The Network Effect: Insight into How the Internet of Things Will Transform Society and Business

Trend Analysis

According to an emerging consensus, virtually every walk of life and industry sector will be transformed by the Internet of things (IoT), including manufacturing, supply chain management, health and wellness, transportation, agriculture, and household living, to name a few. If you think this is an exaggeration, here’s but a sampling of what the top global IT research firms are predicting about the tremendous impact of the Internet of things on society and business:

1. Gartner – Global IT Research and Advisory Firm (excerpted from Forecast: The Internet of Things, Worldwide, 2013, published December of 2013).

“The Internet of Things will include 26 billion units installed by 2020. IoT product and service suppliers will generate incremental revenue exceeding $300 billion, mostly in services, in 2020. It will result in $1.9 trillion in global economic value-add through sales into diverse end markets.”

2. Mckinsey Global Institute – Business and Economics Research Arm of the Global Management Consulting Firm (excerpted from Disruptive technologies: Advances that will transform life, business, and the global economy, published May of 2013).

“We estimate the potential economic impact of the Internet of Things to be $2.7 trillion to $6.2 trillion per year by 2025 through use in a half-dozen major applications that we have sized.  The largest impacts among sized applications would be in health care and manufacturing. Across the health-care applications we analyzed, Internet of Things technology could have an economic impact of $1.1 trillion to $2.5 trillion per year by 2025.”

3. IDC – Global IT Research and Advisory Firm (excerpted from Worldwide Internet of Things Spending by Vertical Market 2014–2017 Forecast, published February of 2014).

“IDC has looked at the components, processes, and IT support for IoT and expects the technology and services revenue to expand from $4.8 trillion in 2012 to $7.3 trillion by 2017 at an 8.8% CAGR, with the greatest opportunity initially in the consumer, discrete manufacturing, and government vertical industries.

The IoT/M2M market is growing quickly, but the development of this market will not be consistent across all vertical markets. Industries that already “understand” IoT will see the most immediate growth, such as industrial production/automotive, transportation, and energy/utilities. However, all verticals will reflect great opportunity.”

If one takes any stock in these assertions made by some of the world’s leading business research firms, the IoT is clearly poised to have a profound impact on business and society in coming years. To see why, it’s helpful to gain a basic understanding of the unique structural framework of the IoT.

IoT and the Network Effect

The very structural framework of the IoT is disruptive of traditional models, moving from siloed, vertical functions to interoperable, horizontal ones through what is known as “the network effect.”

Here’s how it works. As the number of participants in a network increases, so do the number of connections. Even as each participant adds potential value, so does each connection. Given this, the total value potential of the network grows as an exponential function of the number of participants multiplied by the number of connections between them. Social media offers us an excellent example of the network effect. The total potential value of the interconnectedness between members of a social network is exponentially more valuable than the sum of individuals on the network alone.

One of the fundamental underpinnings of the IoT is the machine-to-machine (M2M) interface, the idea of machines using the network effect to communicate with other machines to create greater potential value. This is facilitated by using software to connect physical machines to each other.

The idea is actually pretty straightforward: as more physical resources are connected via software, they can be managed as a unified network or system. In this sense, we realize the network effect when the number of software connections to each physical resource increases, enhancing the number of participants and connections to the network, and thereby exponentially increasing the potential value of the network. Cloud computing offers an excellent example of an early, successful application of the M2M interface concept.

Until recently, much M2M architecture has been focused on creating top-down vertical network integrations to improve the functionality of isolated systems; this creates highly efficient silos with fragmented interfaces that render the type intercommunication characteristic of the network effect/IoT all but impossible.

However, as more individual resources are connected to the network, they can be managed as a single, interconnected system. To do this, “horizontal” interoperability is required to bring diverse resources together into single systems.

In the IoT, disparate systems are brought together to create broader value networks. Imagine a smart household where innumerable internet-enabled products from numerous industries are brought together to form a single, interconnected value network that is exponentially more valuable than the sum of its individual parts, and you get a glimpse at the potential impact of the network effect and the IoT on business and society.

Impact of the IoT on Marketing: From Product to Experience

The network effect characteristic of the IoT stretches well beyond the M2M interface into all aspects of business, especially into the marketing function.  As the touch points that characterize a customer’s relationship with a brand become increasingly numerous and interconnected, there is a shift from interface design (i.e. product aesthetics and usability) to experience design.

One example is the Nest temperature control system, where perceived value is less about the physical product and more about the experience of the service. Design smarts will need to consider the spaces between things, as well the things themselves.

This subtle shift in focus from product to service and from usability factors to customer experience also necessitates fundamental changes to the business function, with the convergence of marketing and technology an inevitable consequence of increasingly customer-centric business models.

Indeed the IoT-enabled business landscape will see a seamless integration of software and technology into all aspects of the organization, blurring the lines between functional silos and paving the way for the Digitally Integrated Organization (DIO). Given its role in managing the consumer interface, in many cases this organization-wide digital transformation will be led by the marketing department.

Beyond Business: The Broader Societal Implications of the IoT

Along with the promises of IoT come its negative implications, which include heightened fears of the potentially grievous implications of hacking and cybertheft in a world of billions if not trillions of Internet-connected social devices, along with the obvious privacy concerns.

Moreover, in pursuing IOT, some argue that we humans have collectively resolved to crack open the Pandora’s Box that is Artificial Intelligence (AI), and are incrementally underscoring and perhaps even quickening this irrevocable action by breathing awareness into the random assortment of dumb objects around us.

Regardless of one’s perspective on the future implications of the Internet of things, it’s getting harder to question its profound impact on society and business.

Additional ResourcesFor a simple explanation of the IoT from Mashable, check out this video.To hear how economic and social theorist, writer, public speaker, political advisor, activist and all-around tech prognosticator Jeremy Rifkin explains the IoT, check out this video.

You may also want to watch this video of Dr. John Barrett’s Tedx Talk on How IoT will Change the world.

Finally, here are a couple of interesting videos from Telit Communications and FW: Thinking, each showing how the IoT will change our everyday lives.


  1. How might the network effect characteristic of the IoT influence a brand’s operational processes? How about its IDM strategy?
  2. What is the relationship between the IoT and cloud computing?
  3. What are some other implications of the IoT for business and society?