When Your Alarm Clock Knows Your Train Is Late, And Your Car Remembers Getting Tanked

Talking to inanimate objects used to be a sign of eccentricity. Those same objects talking back to you would get you admitted to the psychiatric ward.

Well, those days are over. Soon your alarm clock, car, and coffeemaker—all digitally connected to each other—might take a very active role in managing your schedule.

The Cisco graphic below displays what one of your future days might look like.

We’re almost there. The next step after the Internet is… the Internet of Things (IoT).

How hot a topic the IoT is became clear to me when I leafed through the exhibits from International Consumer Electronics Show (CES) in Las Vegas in January. That extravaganza is the biggest event on that city’s calendar, with 150,000 visitors and nearly 2 million square feet of dedicated floor space.

This year’s show was the coming-out party for the IoT and for its largest subset, machine-to-machine (M2M) communications. M2M is the kind of thing where, for example, sensors in a farmer’s field report soil moisture conditions back to his computer, which then triggers automatic irrigation on an as-needed basis. No human intervention required.

IoT in itself is not a brand-new concept, but it hasn’t gone totally mainstream… yet. Give it a little time, though, and it may become as much a part of our everyday lives as the Net itself. With today’s cheap, ever more miniaturized technology, you can stick a sensor on just about anything, plug it into the grid, and operate it via your smartphone or tablet.

In 2008, for the first time, the number of Internet-connected devices exceeded the world’s population. By 2020, according to market research firm International Data Corporation, there could be 200 billion of them. That means statistically, every man, woman, and child on the planet will be in intimate contact with a dozen electronic gadgets.

The World of the (Near) Future

Imagine you’re on the interstate on your way home from work, and beep-beep-beep, your digital door lock informs you via iPhone app that your wife has just come home, followed by your son five minutes later. You call home and make dinner arrangements with your family. As you get home, you use your app as a key to get in by swiping it across a sensor.

Going away on vacation and have part-time house-sitters over? Program your digital lock to give them limited access to your home, only twice a week between 3:00 and 5:00 p.m.

Want to cut your electric bill? Just install a NEST smart thermostat and change the temperature in your house depending on the time of day and whether anyone’s home or not. The device can learn your habits and program itself to auto-schedule. You can reprogram it remotely at any time via your smartphone. Google was so taken with NEST’s potential that it bought out the parent company, Nest Labs, in April of 2013—for a cool $3.2 billion.

Engineers can now fit a computer, camera, and transmitter into a one-millimeter cube. Someday, these will be sown like seeds all over the place, to monitor environmental changes, traffic flows, animal migrations, insect infestations, and crop health, among other things. In 2009, Cisco and NASA launched Planetary Skin, a project aimed at coordinating massive amounts of input from a grid of “space-to-mud-to-ocean sensors” that will fine-tune weather forecasting, predict landslides, provide early warnings of impending tsunamis, and much more.

Health and Fitness Through Cyberspace

One of the IoT sectors that already has come a long way is medical care and wellness. Take Preventice’s BodyGuardian Remote Monitoring System, for example—a wearable device for people with cardiac arrhythmias. A small sensor is attached to the patient’s chest and collects data, including heart and respiration rate and activity level, that’s transmitted via smartphone to the patient’s physician.

That lets the doctor (or, more likely, the doctor’s computer) monitor key biometrics automatically, in real time, while patients carry on with their daily lives. At any sign of impending trouble, a warning signal flashes, and the patient immediately can be called in for evaluation and/or treatment.

But you don’t have to have a serious medical condition to monitor yourself. More and more people—known as “self-quantifiers”—take frequent bodily measurements as a means of attaining and maintaining optimal physical fitness (sometimes referred to as the “Health 2.0 lifestyle”).

There has been an explosion of products tailored to their desires, such as the Fitbit One, a clip-on that by day tracks your steps, distance, calories burned, and stairs climbed, and by night measures your sleep cycle and helps you learn how to sleep better. Self-quantifying has become such a trend that there are now online groups who upload all their data to the Cloud and share it with other members. (Just in case you’re dying to know your buddy Frank’s calorie count for last Wednesday.)

The Downside of Progress

Of course, the IoT is bound to attract its share of bad guys. In January of this year, cyberthugs launched a global spam attack that included more than just computers. According to Proofpoint, a Sunnyvale, CA, cybersecurity firm, the attack consisted of “waves of malicious email, typically sent in bursts of 100,000, three times per day,” targeting businesses and individuals around the world. 25% of those emails, said Proofpoint, were sent via Internet-connected things: consumer appliances like media centers and televisions—and at least one refrigerator.

“Thingbots’—which unite massive numbers of devices under the remote control of someone with malicious intent—are becoming a major security concern. Many of the things we’ll be connecting to the Net are poorly protected, if at all. And consumers will have virtually no way to detect or fix infections when they do occur.

Could a cybercriminal break into your home network through your gaming console, then make off with your credit card number and other valuable information? Yep.

How to Invest

Despite the risks, the IoT revolution should be mostly benign. And because it promises to be so big, many investors are chomping at the bit to make money off of this latest trend in tech. Unfortunately, they’re early to the party. You’re not going to cash in on programmable thermostats by buying Google stock.

The problem is that most of the companies doing the groundbreaking work in this arena are still private. The website AngelList lists 282 IoT startups, hard at work on a wide variety of products and services. Just a few examples:

• TempoDB—A database service purpose-built to handle input from sensors and smart meters.

• Active Mind Technology—Developers of Game Golf, a wearable sensor system that records every aspect of your round and sends the results to your phone for later review.

• Canary—Smart security solutions for the home.

• Speak With Me—Voice-recognition platform to allow you to talk to your smart devices.

• Soil IQ—A smartphone app and hardware soil probe that monitor and wirelessly stream soil nutrient content, pH, temperature, moisture, and light data from the garden to the Cloud.

• Building Robotics—Offers software designed to increase employee comfort in an office setting and optimize building systems.

Since you can’t invest in any of these direct plays on the emerging IoT, investors have been flocking to indirect plays as surrogates to get them in on the action.

Among these is Sierra Wireless (SWIR). We were a little early to the party when we recommended SWIR to subscribers in 2009, but still cashed out with a nice profit. Today, SWIR has segments called OEM Solutions and Enterprise Solutions, both of which have M2M revenues. It doesn’t break out M2M revenues, so it’s difficult to tell how much the IoT adds to its bottom line, but in any event it isn’t a pure play.

Other popular companies are TriQuint, a maker of high-performance RF components for wireless communication, and MEMSIC, a leading manufacturer of sensors and sensor components.

The hardware here—i.e., sensors and related devices—must be cheap to build, capable of running for very long periods of time in often high-stress areas (like outdoors), standards driven, and open-sourced. Manufacturers which make them will do okay as the IoT rolls out. But it all adds up to the kind of low-margin businesses that rarely make for exciting investment opportunities.

Then there’s wireless protocol standards for these devices, which are still development stage. Once they’re finalized, giants like Qualcomm and Broadcom will likely come to dominate that space, either through in-house development or by simply gobbling up the small pioneer companies.

In the end, IoT only begins with collected data; after that, it must be digitized, transmitted, and eventually analyzed. The highest value (and greatest shareholder return) will likely come not from those fabricating the collectors, but on the high-margin end, from whoever builds the software suites to analyze the data.

Those are the kinds of smaller companies we’ll be keeping an eye out for at Casey Extraordinary Technology as they start going public. In the meantime, the one place where they have started to hit the markets already is in the Smart Grid, with companies like Silver Spring Networks (SSNI).

Since its founding in 2002, SSNI has networked more than 17.5 million homes and businesses around the world—and is currently working with utilities representing another 30 million.

But that’s just the tip of the iceberg: according to Pike Research, the global market for smart metering and related services will grow to $19.5 billion in 2015, from just $7 billion in 2010.

We think SSNI is poised to capture growth at an even faster rate than the industry average in the years ahead as the company leverages its market-leading position and other competitive advantages. To see our complete write-up on SSNI and get our ongoing guidance on the stock, try Casey Extraordinary Technology risk-free today. Learn more about CET here.