Currents of Disruption: Internet of Things Reaches Takeoff Point

 In Market and Investment Insights, Market Insights, Podcast

Advances in four interconnected mega themes mean the much-touted Internet of Things is reaching takeoff point, with the number of smart, connected devices set to explode, says Denny Fish, co-portfolio manager on the U.S.-based Global Technology strategy.

Key Takeaways

  • The Internet of Things is reaching critical mass as a result of advances in cloud computing, mobile connectivity and artificial intelligence.
  • Voice-controlled devices are helping drive adoption of the IoT among consumers, maintenance and precision agriculture are early adopters in the industrial arena, while face and body recognition are boosting uptake in public sector applications.
  • The market for smart, connected and autonomous devices will create a yearslong tailwind for semiconductor and chip-equipment makers, cloud computing platforms, sensor producers and connectivity providers, especially in the era of 5G mobile communications.

Dex McLuskey: Well, good morning, good afternoon, and good evening, and welcome to the Janus Henderson Knowledge Shared Disruption Podcast. We are in an age of considerable and constant change, driven in large part by advances in technology, and as our guest today, global technology co-portfolio manager Denny Fish likes to say, “We are in the early stages of a digital transformation of the global economy that will impact every company and every industry, across every region over the coming years.” A major part of that revolution is the so-called Internet of Things, which will lead to a world crammed with smart connected devices all with the ability to make decisions and act autonomously. Denny, thanks for joining us.

Denny Fish: Thanks for having me.

McLuskey: We have heard a lot about the Internet of Things for many years now, but it seems to be becoming more of a reality. So, I’m just wondering, to begin with, why is that? What are the conditions that now exist that allow this technology to really begin to take off?

Fish: I think it’s a really good question because we’ve been talking about the Internet of Things now for the last few years, and we are starting to see adoption because really it is this combination of the intersection of multiple themes that are occurring that are interrelated and helping advance all. And it’s really this intersection of Internet of Things with cloud computing, with more dense and low-latency connectivity that is coming with 5G, and layering on artificial intelligence that actually helps to enable this. So, it is really the combination of these four mega-themes that are coming together and creating a really virtual cycle for connected devices. And as you see, whether it is the connected home or whether it is an autonomous vehicle, they all have a number of things in common, and that is they are sensor and semiconductor content-heavy, they have connectivity, they are secure, and they send a lot of information back into the cloud that is processed. So, hence all these coming together is what is enabling the Internet of Things to really get started. And I think it is really an exciting time in technology because if we think about the opportunities associated with this as companies transform their digital models, the Internet of Things is clearly a pretty significant consideration for most subsectors of the economy.

McLuskey: There is a huge number of ways that this technology could be utilized like across the public sector with government and social ways, in the industrial arena, and of course in the consumer space as you mentioned with the connected home beginning to take off, so let’s look at some of the ways we can use this, starting in the public sphere. There is obviously military, there is law enforcement, and other government applications. What kind of applications are there now?

Fish: As far as your imagination can wander, you could think of the types of applications that could actually be deployed via the Internet of Things, but I think maybe a couple we can talk to because you mentioned military, for example. I think one of the most obvious deployments of IoT is the use of drones and unmanned aerial vehicles for example, and that is either for a reconnaissance or combat missions like we have seen, so I think that is a pretty straightforward one. Also, areas, like if you think about in the public service and you think about facial recognition and leveraging that to potentially ferret out terrorists in crowds and in an airport or in some sort of sporting event or something like that. And the more data we collect and the better the processing power gets and, in particular with IoT in at the Edge, it makes this more and more accurate and more and more feasible over time.

McLuskey: What is the Edge? What is that about?

Fish: The Edge is actually, we talk about cloud computing, for example, where it is really centralized computing where you are pushing a lot of data back to these big heavy-data centers. But then think about the idea of wanting to have that same level of processing power closer to where that device is at the Edge. So, it is effectively in some ways creating little mini data centers where you get the same level of processing power closer to the device to improve the performance. And that is particularly important for things like autonomous driving, for example, or in the case of real-time detection of, as I mentioned, a terrorist or something like that. So yes, so those are a couple of high-level… I think another interesting one that is both really interesting from just how the technology is being applied but probably a little scary for people to hear about is the social credit program in China, for example. Effectively, in China relative to the United States, people’s idea of what data privacy means is just far different. Effectively, you have no data privacy in China, so you effectively just assume that all of your data is effectively public. And what is important about that is China is in the early stages of testing the social credit program, and effectively, what it requires is continually monitoring everyone in the country. And that’s a lot of smart connected cameras. And effectively what they are looking for is they are trying to identify behaviors and habits of consumers and deducting or adding points to what is a so-called social credit score which would be similar to a FICO score that we have here. And it’s a tremendous amount of data that they have to collect.

McLuskey: How are they doing this, how are they gathering this data?

Fish: Effectively, they’re putting a ton of cameras at end points all over the country. They are using facial and body recognition, linking this information back to data centers, leveraging mobile and banking apps, for example, and aggregating all this information together. And what they are looking for is they are looking for people that are behaving in the right way socially, are good credit risks. They are trying to effectively prioritize who potentially could even get reservations at a restaurant, for example, based on a social credit score. And it’s really, like I said, it’s a little scary to think about, given that they are trying to collect as much data as possible on their citizenship and then actually apply a score to each individual and then prioritize benefits or services based upon that, but it is kind of like the most massive scale in terms of thinking about how IoT could be deployed, and it requires all four of those key mega-themes coming together to actually be able to pull this off.

McLuskey: So, they’re using these cameras for facial recognition, they’re uploading all that data to the cloud, analyzing it using AI and through connectivity sending it back to, I don’t know, whoever is monitoring all this data to determine whether or not you are a positive or negative influence on society. That’s staggering.

Fish: Yes. It really is. And if you think about the number of devices that need to be deployed, some estimate it could be upwards of 500 million cameras that need to be deployed to actually pull this off. And that is actually bigger than the worldwide PC market today that ships somewhere around 300 million devices annually. So, it is almost twice the size of the PC market to do this in China.

McLuskey: So, this is one application in one country of one system. If you multiply that across all potential markets, all potential applications, the IoT is beginning to look pretty darn big.

Fish: Yes. I mean, it really is. And as you mentioned, that is one mega application. And then we have this aggregation of a lot of other smaller applications, whether it is, I mean, and these aren’t even small, they’re actually quite big, when you think about the connected home and Alexa devices, for example, from Amazon or you think about autonomous vehicles and what that is going to mean in terms of content. And if there is one common theme among all of this, it is there is going to be increased demand for content at the edge obviously and the device, and that’s sensors and analog semiconductors and mixed signal semiconductors and digital, and then there is the increased demand for connectivity, which requires a real densification of the network, which is going to require continued deployment of towers as well as small cells to be able to do that with 5G. All of this data has to be processed somewhere, and the natural place to do that is in a centralized environment in cloud. And then to make this all really work and really deliver on the promise of all of these applications, we need to layer any number of artificial intelligence or machine learning algorithms on top of this to automate as much as possible. And it just creates one large virtual circle, but there are going to be tremendous number of applications, both small, what we call mini-applications, all the way up to the mega-applications, but they all share these common attributes.

McLuskey: So, China is a mega-application, and a somewhat worrisome one for many people, one would imagine. But it’s not all about these scary ways of deploying this technology. What are some of the benign ways? You mentioned the connected home. Is that a good example that is pretty familiar to people?

Fish: Yes. I think it really is. You know, the connected home is probably the easiest one to understand. Because anyone that either has an Alexa device or a Google Home system or whatever it is, that has actually used it and understands the promise of what that means, it is pretty remarkable. My daughter can actually have friends over, and if they want to bake cookies, she can… Let’s say we don’t even have the ingredients to make the cookies. My daughter can talk into Alexa, and within two hours in our local hometown, we can actually have all the ingredients delivered, they’re baking cookies, and the recipe, the ingredients, and everything, and it’s at their, not even fingertips anymore, just on the tip of their tongue to be able to do that. It is just pretty remarkable as you roll that forward and just think about how the whole idea of grocery shopping and replenishment and how that is going to work as we continue to go forward. And not to mention energy efficiency in the homes in terms of smart thermostats, smart appliances. And there are just a number of applications we think about what the home is going to look like not even 10 years from now but five years from now relative to what it looks like today, and it is going to be really, really highly connected and automated. It’s going to be almost like a what I call a personalized family supply chain in real time.

McLuskey: That sounds extremely interesting. So, you mentioned, for example, grocery. Would you imagine that your kids just won’t go to the store anymore, that is just not going to be happening anymore? Are devices like Alexa just going to take over this chore, if you like, and make our lives easier in that regard?

Fish: I wouldn’t say they won’t go to the grocery store, but it seems to me that they are going to go to the grocery store much more infrequently than we go to the grocery store today. And it’s just a function of two things. One is the convenience associated with digital assistance, but then just also the amount of artificial intelligence that is actually going to improve the grocery experience without going to the grocery store, meaning the more you use it, the more it learns about you, the more it can actually suggest things that you might enjoy relative to walking up and down the aisles and in some way being overwhelmed with the amount of selection and choices that are in the grocery store, and it is just going to be a very different experience. And to the extent that AI and data analytics help deliver on that promise, that is going to just fundamentally reshape the way people think about their relationship with a grocery store. And if you are a Millennial today and going out on your own or Gen Z, this is just the way you operate in the world at this point.

McLuskey: What about other sectors as well? Because we have seen Amazon in particular come in and disrupt retail, disrupt media. So, what other sectors do you think are ripe for this kind of disruption?

Fish: Well, I think, just while being on the thread of Amazon, I think there are a couple of recent examples that we can talk about outside of retail and enterprise compute, which they have already heavily disrupted. But healthcare is an area. You know, a few months ago, Amazon announced its intention to buy PillPack. And effectively, that is a platform for managing and replenishing medicines and prescriptions. So, to the extent that you are able to receive prescriptions in the same way that you receive groceries or delivery of physical goods or electronics or Amazon Prime, it seems like to the extent that you can manage through the regulatory processes associated with pharmacy, that that is really ripe for disruption. An industry that has historically been fairly slow-moving and with relatively high margins. As Jeff Bezos always says, “Your margin is my opportunity,” so that one seems ripe. Another area that might be less obvious to people but it is this idea of financial services. And as consumers get more and more comfortable with their relationship with these large platform providers, you could envision, I’m just thinking about I just used Apple Pay to pay for, I was on a trip with some friends, and we were segregating out how much everybody owes each other, and you use Apple Pay, and you do it through iMessage, and you pay, and it was loaded up, and in many ways, that is a lot easier than actually going… One of the guys on the trip had to do a physical check that he actually had to do from his account. And I was able to do the transaction in two seconds. So my experience was actually far better than the experience that he was getting. And as people get more and more comfortable with that, you could potentially see some disintermediation in banking as well. And as a proof point, if you go to China, once again, you know, thinking through what is going on there, they have effectively just leapt ahead of credit cards and what we would look at as traditional retail banks in many respects, and they leverage the mega-platforms of Alibaba’s or Ant Financial’s Alipay as well as Tenpay from Tencent. And those are very interesting relationships that have developed among a billion consumers in China.

McLuskey: Do you see a similar kind of process perhaps happening in the US?

Fish: Potentially. I think the challenge there, though, is we have an infrastructure that has been built up over many, many years. And I use the phrase skip a step with China because they didn’t have that same credit card infrastructure. People are banking for the first time. Hence, they are stepping into that environment with these other options versus this historical legacy baggage that we have. But on the margin, the platforms are going to be competitors to the big banks in certain areas, and that is going to be in multiple industries, but financial services is just one that might be less obvious to people.

McLuskey: It seems, as you say, something that could be fairly obvious for Amazon, having established a huge ecosystem with Prime, to then start leveraging that loyalty in an area like banking.

Fish: Yes. And if you think about the amount of information they are going to have on people’s purchasing habits, their credit, why wouldn’t they be in a position to offer even peer-to-peer lending or… There are so many things you could think about given the amount of data that they are collecting about consumers across multiple lines of business.

McLuskey: Another area that seems pretty obvious in the consumer space would be cars, not just in the totally autonomous side of things, but even today, we have lots of driver assistance devices. Are these related to the IoT? Is this AI and IoT-related?

Fish: Yes, I would say to the extent that the car continues to get connected. So, you have certain features that are just sensory, based on what is next to you, what is around you. There is an element of that. We are just in the early phases of really getting that connected content as it relates to the ability for a car say to recognize pedestrians in adverse weather conditions or things like that. That requires a different level of connectivity than just recognizing, “Hey, I have parking assist on my car, and I am close to something, I have no idea what it is,” and the car is not going to react in any way. So, we are just starting to get to the point where we are starting to bridge some of these as we think about level 1, level 2, level 3, level 4, and level 5 autonomous driving.

McLuskey: But the technology, as you point out, is already sharply increasing within existing cars, even before we reach fully autonomous driving.

Fish: Yes. Absolutely.

McLuskey: So, moving into the industrial area, because there has been a lot of talk about how autonomous driving is being developed in the industrial arena, that is something that is being looked at quite heavily with truck-driving, for example, but in the wider industrial space, are we seeing a lot greater deployment of IoT and AI functionality?

Fish: I think what we are seeing, we’re seeing a couple of things. You hit something on the head with autonomous. You know, point-to-point trucking, for example, that seems like just an incredible opportunity for autonomous and one of the early use cases for autonomous. The other element of, when I think about IoT and I think about industrial is, you can look at companies from GE to Boeing, and they have been in the business of selling whether it is aircraft equipment or industrial turbines or whatever it may be for years, but what IoT is enabling them to do now is actually create secondary businesses as they effectively move into the digital economy. And what that means is more pronounced downstream services businesses, real-time maintenance, monitoring, and that is only possible if you can collect a tremendous amount of information off of these devices, analyze it in your real-time, and be able to provide services that are meaningful and relevant and you’re starting to see that across a number of these subsectors. And then the other thing that you are seeing in terms of industrial is this idea of this combination of artificial intelligence and robotics where you are actually implementing really, not just automated robots but really smart, intelligent robotic technology that is much safer and much more efficient than things have been historically.

McLuskey: So, are you saying that companies such as GE and other large industrials, instead of just becoming companies that sell a product one time, they’re moving into more of a services-oriented, kind of recurring revenues kind of operation from the servicing, from the maintenance? Is that what is happening?

Fish: Yes. They are augmenting their business. So, they are still in the product business, but they are able to create even a sub segment of their business that is highly recurring, and hence, investors generally put a higher multiple on those types of businesses.

McLuskey: That’s interesting. And what about other aspects of the industrial space? Agriculture seems to be something that seems to be getting a lot of focus with smart devices.

Fish: Yes, it is. And this is an area where if you just think about real benefits to society and we think about the ability to more sustainably grow agriculture, the ability to more efficiently use water in the agricultural process and produce more agriculture without waste, the idea of integrating in IoT devices into weather data, in combination with algorithms to help predict changes in soil composition or the amount of water and what that impact is going to have and be able to monitor most importantly in real-time and make adjustments is the big difference today than say how we would have done this 10 years ago. So, those are definitely areas that, you know, there are real tangible benefits to society in areas like agriculture.

McLuskey: So, how close are we to the stage where within the industrial arena you can have these devices not just getting the data, sending it to the client for analysis, and that data coming back so that they can take an action? Are they behaving autonomously? Is this all being done without human interaction?

Fish: Not entirely yet, but we are right on the cusp of that. So, there are some edge cases, but that is where we are at. That is where we are at right now.

McLuskey: So, for you as an investor, what does this mean? Presumably this is a decades-long trend. What are you looking for?

Fish: It’s exciting. And to your last question, is it happening now, we feel like we are right on the cusp of it starting to happen. And I think there are a couple of ways that we think about just the amount of content that is going to be required from a semiconductor level into these edge devices. We almost view it as a renaissance in semiconductors possibly over the next decade relative to what we have seen over the prior 10 years, just given the proliferation of these applications. As we talked about this idea of the densification of the network as well in small cells and thinking about the telecom infrastructure needed to support 5G through like the tower providers, for example. And then clearly, the large cloud platforms that are actually going to have to continue to scale to support the significant amounts of data that are going to be required to be processed and pushed back and forth. So, that is the way we think about it. It comes back to what I mentioned before. We sort of have four mega-themes that are all coming together at once and intersecting and making all this possible.

McLuskey: That is a fine point to end on, Denny. Thanks for your time. And we will just wrap up by saying this really has been a fascinating look into what certainly looks like being an inevitable part of the digital revolution going forward.

Fish: Yes. Great. Thanks for having me. I appreciate it.

Disruption is creating compelling investment opportunities for those who know where to look. Learn how to harness the power of disruption in your portfolio.

Technology industries can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, competition from new market entrants, and general economic conditions. A concentrated investment in a single industry could be more volatile than the performance of less concentrated investments and the market as a whole.

C-1018-20044 12-30-20

Currents of Disruption: Internet of Things Reaches Takeoff Point