IoT to add up to $11.1 trillion to global economy by 2025

19 October 2015 4 min. read
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The value of the IoT has been hyped over the past years, with widely varying predictions from futurist and business alike. To get a grip on the potential benefits of the technology, McKinsey and Company performed a comprehensive economic study of its potential benefits. According to the consulting firm, the total economic benefit in 2025 could hit between $3.9 trillion to $11.1 trillion, with the high estimate equivalent of 11% of world GDP in 2025. The technology still has some ways to go however, and both technical and privacy issues need to be carefully considered.

Recent research from McKinsey & Company’s Global Institute explores the potential value of the Internet of Things (IoT) on the global economy. As there is a considerable amount of hype around the technology, the consulting firm sought to find out how much of that hype is likely to eventuate, in terms of the economic impact.

The resultant report, titled ‘The Internet of Things: Mapping the Value Beyond the Hype’, looks at the value generated from business applications, as well as the potential surplus value for consumers.

Building on earlier research into the IoT, the consultancy analysed more than 150 potential applications of the technology globally. Then, using a bottom-up economic modelling approach, estimated the kinds of benefits and the economic value of the IoT, including productivity improvements, time savings, and improved asset utilisation, as well as an approximate economic value for reduced disease, accidents, and deaths.

Economic surplus of IoT

Technological development

In its analysis of the potential benefits, McKinsey finds that the IoT has a potential economic impact of between $3.9 trillion and $11.1 trillion per year in 2025. The combined result of the wider ecosystem of the technology – which includes consumer surplus – is equal to around 11% of the global GDP in 2025. A large amount of the benefit will be for consumers. Consumer value is expected to be at $2.6-7.6 trillion by 2025 and consumer surplus at $1.0-2.8 trillion.

Different segments will come to generate different kind of value however. The consulting firm projects that the value created in health and wellness could be between $170 billion and $1,590 billion. Retail environments could see economic benefits of between $410 billion and $1,160 billion.

It is particularly industrial applications, or what has been called industry 4.0, that could see the greatest economic benefit of the technology of between $1,210 billion and $3,700 billion in 2025. Cities are expected to see the second largest gain from the introduction of the technology, benefiting in the range of between $930 billion and $1,660 billion.

Economic impact by sector of IoT by 2025

Barriers remain

Although the technology is shown to create a considerable economic benefit to the global economy, a number of issues remain before the technology can be effectively deployed and used. One of the potential problems is the cost of components. In the past five years, the cost of micro-electromechanical system sensors dropped rapidly to between 30-70% of their original cost.

However, the same cost reductions in radio-frequency identification tags will need to eventuate to make IoT tracking practical for low-value, high-volume items in package delivery and retailing. Low cost battery technology also remains an issue. Furthermore, to leverage the information gained through the sensors, advances in computing power and storage may be required, as well as improvements to the visualisation of results.

Interoperability, whereby devices come to communicate with each other in a way that provides synergies, is also seen as a difficulty. The researchers note that up to 40% of the value of the IoT may be lost without improvement to the interoperability of data. Thus up to $4 trillion is dependent on IoT systems working together.

A further issue with the IoT is that much of the information gathered is currently not interpreted. For instance, only 1% of the information gathered by oil rigs IoT is currently used, with multiple issues holding back the complete use of the data. The overlarge part of what is leveraged is used merely for maintenance, rather than predictively.

Unused oil rig data

Privacy issues may also hold back the deployment of the IoT. Privacy advocates are increasingly concerned about the constant and uninterrupted tracking of people through a wide range of situations and the potential risks for manipulation and control that come with complete behavioural modelling.

Issues around the way data is used, collected and stored will need to be carefully considered in light of more than just profit incentives.