Will the IoT bubble burst?

The consulting and market research firms are closer in their projections for 2019-2020 (23 to 30bn unit installed base) than they are in their estimates of 2014 (3 to 10bn). My theorem about high technology markets is the forecasters are always closer to each other than they are to the final reality. This is not surprising since the companies are operating with the same general set of assumptions. Unforeseen events often drive the market higher or lower than the consensus forecast.

The IoT is made up of numerous devices across many applications. The media focuses on consumer purchased devices such as wearables and connected home devices. The hype was obvious at International CES 2015 in January. The top two categories for exhibitor press releases were wearables and the connected home.

The same is probably true of IoT. Some companies and technologies are overhyped and could crash and burn in a market correction. However, the trend is inevitable; devices will increasingly communicate with the internet, many without any human interaction.

However, most of the IoT is driven by business and government. Business Insider estimates in 2019 about 74% of the IoT installed base will be business and government applications and about 26% will be consumer applications. IDC expects digital signage to be the biggest IoT growth driver in 2015. Businesses and government can usually justify IoT investment with eventual cost savings. A utility company can rationalise the cost of installing smart electric meters at their customer sites will pay off with the savings in not sending human meter readers to each location every month.

Consumer IoT applications will continue to command most of the media attention. Business Insider project about one-third of the 6bn unit IoT installed base among consumers will be connected home devices, including energy, security and appliances. Another key consumer IoT driver is wearable devices which can monitor health, fitness and activity. They can also be an interface to a smartphone.

Prognosticators are also remarkably close in their projections for the wearable device market in four years. Estimates of the 2019 wearable device market are in a narrow range of 145 to 156m units.

Two high profile wearable devices are the Apple Watch, launched on 24th April, and the Fitbit Charge HR, launched on 6th January at CES. Fitbit is the global leader in wearable devices, with 34% share in first quarter 2015 according to IDC. The Apple Watch is being ‘watched’ closely due to Apple's success in redefining markets with its iPad and iPhone. Slice Intelligence estimates 3m Apple watches were sold online in the U.S. in the three months from 10th April (the first day of pre-orders) through 10th July. Slice Intelligence estimated Fitbit sold a total of 850 thousand devices in U.S. online sales in May, beating Apple Watch sales of 777 thousand devices. The Apple Watch is expected to be a major factor in total year 2015 wearable devices sales, with an estimated share of 27% to 40%.

IHS estimated the costs of the components in an Apple Watch Sport at $81. We at Semiconductor Intelligence estimate the semiconductor portion of the cost at $50, 14% of the watch retail price of $349. IHS estimated the component costs of an iPhone 6 at $196. We estimate semiconductor content at $130 for the iPhone 6, 20% of the retail price of the phone.

Below are IDC's recent projections of unit shipments of PCs, tablets, smartphones and wearables for 2019 compared to 2014. Smartphones will continue as the dominant device people use to connect to the internet, with an expected 1.9bn units shipped worldwide in 2019. The combined total for PCs and tablets in 2019 is 563m units, a slight increase from 539m in 2014. Wearable devices are forecast to show a six-fold growth from 26m units in 2014 to 156m in 2019. Even with the strong growth, wearables shipments will be less than one-tenth of smartphones in 2019 and less than either PCs or tablets. The semiconductor content of wearables per device will continue to be significantly less than in the other devices.

Earlier this month Gartner forecast wearable devices will account for only 1% of the semiconductor market in 2019. The total IoT semiconductor market will be more significant, with Gartner data showing it could account for 8% of the semiconductor market in 2019.

The IoT may not be the 'next big thing' to drive the semiconductor market, but it does represent a meaningful growth opportunity. The key semiconductor products in IoT devices are sensors, MCUs, processors and communication and connectivity devices. IoT devices will also drive a market for systems and infrastructure to support the devices. If there is an IoT bubble, it is more likely to slowly deflate than burst. Many companies currently focusing on the IoT will go out of business, but the remaining companies will have an opportunity to profit from a strong growth market.