Here is a brief excerpt from an article written by James Manyika, Michael Chui, Peter Bisson, Jonathan Woetzel, Richard Dobbs, Jacques Bughin, and Dan Aharon for the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out other resources, learn more about the firm, obtain subscription information, and register to receive email alerts, please click here.

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If policy makers and businesses get it right, linking the physical and digital worlds could generate up to $11.1 trillion a year in economic value by 2025.

The Internet of Things — sensors and actuators connected by networks to computing systems — has received enormous attention over the past five years. A new McKinsey Global Institute report, The Internet of Things: Mapping the value beyond the hype, attempts to determine exactly how IoT technology can create real economic value.

Our central finding is that the hype may actually understate the full potential — but that capturing it will require an understanding of where real value can be created and a successful effort to address a set of systems issues, including interoperability.

To get a broader view of the IoT’s potential benefits and challenges across the global economy, we analyzed more than 150 use cases, ranging from people whose devices monitor health and wellness to manufacturers that utilize sensors to optimize the maintenance of equipment and protect the safety of workers. Our bottom-up analysis for the applications we size estimates that the IoT has a total potential economic impact of $3.9 trillion to $11.1 trillion a year by 2025. At the top end, that level of value — including the consumer surplus — would be equivalent to about 11 percent of the world economy (exhibit).

Achieving this kind of impact would require certain conditions to be in place, notably overcoming the technical, organizational, and regulatory hurdles. In particular, companies that use IoT technology will play a critical role in developing the right systems and processes to maximize its value.

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James Manyika, Jonathan Woetzel, and Richard Dobbs are directors of the McKinsey Global Institute, where Michael Chuiis a partner; Peter Bisson is a director in McKinsey’s Stamford office; Jacques Bughin is a director in the Brussels office; and Dan Aharon is a consultant in the New York office.