Growing the Internet of Things, part 1: Cost
November 28, 2016
In my ongoing discussions with customers and the market in general about the growth of the Internet of Things (IoT), I'm often asked what's needed to...
In my ongoing discussions with customers and the market in general about the growth of the Internet of Things (IoT), I’m often asked what’s needed to increase the market and expand the IoT across more devices. Recent articles and blogs question all the hype surrounding the IoT and whether the market is actually going to happen or if it’s just a pipe dream for technologists interested in selling connected devices. I may be a bit biased on this topic since I’m in the middle of many of these developments, and work closely with many customers as well as industry standards for the IoT.
But it is an interesting and pertinent question: What will it take to really grow the IoT? The answer is complex and multifaceted, and we have to consider the following areas:
- Ease of use
- Future proofing
While I will generally discuss the connected home ecosystem, these five IoT growth factors also apply to commercial and industrial devices. I’ll use a light bulb as a simple IoT application example for much of this discussion because it represents such a ubiquitous device for consumers, is currently a common connected item, and reflects each of the challenge areas to be addressed.
I will dive deeper into each of the five IoT topics mentioned throughout this blog series, which consists of five parts, exploring the concerns to be overcome and how challenges are being addressed. I look forward to comments and feedback as the IoT is a work in progress for all of us.
Up first: Cost.
Cost of IoT
While cost is always a concern for device manufacturers, the cost of adding connectivity versus the cost of a basic device provides an interesting point for how much the IoT can penetrate markets. If the value of adding connectivity to a device is not perceived as greater than the cost, then consumers will not pay to connect their devices.
The following table shows a simple cost comparison using Amazon and Lowe’s for some basic devices versus connected versions of the same devices. Based on these differences, we note a multiple that the connectivity is costing. We also add a column of our estimate of the typical number of these devices in a US Home. Note that regional differences will result in different typical numbers.
[Figure 1 | A comparison of basic and connected devices from Amazon and Lowe’s shows that adding connectivity can add orders of magnitude in cost, which is compounded when considering the number of such devices deployed in a typical home. For the Internet of Things (IoT) to succeed, this cost must yield commensurate value. Note: “A,” “B,” “C,” “D,” etc. denote connected products from different manufacturers.]
It’s interesting to note the variability of the cost premium across these devices. Cost is of less concern for the early adopters of a technology as they are making decisions based on other criteria. Early adoption can be driven by compelling use cases and regulations, such as:
- Connected thermostats provide a unique value for consumers concerned with second homes or the cost and convenience of heating, ventilation, and air conditioning (HVAC) in their existing home. In addition, in some areas there are rebates from local utility companies for using a connected thermostat, reducing the cost premium.
- Connected door locks provide a level of convenience that appeals to some consumers.
- Regulations driving coordination of smoke detectors require the addition of connectivity to these devices.
It’s less painful to pay a cost premium on items like thermostats and door locks since there are relatively few of these devices in a home. Items like bulbs or door/window sensors will be much more numerous in a home, and it’s problematic to have a large price premium for these devices. Consumers also directly tie thermostat usage to cost given that it involves a much higher portion of a home’s energy bill and using a smart thermostat can help reduce energy usage.
The cost premium is smaller for devices that already contain electronic components such as microcontrollers and sensors, as the premium here is only about adding the connectivity. The simplest devices, such as light switches or plugs, contain little to no electronics so redesign and cost impact is higher.
Consumers expecting to connect everything in a home can expect to pay a premium today since we are still in an early stage of the IoT market. A typical American home has 40 light bulbs, so replacing them with connected white LED bulbs would cost about $600. Using color LED bulbs would cost $2000 at current pricing. This is a steep price and does not include any switches or other controls, Outfitting an entire home at today’s prices would cost thousands of dollars, and the payback is not really defined.
Some advances in technology really drive the need for connectivity. Full-color LED bulbs are a good example of this. Even white LED bulbs can still be controlled using traditional on/off switches or dimmers. Once the full red, green, blue (RGB) range is available, more advanced controls are required for a consumer to use them. Connectivity to a smartphone application and graphical user interface-driven (GUI-driven) controls then becomes mandatory.
Early adopters of such devices help develop the technology and market, but at a price premium. To drive broader usage, the cost premium must be reduced. This can be done by bundling products and services, as is done with home security systems: the initial cost for the system is subsidized in return for the monthly fee of the service.
Cost does not have to remain an impediment to the IoT over time. As the chart below shows, the cost curve for LED bulbs can move down very sharply in the early years of new technology adoption, with large drops occurring from 2010 to 2015 and expected to continue through 2020. For the IoT market to grow, adding connectivity needs to fit into this cost curve. As an LED bulb approaches several dollars in cost, adding connectivity cannot also cost several dollars.
Cost is driven down in several ways when adding connectivity to these devices:
- For small devices, we do not follow Moore’s Law up in functionality but instead down in cost. Smaller geometries are used only to add minimal features, but mainly drive cost reductions.
- Integration of features and functions into system on chip (SoC) devices reduces the cost and size of IoT products. We already see integration of multiple radio technologies, sensors, and control interfaces in SoCs, as well as power management to minimize external components. Increased integration will continue to drive up functionality while driving down costs.
- Increasing product volumes also drives down costs as manufacturers scale.
As higher-volume products such as light bulbs drive down cost, many other products in the home will benefit from the more integrated and flexible connectivity options developed for them. While cost is problematic today for consumers who want to connect many devices in their homes, we can expect ongoing cost reductions as markets and devices scale.
Next Up: Ease of Use.