The Internet of Things

The Internet of Things has the potential to fundamentally shift the way we interact with our surroundings.
The ability to monitor and manage objects in the physical world electronically makes it possible
to bring data-driven decision making to new realms of human activity to
optimize the performance of systems and processes, save time for people and businesses, and improve quality of life.

From monitoring machines on the factory floor to tracking the progress of ships at sea,
sensors can help companies get far more out of their physical assets—improving the performance of machines,
extending their lives, and learning how they could be redesigned to do even more.
With wearable devices and portable monitors, the Internet of Things has the potential to dramatically improve health outcomes,
particularly in the treatment of chronic diseases such as diabetes that now take an enormous human and economic toll.

Definition of the Internet of Things

The Internet of Things defined  as sensors and actuators connected by networks to computing systems.
These systems can monitor or manage the health and actions of connected objects and machines. Connected sensors can also monitor the natural world, people, and animals.

Value of the Internet of Things

McKinsey Global Institute conducted a research to examine in detail how the Internet of Things can create value, and
in the process we have uncovered novel findings about how that value can be captured by companies, people, and economies.

The applications of the Internet of Things is analyzed in the context of settings—the physical environments in which
these systems are deployed, such as homes, offices, and factories.
A key insight from analyzing the benefits of IoT applications within settings is the critical contribution made by
interoperability among IoT systems.
On average, interoperability is necessary to create 40 percent of the potential value that can be
generated by the Internet of Things in various settings.

For the applications that sized,It is estimated that the Internet of Things has a total potential economic impact of $3.9 trillion to $11.1 trillion per year in 2025.

The settings where the Internet of Things is used

In reviewing nearly 300 IoT applications, MGI discovered that using only a conventional approach to
categorizing the potential impact by vertical industry markets—such as
automotive or consumer electronics—made it more difficult to analyze all the ways in which value could be created.

MGI have identified nine settings, capturing IoT use in environments such as homes, offices, factories, worksites (mining, oil and gas, and construction), retail environments, cities, vehicles, and the outdoors.

settings where the Internet of Things will create impact

Where is the value potential of the Internet of Things?

Where is the value potential of the Internet of Things?

Interoperability among IoT systems is required to capture 40 percent of the potential value.

Of the total potential value that can be unlocked through the use of IoT, 40 percent of this value, on average, requires multiple IoT systems to work together.

In the worksite setting, 60 percent of the potential value requires the ability to integrate and
analyze data from various IoT systems.
Interoperability is required to unlock more than $4 trillion per year in potential economic impact from IoT use in 2025,
out of a total potential impact of $11.1 trillion across the nine settings that we analyzed.

Most of the IoT data collected today are not used at all, and data that are used are not fully exploited.

For instance, less than 1 percent of the data being generated by the 30,000 sensors on an offshore oil rig is currently used to make decisions.
And of the data that are actually used—for example,
in manufacturing automation systems on factory floors—most are used only for real-time control or anomaly detection.

A great deal of additional value remains to be captured, by using more data, as well as
deploying more sophisticated IoT applications, such as
using performance data for predictive maintenance or to analyze workflows to optimize operating efficiency.
Indeed, IoT can be a key source of big data that can be analyzed to capture value, and open data, which can be used by more than one entity.

The amount of IoT value that can be realized in developing economies is comparable to that of advanced economies

Overall, over the next ten years, more IoT value is likely to be created in advanced economies because of the higher value associated with each deployment.
However, the potential number of IoT uses is likely to be higher in developing economies.
The level of value in advanced and developing economies will vary depending on setting, industry, and application.
62 percent of the potential annual economic impact of IoT applications in 2025 will be
in advanced economies and that 38 percent will be in developing economies.

IoT value that can be realized in developing economies is comparable to that of advanced economies

B2B applications of IoT have greater economic potential than consumer applications

Consumer uses of IoT technology have garnered a great deal of attention, thanks to media coverage of fitness monitors and home automation.
While these applications do have tremendous potential for creating value,
analysis shows that there is even greater potential value from IoT use in business-to-business applications.
In many instances, such as in worksite applications (mining, oil and gas, and construction), there is no direct impact for consumers.

A great deal of additional value can be created when consumer IoT systems, such as
connected consumer health-care products, are linked to B2B systems, such as services provided by health-care providers and payors.

Users of IoT technologies will capture most of the potential value over time

As in other technology markets, the end customer ultimately captures the most value, we find.
Eventually, customers (such as factory owners using machines guided by IoT technology,
operators of transportation fleets, and consumers) will capture upwards of 90 percent of the value opportunities IoT applications generate.

In many settings, customers will capture value in both direct and indirect ways, such as
being able to buy more efficient machinery that is designed using IoT data from older products in use.

Of the value opportunities created by the Internet of Things that are available to technology suppliers, in general the largest share will likely go to services and software and less will likely go to hardware.

The Internet of Things will change the bases of competition and drive new business models for user and supplier companies

The Internet of Things will enable—and in some cases force—new business models. For example,
with the ability to monitor machines that are in use at customer sites, makers of industrial equipment can shift from
selling capital goods to selling their products as services.

Sensor data will tell the manufacturer how much the machinery is used, enabling the manufacturer to charge by usage.
Service and maintenance could be bundled into the hourly rate, or all services could be provided under an annual contract.

The service might also include periodic upgrades (software downloads, for example).
Performance from the machinery can inform the design of new models and help the manufacturer cross-sell additional products and services.

This “as-a-service” approach can give the supplier a more intimate tie with customers that competitors would find difficult to disrupt.

Estimated potential impact of IoT applications in 2025

Based on a range of IoT adoption rates, economic and demographic trends, and
the likely evolution of technology over the next ten years, we estimate that the economic impact of IoT applications could be from $3.9 trillion to $11.1 trillion per year in 2025.

Where the actual impact falls on that range will depend on a number of factors, including declining costs of technology and the level of acceptance by consumers and workers.
Our estimates are based on applications that we have sized in nine settings (other applications could increase the total amount of value created). Of these settings,
we estimate that factories are likely to have the greatest potential impact from IoT use—as much as $3.7 trillion per year.

The next-largest setting in terms of potential impact would be cities, where IoT applications have the potential for an impact of as much as $1.7 trillion per year in 2025.

Estimated potential impact of IoT applications in 2025

IoT in Human Use

A wide range of IoT devices and applications are emerging for use in the home, including connected thermostats, smart appliances, and self-guided vacuum cleaners.

As these devices evolve, we expect that the greatest economic impact from the Internet of Things in the home will be
in chore automation, which we estimate can cut 100 hours of labor per year for the typical household. That could be worth nearly $135 billion globally in 2025.

The next-largest impact would come from energy management (up to $110 billion per year), followed by
security, which would have an impact of more than $20 billion per year, based on injuries and deaths avoided.
In total, we estimate that IoT applications in the home could have an economic impact of $200 billion to $350 billion per year in 2025.

IoT in Office Use

We define offices as the physical environments in which knowledge work is the primary activity. Key benefits of IoT use in office settings are in security and energy management.

By using digital security cameras with advanced image-processing capabilities, operators of office buildings can monitor activity throughout their properties without requiring guards to patrol or continuously monitor video feeds.


We estimate that IoT-based energy management in offices could cut energy use by 20 percent. Altogether office IoT applications could have an economic impact of $70 billion to $150 billion per year in 2025.

IoT in Factories Use

This setting is one of the largest sources of value from the adoption of the Internet of Things, potentially generating an economic impact of $1.2 trillion to $3.7 trillion per year.

We define factories in the broadest sense to include all standardized production environments. Therefore, the benefits of IoT use in hospitals and in agricultural settings, as well as in manufacturing facilities.

In the factories setting, value from the Internet of Things would arise chiefly from productivity improvements, including 10 to 20 percent energy savings and a 10 to 25 percent potential improvement in labor efficiency.

Improvements in equipment maintenance, inventory optimization, and worker health and safety are also sources of value in factories.

IoT in Worksites Use

We define worksites as custom production environments, such as mines, oil and gas extraction sites, and construction sites.
Leading companies that operate in worksite settings have been early adopters of IoT technology.

A typical oil drilling platform today might use 30,000 sensors, watching over the performance of dozens of systems.
In mining, self-driving vehicles, including mine cars and ore trucks, are helping to streamline operations and reduce costs.

Overall, improvements in operations from IoT applications could be worth more than $470 billion per year in 2025 in worksites.
The second major source of value—potentially more than $360 billion per year—would be improved equipment maintenance.

Using sensors to monitor the health of machinery in use, companies can shift to a condition-based maintenance model (maintaining equipment when there is an actual need through predictive analytics) rather than relying on
a regular maintenance schedule or repairing equipment only when it breaks down.
Companies can also improve human health and safety by using the Internet of Things.


In total, we estimate that IoT in the worksites setting can have an economic impact of $160 billion to $930 billion per year in 2025.

IoT in Vehicles Use

In the vehicles setting, we assess the potential for IoT to monitor and improve the performance of planes, trains, and other vehicles while in use, which could generate $210 billion to $740 billion per year in IoT impact for this setting in 2025.

Iot in Cities Use

Cities have become the locus of a great deal of innovation and experimentation with IoT technology,
through so-called smart city initiatives.
Since cities are the engines of global economic growth—the 600 largest cities in the world are expected to generate 65 percent of global GDP growth through 2025—the impact of IoT technologies can be substantial.5 Specifically,
cities can benefit from the Internet of Things in four areas:

  • transportation
  • public safety and health,
  • resource management,
  • service delivery

Transportation is the largest application and includes IoT-based systems to manage traffic flow and autonomous vehicles (self-driving cars). For example,
there is great economic potential in the use of IoT that could come from adjusting commuting schedules based on
actual tracking data of public transit systems (buses and trains).

Up to 70 percent of commuting time today is “buffer time”—the extra time between when the rider arrives at a stop or station and
when the bus or train actually leaves.
Reducing the buffer in cities across the world could provide time savings equivalent to more than $60 billion per year.

In total, IoT transportation applications could be worth more than $800 billion per year to cities around the world.
The next-biggest impact would be in public health—up to nearly $700 billion per year, mainly
from air and water quality improvements that would reduce lives lost to pollution.

Building a Smart City: Lessons from Barcelona from CACM on Vimeo.

Using IoT smart meters to reduce loss of electricity in distribution and sensors to detect water leaks could be worth as much as
$69 billion per year globally.
Overall, we estimate that IoT application in the cities setting could have an economic impact of $930 billion to $1.6 trillion per year in 2025.

IoT in Outside Use

The outside setting captures uses of IoT technology outside all of the other settings; that is,
those that take place outdoors between urban environments.

For example, it includes use of IoT to improve the routing of ships, airplanes, and
other vehicles between cities using advanced navigation informed by various sensors.

This also includes using the Internet of Things to track containers and packages in transit. We estimate that these applications could have an economic impact of $560 billion to $850 billion per year in 2025.

Source: MGI