhilesensorsareavitalpieceoftheoverallIoTecosystem,theyarenotlikelytorepresentthelargesteconomicvalueoftheoverallIoTrollout.Rather,webelievetherealmarketopportunityforsemiconductormanufacturerswilllieintheintegrationofsensorswithother

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    componentstoformcustomized,turnkeysolutionstargetingtheneedsofthevariousverticalmarkets.AsshownintheGartnerchart,inertialandimagesensorswillrepresentthelargestrevenueportionoftheoverallsensormarket.Whileweareallfamiliarwithcamerasandsmartphonesintelligentlydisplayingtheirimagesinportraitandlandscapemode,manynewapplicationscombiningtheinformationfromthesesensorswillbecreated.Examplesincludesmartparking,autocollisionavoidance,driverlesscars,smartroads(automaticcongestionavoidance)andhomesecurity.

    Technologiesforstoringelectricalenergy(batteries,fornow)andharvestingit(multiplesolutionsintheworks)efficientlyandcheaplywillcombinewithsensortechnologiestoconvertanaloginformation(temperature,humidity,physicalquantity,location,etc.)intodigitalinformation,whichcanbetransmittedandstoredinthecloud.Atthedataacquisitionlevel,whatisthereforerequiredisaverylowcostcombinationofapowersource,oneormoresensors,anMCU,andawirelesstransceivertodeliverthedatatothenetwork.

    Newsensorandsemiconductordesignsandmanufacturingtechnologies(lowpowerchips,MEMSdevices,etc.)willcometotheforeasthismarketdevelops,creatingopportunitiesfornimbleplayerstopositionthemselvesstrategicallyandreapthebenefits.WevealreadymentionedenergyharvestingandstorageascriticalpiecesofthesemiconductorinfrastructurethatwillenableIoT.

    Othercomplementarytechnologieswillalsobeimportant,suchasactuatorsthethingsthatactuallydosomethingafterreceivinganinputorinstructionfromasensororamicrocontroller.Today,theyarepowerhungryandbulkytheywillneedtogetsmallerandmuchmoreefficient.Technologyforspeechrecognitionandvoicecontrolwillalsocomeintoplay,aswellasnewinnovationsaroundhowtheembeddedsoftwareandfirmwareiscreatedandmanagedonboardthesilicon.

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    TheSmarthomeFinallyhere?

    Aswevealreadynoted,agooddealoftheearlybuzzaroundIoTinvolvesIoTinthehomeandtheconsumer/lifecycle/wearablesspace.Inpartthisisduetotheuniversalityoftheexperienceofconsumertechnologyittouchesusallasindividuals,asopposedtoindustrialorM2Mtechnologies,whicharefamiliaronlytospecialistsinthefield.Butwebelieveamoreimportantreasonforthefascinationwithhome/consumer/wearableIoTtechnologyisthesimplefactthattheverysameforcesthatweveidentifiedasimportantforIoTgenerallyareessentialforconsumerorientedIoTtechnologies.

    Figure26:IoT intheSmarthome

    Source:GartnerForexample,significantlylowercostsensors,systemsandnetworking/transportcombinedwithincreasingpenetrationintothehomeofsophisticatedtechnologies(smartphones,wiredandwirelessinhomebroadbandnetworking,etc.)arepoisedtoenablemultiplenewfunctionalitiesandbusinessmodels.AsshowninFigure26,thethreemajorcategoriesofSecurity,EnergyManagement,andAutomationwillseesignificantgrowthoverthenextseveralyears.

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    Today,mostconsumershaveaplethoraofTVremotesfestoonedwithtinybuttonsthatarehardtoreadandnotintuitive,oneormoresettopboxes,andsomehomenetworkingequipment,oftenprovidedbythesameorganizationtheyobtaintelevisionortelephoneservicefrom,andperhapsaprogrammablethermostatorelectriccoffeemaker.Togettothenextlevelofhomeautomationrequiresnavigatingaprofoundlyconfusingarrayofchoicesandcompetingsolutions,manyofwhicharenotcompatiblewitheachother.IFTTT,astartupbuildingacloudbasedplatformforbuildingsimplerulesbasedformulas,calledrecipes,offerstheabilitytocontrolconnectedhomedevices(amongotherthings)withasingleapp.Anumberoftheincumbentprovidersoftelevision,telephony,andbroadbandarevyingforconsumerattentioninthehomeautomationspace.Fundamentally,IoTinthehomerequiresbroadbandconnectivity,LANconnectivity(wiredandwireless)withinthehome,andtheabilitytoconfigurethesystemsaswellascontrolandoperatethevariouselementsinauserfriendly,nontechnicalfashion.TheIoTsetsupanopportunityforconsolidationandsimplificationofcontrolofthehomeenvironment,usingthealreadyfamiliarinterfaceofthesmartphoneortablet,butitalsopromisesmuch,muchmore.Whilewevedescribedtheopportunitiesbroughtaboutbyconnectedapplianceselsewhereinthisreport,wealsowanttostressthatthereisstillplentyofroomfordifferentapproachestosucceed,andforquiteafewnewapplicationsthathaveyettobeconceived,letalonedesigned,implemented,andcostreducedtothepointwheretheyareprofitabletomakeandsellatarealisticpricepoint.Thechallengeswillbeinreachingagreementoninteroperabilitystandardsandmaintaininglaserfocusonapplicationsthataddressagenuineneedinauserfriendlyfashion,beitforenergysavings,theconvenienceofroboticcleaning,orhomesecurityintheformofelectronicaccesscontrolandsurveillanceandalarmsystems,aswellasnavigatingtheissuesaroundprivacyanddatasecurity.

    Reducingcomplexityinthenewsmarthome

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    Withinthelastweek,SamsunghasgarneredsomeunfortunatepublicityaboutachangeintheprivacypolicyfortheirSmartTVconnectedTVsets.Samsunghaswarnedcustomersthatthevoiceactivationfeaturecouldeavesdroponuserswhileitisattemptingtolistenforusercommandsandintheprocess,transmitprivateinformationtothirdparties.AndonedaylatercomeswordthattheSamsungSmartTVshavebeeninsertingsilentPepsiadsintoprivatehomevideosevery1520minutesinsomeinstances.Samsunghasacknowledgedthisissueanddescribeditasanerror,butthishasalertedconsumersthattheirexpensivenewTVsetmaynotbeanentirelybenignpresenceinthehome.

    Figure27:GeorgeOrwellsTelescreen*becomesarealityinthesmarthome?

    *Telescreens,featuredinGeorgeOrwellnovelNineteenEightyFour,arefictionaldevicesthatoperateasbothtelevisionsandsecuritycameras.

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    ConsumersandWearablesTheConnectedPerson

    Wehavealreadyseenrapiddevelopmentoffitnesssensorproductsandassociatedsmartphoneapps(Fitbit,Jawbone,NikeFuelband,etc.)andexpecttoseeamarketdistinctionmadebetweenhighercostandfunctionalityintruemedicalgrademonitoringdevices(glucose,bloodpressure,otherbiometricdata)versusthesetypesofconsumerfitnessproducts.Duetoanumberofconsiderationsincludingoverallcost,liabilityissues,thecomplexityofthehealthcareindustrystructure,andtechnicalchallengesweseethemarketformoresophisticatedmedicalgrademonitoringtoolsdevelopingmoreslowlythansimplefitnessproducts.

    Figure28:WearablesLandscape

    Source:Variousindustryandcompanysources.Asyoucanseeinthechartabove,therearemanyplayersinthewearablesspaceincludinganumberofstartupssuchasZepp(golf,tennisandbaseball),Sensoria(sportssocksandbraswithsensors),andStrava(runningandcycling).Projectionsforthenumberofnumberofunitssoldrunintothebillions.Apple,whichismissingfromtheabovechart,isscheduledtoreleasetheAppleWatchonApril1,2015.ItremainstobeseenifApplecanrepeatthesuccessoftheiPhoneinthewearablesmarketandmaintainitspremiumpricepointstrategyinthisspace.Ifitdoes,wethinkthatmanyoftheotherplayersmayendup

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    beingrelegatedtothesidelinesandforceintointensecompetitiononpriceandfeatures.TherecentacquisitionsofEndomondoandMyFitnessPal,bothacquiredbyathleticapparelmakerUnderArmour,dramaticallyillustratetheintersectionofthetraditionallowtechworldofclothingwiththehightechworldofsoftwareandIoT.TheseacquisitionsfollowUnderArmours2013acquisitionofMapMyFitness,amakerofbiometricmeasurementmonitoringdevices(for$150million),aspartofitsoverallConnectedFitnessplatformstrategy.IntelsrecentpushintowearableswithitsnewMICAbracelet(introducedlate2014)andtheacquisitionofBASISScience,afitnesstrackertechnologycompany,arefurtherindicationsofkeeninterestinwearabletechnology.

    Figure29:WearableEquipmentMarket

    Source:CCSInsight/EETimes

    WewouldliketopointthereadertoarecentstudyfromtheUniversityofPennsylvaniaSchoolofMedicineandpublishedintheJournaloftheAmericanMedicalAssociation,whichlooksatthequestionwhetherfreesmartphoneapps(runningoniPhone5sandSamsungGalaxyS4)canbeasaccurateatmeasuringusersstepsaswellaspopularwearablefitnessdevicesthatcostmorethan$100.DevicesstudiedcamefromFitbit,JawboneandNikesdiscontinuedFuelband.Theresearchersfoundthattheaccuracyoffreesmartphoneappsandwearableswereaboutthesame.Specialistwearablesforsportandhealthmaysurvive,butwesuspectthatgenericwearableswillfacecompetitionfromsmartphoneappsandcheaperimportsfromChina.

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    TheSmartandConnectedAutomobile

    Theconnectedcariswidelydiscussedinthetechnologyliterature.WeviewIoTinthecontextofthecarasanarealikelytoseesignificantactivityinthenearterm.InarecentMcKinseyQuarterlyinterview,WilliamClayFordJr.(ExecutiveChairmanofFordMotorCompany)said,Theroleofatraditionalautomakerchangesdramatically.Webecomeapieceofthemobilityecosystem.Inthisnewworld,weneedtofigureoutwhatwehavetoownandwhatwedontandtobeagreatintegratoroftechnologiesandservices.(October2014).

    Figure30:AutomotiveIoT(a) Numberofconnecteddevices(Automobiles) (b) Semiconductorrevenue(Automobiles,$Millions)

    Source:Gartner

    Thecarrepresentsauniqueplatformbecausecarswearoutfasterthanhomesdo,andthereforeconsumersbuynewcarsmuchmorefrequentlythantheybuynew(inthiscase,meaningnewlyconstructed)homes,andassuch,theopportunitytobuildinnewtechnologyiscorrespondinglygreaterintheautomobilesector.Moreover,thehouseandthecararegenerallythetwolargestfinancialcommitmentsinatypicalconsumerslife,andrepresenttwoofthethreeprimaryenvironmentsofapersonsexistenceandthetwooverwhichtheconsumerhasthemostdiscretion(thethirdspacebeingthe

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    workenvironment).TheIoTtechnologiesforautomaticallymanagingonesenvironmentandentertainmenthaveanaturalplacehere.ThecarthusbecomesbothaThingintheIoTaswellasagatewaytotheIoTintermsofitsabilitytoconnecttheconsumertothelargerIoTalmostinvisiblyasitaffordsconvenienceslikeGPSlocationfinding,smartphoneconnectedentertainment,sophisticatedsensorbasedcollisionavoidance,trafficrerouting,andsoforth.Inthisway,thecarhasthepotentialtobetheleadingedgekillerappforIoTtechnologiesevenmoresothantheconnectedhome.OtherIoTrelatedapplicationswillusesensorstomonitorallsortsofaspectsofthecarsoperationtoincreasesafety,predictpreventivemaintenance,andensurelongerservicelife.

    Figure31:IsthisanAutomobileoraComputeronWheels?(Capableofgeneratingupto250GB/hourofdata)

    Source:ChipDesign

    Connectedcarthekillerapp

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    Overthenextdecadeandbeyond,wealsoexpectthatafullyorpartiallydriverlesscarmodelwillemerge,althoughitremainsunclearhowquicklysuchtechnologywillbeadoptedasmainstream.Becausetheautomotiveindustryismature,designcyclesarestillcomparativelylong,andconsumercontroldesiresarehigh,wesuspectthatradicalshifttothedriverlesscarmaybedecadesaway.

    WewereatarecentIoTeventwhereanexecutivefromaDetroitbasedcarmanufacturersaidthefollowing,OurnewcompetitorsaretheInternetcompaniessuchasApple,GoogleandTesla.TheynolongerjustcomefromDetroitorJapanorKorea.

    Manysemiconductorcompaniesnolongerowntheirfabs,whichcancostfrom$3.5billionforDRAMto$10billionforlogicchips.Whyshouldautomobilecompanieshavetheirownmanufacturingplants?(Anewautomotiveplantcancostmorethan$1billion.)

    ThisheadlinefromtheWallStreetJournal(Feb.13,2015),AppleGearsUptoChallengeTeslainElectricCarsiPhonemakerhas100sworkingondesignonaminivanlikevehicle,mayhavecausedafewheartpalpitationsinboardroomsinDetroitandelsewhere.Skepticsatautomanufacturingcompaniesonlyneedtospeakwithexecutives(formerexecutives?)inthemusicandmobilephonebusinessestolearnabouthowApplerevolutionizedboththeseindustries.Applereliesoncontractmanufacturerstobuilditsproductsanditremainstobeseenifthecompanywouldadoptthismodeltobuildsomethingascomplexasacar.But,asthesemiconductorindustryhasshown,usingthirdpartiestobuildextremelycomplexproductsisindeedachievable.

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    CreatingSmartCitieswithIoT

    WebelievethereisasignificantopportunityforIoTtechnologytobedeployedinthecreationofwhatisnowbeingcalledSmartCities.Theabilitytouseinexpensivesensorscrossconnectedintoanetworkoffersmuchfinercontroloverthephysicalelementsoftheurbanlandscapestreetlighting,publictransportation,buildingsandgrounds,etc.Thisfinecontrolaffordstheopportunitytoreducecostsviacuttingenergyandresourcewasteaswellasincreasingpublicsafetybycontrollinglightingandremotelymonitoringactivities.

    Figure32:SmartCities

    Tremendouspotentialtoreducecosts,raiseefficienciesandimprovelives

    Source:CiscoMuchhasalreadybeenwrittenaboutsmartgrids,smartmetersandtheirroleinthereengineeringoftheelectricalpowersystem.Itisalreadyclearthatrenewableenergy,withitsoftenunpredictableoutputlevels,willrequiresmartgridtechnologythatwilllookmuchmorelikeaninterconnectedmeshnetworkofintelligentnodesratherthana

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    dumbnetworkcharacterizedbycentralizedlargescalegenerationdistributingpoweroutwardalongagridsystemwithvoltagetransformersandsimplecircuitbreakers.

    CiscohasidentifiedSmartCitiesasaprimaryfocusofitseffortstobuildouttheIoT(seeFigure33,CiscoSmartCityBusinessArchitecture.)TheCiscoSmartCityBusinessArchitectureidentifiesasetofessentialrequirementsinanumberofdifferentbusinesslayersessentialfordeliveringandoperatingasuccessfulsmartcityinitiative.

    Figure33:CiscoSmartCityBusinessArchitecture

    AwayforCiscotocombineitsnetworkingprowesswiththeopportunitiesinsmartcities

    Source:Cisco

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    TheCiscosmartcityinitiativeforSeattle,Washintonincludedcovering30percentofthecityareawithaWiFinetworkandfourkeysmartcitysolutionstrafficincidentmanagement,smartlighting,smartparking,andsafetyandsecurity.Applyingthistheoreticalmodelgloballysuggestsanestimated$7.5billionannualrevenueopportunityfortechnologyvendorsintheSmartCitiescategory.Inmakingthisestimate,Ciscoisassumingthatthesolutionsprovidedwillincludemorethanjustabuild/installelementthattheywillinfactbebundledasaninstallationwithanassociatedannualservicecontractwhichwillgenerateongoingrevenueforthevendorsandensurethattheinstallationisproperlymaintainedandcontinuestofunctionasoriginallydesigned.

    InadditiontoCisco,otherprovidersofsmartcitytechnologyhaveemerged.Ahostofcompaniescompeteinthesmartmeteringspace,includingItron,SilverSpring,Siemens(eMeter),andEchelon,tonameafew.CyanTechnology,aUKbasedcompany,hasdemonstratedsomeinterestingtechnologyintheformofameshnetworkthatcanbeusedtooperateconnectednetworksofelectricalandgasutilitymeteringaswellasdistrict(street)lightingandwater.Ecofactorisacloudbasedhomeenergymanagementplatformthatincludesbothsmarthomemanagementanddistrict/regionallevelanalyticsfordemandresponseandloadmanagement.

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    IoTRevolutionizingHealthcare

    TherearemassivepotentialadvantagesofIoTinthehealthcarespace(seefigurebelow).Thesecanbebroadlydividedintoi)monitoringforpreventionandmaintenanceofchronicpatientconditions(e.g.glucosemonitoringfordiabetes),ii)impactsonhospitaloperationsandprocedures,analogoustothekindsofadvantagesIoTcanprovideinanyproductionorservicesetting,andiii)impactsontheutilization,maintenance,andsupportofexpensiveandsophisticatedcomplexmedicaldiagnosticandtreatmentequipment.

    Figure34:EnormousPotentialforIoTinHealthcare

    Loweringcosts,improvingdiagnosis,trackingassets,

    Source:TI

    MaintainingandrepairingsophisticatedandexpensiveequipmentlikeMRIscannerscanrequireexpensiveservicevisits.Providingoperationalsupportremotelycanimprovebothutilizationandoutcomes.AccordingtoSalesforce.com,companieslikeVarianMedicalSystemsareseeinga50percentreductioninmeantimerequiredtorepairtheirconnecteddevices.Varianreducedservicecostsby$2,000foreachproblem

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    resolvedremotely,with20percentfewertechniciandispatchesworldwide.ElektaisalsoseeingexcellentresultsfromprovidinginstantexpertadviceandovertheshouldersupporttotheircustomersforElektaradiationoncologymachines.Inaddition,connectedmachinescananticipatetheneedforreplenishmentofconsumablesuppliesandpotentiallyalertacentralmonitoringsystemtofailingsystemssufficientlyaheadoffailurethatdowntimecanbereducedoreveneliminated.

    Centrallymonitoringutilizationofremotelyconnectedequipmentalsoallowsefficientloadbalancingandmakespossiblehigheroverallutilization.Eitherpatientwaittimesarereduced,oroverallcapitalexpendituresarereducedbecausethesamenumberofmachinescanefficientlyservicemorepatients.

    Duetobeinglargeplaceswithmanypeopleandthingsmovingaboutagreatdeal,hospitalsposeachallengewithregardstokeepingtrackofassetsrangingfromMRIscannersto$60,000beds.AFinnishstartup,Ekahau,isleveragingWiFirealtimelocationsystemstotrackexpensiveassets,patientsandstaffwithinhospitals.Thetechnologycanalsobeusedtoimprovepatientsafetyandautomateworkflow.SimilartypesofIoTtechnologycanreducehospitalinventoryexpenses,maximizeequipmentutilizationrates,shortenequipmentsearchtimes,preventtheft,andautomatehospitalassetmanagementandmaintenancewithrealtimevisibilityintothelocationandstatusofmedicalequipment.

    Aeroscout,partofStanleyBlack&Decker,isanothervendorthatusesWiFinetworkstotrackandmanagethelocationandstatusofmobileassetsandpeopleinhospitals,aswellmanufacturing,miningandlogistics.Ontheoperationallevel,connectingthevastarrayofdevicesthatmaybeinusetocareforapatientintheICUcanreducethepotentialfordangerousorevenfatalerror.Today,manyofthesedevicesarecompletelyindependentofoneanother.Connectingthesedevicesisnottechnicallysimpleandtheconsequencesofanerrorarehigh.Whilethisisachallengingproblem,thebenefitsareclear,andwebelievethisabsolutelywillhappen.

    MultipleopportunitiesinhealthcareIoT

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    JustaswearablefitnessdeviceshavecapturedtheimaginationofconsumerorientedIoTadvocates,moresophisticatedpersonalmonitoringdevicescreatethepossibilityofbettermonitoringofchronicconditionslikediabetesandcongestiveheartfailure,improvingpatientqualityoflifeandextendinglifespanaswellasreducingthecostofacuteinterventionbyanticipatingandpreventingproblems.Ofcourse,thepotentialofBigDataanalyticsinpredicting,preventingandcontrollingepidemicdiseaseisyetanotherinnovationconnectedwithIoTthathassignificantimplicationsforpublichealth.Itisnotdifficulttoimaginetheaggregationofindividualdataonalongtermlongitudinalbasisdramaticallyimprovingthequalityofscienceasitrelatestodiseasepreventionandmanagement.Aswevenotedelsewhere,securityandpropersafeguardingofpersonaldatawillbeabsolutelycriticalhere.HIPAAisjustthebeginningofthescopeofregulatoryrequirementsthatwillneedtobeaccommodatedtooperatesuccessfullyinthehealthcaredataspace.

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    SmartConnectedProductsandCorporateStrategy

    ThequestionsinthetablesthatfollowarebasedonthepaperpublishedbyJ.HeppelmannandM.Porter:HowSmart,ConnectedProductsareTransformingCompetitionHBR,November2014.ThispaperhasavoidedalotofthehypeandtechnicaljargonthatsurroundstheInternetofThingsandtheauthorshavelistedanumberofcriticalquestionsthatBoards,CEOsandinvestorsneedtoconsidercarefully.Wehaveaddedourthoughtsbasedonourownresearchaswellasfromdiscussionswithmanyexecutives,entrepreneursandinvestors.

    StrategicChoice OurThoughtsandObservations

    Whichsetofsmart,connectedproductcapabilitiesandfeaturesshouldthecompanypursue?

    WiththehypeandpromiseofIoTmanycompaniesmaybetemptedtosmartenablemanyoftheirproductsbeforerealizingthecomplexityinvolvedinmanagingtheIoTvaluechain.

    Thecrowdfundingphenomenonhasmadeitpossibleforyoungcompaniestodevelopinterestingproductsforthehome,consumerandwearablesapplications.

    AlotoftheexcitementofIoThasbeengeneratedbyM&Atransactionsinthehome/consumerspace,anditwouldbeprematuretoextrapolatethissentimenttotheindustrialbusinessworlds,whereamorethoughtfulapproachisrequired.Onethatsupportsanexistinginstalledbaseofsolutions,butalsoworkingwithcustomerswhowishtobenefitfromIoT.

    Howmuchfunctionalityshouldbeembeddedintheproductandhowmuchinthecloud?

    Embeddingmorefunctionalityintheproductraisescostsandmakesitdifficulttoadd/updatefeatures.

    Functionalityinthecloudwillrequiresecure,reliableandresponsivenetworks. Therelationshipanddependabilityofthecloudvendorwillbeanimportantfactor. Duetoprivacylaws,cloudsmaynotextendacrossnationalboundaries,e.g.betweentheUSandtheEU.

    Tosomedegreethischoicewillbedrivenbythenatureofwhereandwhattheproductisproductsthatoperateinremoteorinhospitablesettingswillinherentlyneedtodependlessonconnectivitywiththenetwork.

    Shouldthecompanypursueanopenorclosedsystem?

    ClosedsystemswerethenorminIndustrialsystemsandmanufacturerswilltryandmaintainthiscontrolevenwiththemoreopenIndustrialInternettomaintainorgaincompetitiveadvantage.

    Intheconsumerworld,Appleisnotoriousforimposingitsclosedsystemonwillingcustomersandtherebychargingpremiumprices.ItremainstobeseenifApplecanextendthistothesmarthome.

    ThelackofIoTstandardscouldmeanthattheIoTmarketsendupbeingislandsofclosedsystems.

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    StrategicChoice OurThoughtsandObservations

    Shouldthecompanydevelopthefullsetofsmart,connectedproductcapabilitiesandinfrastructureinternallyoroutsourcetovendorsandpartners?

    WethinkthatduetocomplexityofIoTproducts,manycompanieswillpartnerwithoutsidervendorstodevelopandsupporttheirIoTproductsandserviceofferings.

    ManyarealreadyoutsourcingITandmanufacturing;doingthesamefortheirIoTmaynotbeenseenasabigleap.

    Thedownsidewillbethatcompanieswillthenbeforcedtosharesomeofthevaluewiththeirsuppliesandpartners.

    Whatdatamustthecompanycapture,secure,andanalyzetomaximizethevalueofitsoffering?

    JustlikeBillyBeaneusedstatisticsandanalysistobuildaworldclassbaseballteam,IoTallowsalmosteveryeconomicactivityandindustrytobemonitoredandanalyzedmorecheaplythaneverbefore.

    Intheconsumerrealm,anequallyimpressive(andfrightening)amountofdatacanbegatheredaboutaperson24hoursaday.FordsFusionEnergicarproducesupto25gigabytesofdataperhourwhichcouldincreaseto250gigabytesinfuture.

    ThechallengeforallIoTapplicationsistooptimizethetypeandamountofdatacaptured,andnaturally,howthentosecureit.

    Howdoesthecompanymanageownershipandaccessrightstoitsproductdata?

    Likethetechnicalstandards,IoTdataownershipstandardsareaworkinprogresswithnoresolutioninsight.

    Porteret.al.ask,Whoistherightfulownerofthedatastreamingfromasmart,connectedaircraftenginetheenginesupplier,theairframemanufacturer,ortheairlinethatoperatestheplanes?

    Consumersmaynotwishtosharetheirhealthwearableordrivingdata,orgiveuptheirrights.

    Wethinkthattherewillbealotofquestionsthatcourtsandlawmakerswillhavetograpplewith.

    Shouldthecompanyfullyorpartiallydisintermediatedistributionorservicechannels?

    IoThasthepotentialtoreducetheroleofmiddlemenandallowmanufacturerstocapturenewrevenueswhilebuildingnewrelationshipswithendcustomers.WhatrolewouldtheSearsoftheworldplayifwhitegoodsmanufacturersforgeddirectrelationshipswiththeirendcustomers.WhatisthefutureroleforITdistributorssuchasIngramandTechData?

    ThevalueofthemiddlemanwillsurelybechallengedintheIoTenabledeconomy.

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    StrategicChoice OurThoughtsandObservations

    Shouldthecompanychangeitsbusinessmodel?

    ThemusicindustrysoldvinylrecordsandthenCDs.WiththeInternetcameNapsterandiTunesandconsumersnolongerwantedtobuyandalbumonaCD,havingdiscoveredthattheycouldpurchaseonlytheindividualtunestheyliked.Spotify,Pandoraandtheirbrethrenoffertheoptionofnotbuyinganymusicatall.

    Similarly,IoTcouldturnproductsalescompaniesbusinessmodelsupsidedownandforcethemtoofferaproductasaservicemodel,withlowerlevelsofprofitabilityandgrossmargins.

    Theirrevenuemodelsmayhavetoshiftfromsales+maintenancetoarecurringrevenuemodelwhichtendstohavedifferentmarginandprofitabilityprofiles.

    WallStreet,whichtendstolookforyearonyearrevenueandEPSincreases,maypunishthesechangesinbusinessmodels.Hybridsales/supportmodelsmaybetoocomplexandconfusingtoinvestors.

    Wouldcompaniesthenhavetoresorttogoingprivate,somethingthatDelldidtoremakeitsbusinessmodelandescapetheburdenofhavingtomeetWallStreetsquarterlyexpectations.

    Shouldthecompanyenternewbusinessesbymonetizingitsproductdatathroughsellingittooutsideparties?

    IoTmaygiveothercompaniesaccesstohugevolumesofdatathattheymaybetemptedtomonetize,butthereareafewhurdles.

    GoogleandFacebookhavebecomewildlysuccessfulatmonetizinguserdataandmayviewmonetizingproductdataasthenextfrontierforthem,makingthemselvesimposingcompetitorsforthosechoosingtomonetizeproductdata.

    Assomecompanies,suchasVerizon,havealreadydiscovered,monetizingdatawithoutexplicitpermissionfromthegeneratorsofthatdatacanleadtounwantedattentionfromregulatorsandnegativepublicity(seeourearlierdiscussionofVerizonsuseofsupercookies.

    Intheindustrialworld,companiesareunlikelytobewillingtoshareanytypeofdatawiththeirarchrivals.ExamplesherewouldincludeCiscoandHuawei,orBoeingandAirbus,orGEandSiemens.Aplatformplayerattemptingtomonetizethisdataforsupplementalrevenuemayencounterstrongoppositioninthisspace.

    Shouldthecompanyexpanditsscope?

    TheIoTvaluechainisbroadandsomecompaniesmaybetemptedtoexpandbeyondtheircorebusinessareastocapturemorerevenueandprofitsforthemselves.

    AsweidentifiedwhendiscussingCiscosDNAearlierinthereport,thisisnotaneasythingtoaccomplish.

    Therewillbeboldcompanies,suchasAmazon,whichhasexpandedfrombeinganecommercegianttoacloudservices/infrastructurebehemothwithamarketcapitalizationinexcessof$170billion.(AmazonrecentlyacquiredAnnapurnaLabs,anIsraelichipcompany,for$350million.)

    WethinkmanyotherswillbecautiousandplayindifferentpartsoftheIoTvaluechainthroughpartnerships,atleastinitially.

    Inanycase,wheretodrawthelinebetweencorecompetenciesandoverreachwillbecriticalbutalsonotnecessarilyobvious.

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    ConcludingRemarks

    AsweveseenIoTcanmeanmanydifferentthings.Muchoftheconfusion,inourview,hastodowithsomethingveryaptlydescribedbytheparableoftheBlindMenandtheElephantagreatdealofonescomprehensionoftheIoTdependsononesexistingunderstandingoftheInternet,oftechnology,andofprovenusecasesinafamiliarmarketorindustrysegment.Whatdoesseemindisputablyclear,however,isthatthisisthebeginningofaverysignificanttechnologybuildoutopportunity,perhapsassignificantandfarreachingintermsofhowweliveandhowoureconomiesfunctionastheInternetitselforiginallywas.

    Indeed,wecouldcertainlyarguethattheInternetofThingsisreallyjusttheregular,oldInternet,butwithmany,manymorenodes.Thisstrikesusasanoversimplification.WhilethereislittledoubtthatIoTiscurrentlyinthemidstofahypecycle,beneaththehypethereistheprobabilityofrealrevolutionarychange.ItreallyisfarmorethanIPv6andabitofaddeddataconnectivityonexistingplatforms.

    WebelievetherearerealandveryrelevantdifferencesamongvariousmarketsegmentsintermsofhowIoTtechnologywillbedeployed,howitwillprovetobeuseful,andhowitwillaffectmanufacturers,serviceprovidersandendusers.Inthisreport,wehavetriedtoillustratesomeofthewaysmarketparticipantsarealreadyrespondingtothesedevelopmentsandsomeofthelogicbehindwhytherearesomanydifferingpointsofview.WevelookedbothathowM&Aactivitycaninformusastowhatsomeofthemoreprominentplayersarethinkingintermsofstrategy,andatsomeofthebusinessmodelimplicationsofthesizablenewmarketsthatmayemergeasaresultofthenewtechnologies.

    Securityconsiderationswillbeabsolutelycritical.Theinterconnectionofequipmentthatrepresentsvitalandimportantinfrastructureforlifesupportandsafetywillneedtobedoneinathoughtfulandhighlysecuremanner.Thisrepresentsbothanopportunityandathreatforallofusintermsofthepotentialforbenefitsormisuse/abusestemmingfromtheabilitytocontrolassetselectronicallyfromaremotelocation.

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    Moreover,aswithanybigtechnologydevelopment,IoTbringswithitbothopportunitiesandthreats.Incumbentgiantswithcozybusinessmodelswillfindthattheymaybechallengedfromunexpectedcorners,andthattheymayneedtorethinkorperhapsevencannibalizeexistingproductsandmarketstoensuretheirlongtermsurvival.Sotherewillbeanexistentialthreatforsome.

    BewarethegeeksofSiliconValley,eventhosebearinggifts.

    TheApples,GoogleandFacebookshaveupendedmanyindustriesandwillbegunningforthelargemarketsthatsomeincumbentshavecontrolledforsolong.ThestructuralchangesthatwillresultfromtheInternetofThings,especiallythegleaningofbusinessintelligencefromfastdata/bigdatapiecesmaybethecatalystthatwillallowsthemtobecomeformidablecontenders.PerhapswemayseeamergerbetweenaGE(minusitsfinancialarm)andCisco.Suchaconglomeratecouldaltertheglobalcompetitivelandscapefordecades.

    Ultimately,theIoTshouldbringaneweraofconvenience,functionality,andutilitytothewaywelive,travel,workandmanageourhealth.Thesmarttechnologieswillbetteranticipateourneeds,reducewaste,andimprovetheoverallqualityofourlives,whichwillsurelybeagoodthing,aslongasweavoidthepitfalls.

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    Appendix

    Companiesmentionedinthereport

    ABB Comcast Honeywell Newtrax Sony

    Accenture CommScope HP Nokia SpliceMachine

    Actian Couchbase Huawei NomadDigital Splunk

    ActiveMind CSC IBM NXPSemiconductors Sqrrl

    Acuity CyanTechnology IFTTT Omron Strava

    Aeris Cymbet Infosys OnRampWireless StreamTechnologies

    Aeroscout CypressSemi IngramMicro Optus Symantec

    AGTInternational Daintree Intel Oracle Synnex

    AlcatelLucent Databricks IS2T OsramSylvania TCS

    Amazon DavraNetworks Itron Palantir TechData

    Anthem Dell JasperTechnologies Panasonic TechMahindra

    Apple DigiInternational Jawbone ParStream Telit

    Arduino DigitalLumens JohnsonControls Pebble Telus

    ARM EatonCooper Kii Percolata Tesla

    Arrayent Echelon KOREWireless Perpetuum Turn

    ArrowElectronics Ecofactor LG Pivotal UnderArmour

    Atmel Ekahau Lenovo Platfora Uniqlo

    AT&T ElectricImp Legrand PTC UnitedTechnologies

    Avago Electrolux Libelium Qualcomm VarianMedical

    Avnet Elekta Lifx Quirky Veedims

    AylaNetworks EMC LinkLabs RedPineSIgnals Verizon

    Belden Emerson Lively Salesforce ViaSat

    Belkin Enlighted LockheedMartin Samsung VMware

    BigAssFans Enocean LogMeIn SAP Vodafone

    Boeing/ArgonST Ericsson Lutron SchneiderElectric Whirlpool

    BorgWarner Facebook MapR Schlumberger WinkBosch Fanuc Marvell Sensoria WiproBroadcom Fairchild Mocana Sharp XivelyBsquare Ford MicroGen Siemens YaleLocksChevron Freescale Microsoft Sigfox ZebraCisco GainSpan MongoDB SiliconLabs ZeppCitrix GE Murata SineWave ZTECloudera Gemalto Narus/Symantec SilverSpring CocaCola Google NetApp SingTel CohdaWireless Haier Netflix SiriusXM

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    RecentM&AtransactionsintheIoTspace

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    RecentprivateplacementsintheIoTspace

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    ItwassixmenofIndostanTolearningmuchinclined,

    WhowenttoseetheElephant(Thoughallofthemwereblind),

    ThateachbyobservationMightsatisfyhismind.

    TheFirstapproachedtheElephant,

    AndhappeningtofallAgainsthisbroadandsturdyside,

    Atoncebegantobawl:"Godblessme!buttheElephant

    IsverylikeaWALL!"

    TheSecond,feelingofthetusk,Cried,"Ho,whathavewehere,

    Soveryroundandsmoothandsharp?Tome'tismightyclear

    ThiswonderofanElephantIsverylikeaSPEAR!"

    TheThirdapproachedtheanimal,

    AndhappeningtotakeThesquirmingtrunkwithinhishands,

    Thusboldlyupandspake:"Isee,"quothhe,"theElephant

    IsverylikeaSNAKE!"

    TheFourthreachedoutaneagerhand,Andfeltabouttheknee

    "WhatmostthiswondrousbeastislikeIsmightyplain,"quothhe:

    "'TisclearenoughtheElephantIsverylikeaTREE!"

    TheFifth,whochancedtotouchtheear,Said:"E'entheblindestman

    Cantellwhatthisresemblesmost;Denythefactwhocan,

    ThismarvelofanElephantIsverylikeaFAN!"

    TheSixthnosoonerhadbegun

    Aboutthebeasttogrope,Thanseizingontheswingingtail

    Thatfellwithinhisscope,"Isee,"quothhe,"theElephant

    IsverylikeaROPE!"

    AndsothesemenofIndostanDisputedloudandlong,Eachinhisownopinion

    Exceedingstiffandstrong,Thougheachwaspartlyintheright,

    Andallwereinthewrong!

    TheBlindMenandtheElephantJohnGodfreySaxe(18161887)

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    SelectedWCPIoTRelatedTransactions

    Androidsmartwatch WirelessLTE Assettracking

    MEMSfortiming Energy&power

    managementConnectedcar

    PrintedRFID Sensors&clocks Humiditysensors

    WoodsideCapitalPartners(WCP)WhoWeAre

    Aglobal,independentinvestmentbankthatdeliversworldclassstrategicandfinancialadvicetoemerginggrowthcompaniesintheSoftware,HardwareandInternetsectors

    Foundedin2001. Over$8billionintransactionvalue M&A,strategicpartnershipandcorporatefinanceadvisoryin:

    o SoftwareandInternetTechnologieso DigitalMediaandAdvertisingo Hardware:Semiconductors,Electronics,andEnablingMaterialso SpecialSituationso CrossborderTransactions

    SiliconValleybased,withofficesinLondon WCPResearchteamofferstechnologyresearchservingbuysideinstitutional

    investorsandtechnologyindustryexecutives. 25professionals:backgroundsasentrepreneurs/CEOsandfromtopinvestmentbanks.

  • SiliconValleyLondon

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    SoftwareandInternetServicesTeam

    KellyPorterPartnerandManagingDirectorkelly.porter@woodsidecap.com6505132756

    TriciaSalineroPartnerandManagingDirectortricia.salinero@woodsidecap.com6505132758

    RonHellerManagingDirectorron.heller@woodsidecap.com6505132762

    InduNavarManagingDirectorindu.navar@woodsidecap.com6505132774

    PerSelbekkManagingDirectorper.selbekk@woodsidecap.com+447782325319

    AmarSenanManagingDirectoramar.senan@woodsidecap.com6506563374

    HardwareandSemiconductorTeam RudyBurgerManagingPartnerrudy.burger@woodsidecap.com6505132755

    GregMischouSeniorPartnerandManagingDirectorgreg.mischou@woodsidecap.com6505132768

    MikePowellPartnerandManagingDirectormike.powell@woodsidecap.com+442074882772

    KirkBloedeManagingDirectorkirk.bloede@woodsidecap.com6505132761

    ShusakuSumidaManagingDirectorshusaku.sumida@woodsidecap.com6505132760

    SpecialSituations

    JonThomasManagingDirectorjon.thomas@woodsidecap.com6505132763

    ResearchTeam SamSkinnerChiefOperatingOfficersam.skinner@woodsidecap.com6505132759

    EdBierdemanManagingDirectored.biedeman@woodsidecap.com6505132780

    RyanKoontzManagingDirectorryan.koontz@woodsidecap.com6505132778

    MarshallSenkManagingDirectormarshall.senk@woodsidecap.com6505132781