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Adoption of the Internet of Things is proceeding more slowly than expected, but semiconductor companies can help accelerate growth through new technologies and business models.

Niccolò Machiavelli, one of history’s great futurists, might have predicted the Internet of Things (IoT) when he wrote, “There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things.” The IoT’s early innovators, who have grappled with mixed overall demand, a lack of consistent standards, and other challenges, would agree that their road has been difficult. But, like other visionaries before them, they have persisted in establishing a new order because they see the promise ahead.

Both consumers and the media are fascinated by IoT innovations that have already hit the market. These “smart” devices have sensors that communicate seamlessly over the Internet with other devices or the cloud, generating data that make the world safer, more productive, and healthier. In just a few years, some IoT devices have become standard, including thermostats that automatically adjust the temperature and production-line sensors that inform workshop supervisors of machine condition. Now innovators want to enable more sophisticated IoT technologies for self-driving cars, drone-delivery services, and other advanced applications.

Although some analysts are excited about the IoT’s potential, others have argued that it is overhyped. We take a more balanced view, based on our extensive research as well as our direct work with IoT application developers and their customers. Like the optimists, we believe that the IoT could have a significant, and possibly revolutionary, impact across society. But we also think that the lead time to achieve these benefits, as well as the widespread adoption of IoT applications, may take longer than anticipated. The uptake of IoT applications could be particularly slow in the industrial sector, since companies are often constrained by long capital cycles, organizational inertia, and a shortage of talented staff that can develop and deploy IoT solutions.

For semiconductor companies, which are looking for new sources of revenue, the rate of IoT adoption is an important concern. In this article, we will look at the case for optimism, as well as the reasons for more modest expectations. We will also examine new technologies that could accelerate the IoT’s growth and product-development strategies that semiconductor companies could implement to increase the appeal of IoT offerings.

Reasons for optimism: Increased connectivity helps the IoTIf we look at the IoT’s recent growth, the optimists have reason to be encouraged. Consumers are more connected than ever, owning an average of four IoT devices that communicate with the cloud. Globally, an estimated 127 new devices connect to the Internet every second. 

A report from the McKinsey Global Institute estimates that the IoT could have an annual economic impact of $3.9 trillion to $11.1 trillion by 2025 across many different settings, including factories, cities, retail environments, and the human body (Exhibit 1).1The IoT is also benefiting from infrastructure improvements that have enhanced connectivity. 

For example, only 20 percent of the global population is now covered by low-power, wide-area networks (LPWANs) that allow long-range communications among connected devices while optimizing both costs and power-consumption requirements. By 2022, however, we expect that 100 percent of the population will have LPWAN coverage. 

Similarly, technological advances are reducing power requirements, decreasing costs, and promoting the development of more integrated IoT solutions. Consider lidar sensors, the laser-based sensor packages that scan and detect surroundings, which are essential for autonomous driving. Their price has declined more than 10-fold over the past eight years and is expected to drop more than 65-fold over the next two. This decrease, combined with the increased technological sophistication of lidar, is contributing to the development of fully autonomous cars, which could constitute 25 percent of all vehicle purchases by 2035.

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Mark Patel is a partner in McKinsey’s San Francisco office, Jason Shangkuan is a consultant in the Dallas office, and Christopher Thomas is a partner in the Beijing office.