When digital meets the real world

The Internet of Things turns physical assets into participants in real-time global digital markets.

With the invention of the printing press, Johannes Gutenberg reduced the marginal cost of copying and distributing information by an order of magnitude. As the printing press matured and scaled, books and the information they carried were transformed from being luxuries for the wealthy into everyday necessities.

The printing press made information cheap. The Internet made it almost free. Indexed, searchable and infinitely available, changes in the economics of digital information such as online news have been revolutionary and disruptive. Information may be as valuable and powerful as ever, but where the invisible hand of the market is not tied down by copyright laws, a marginal distribution cost of zero inevitably means a market-clearing price (the price at which the market can avail of it) that is also zero.

The widespread availability of personal computers and mobile phones brought liquidity to markets in information and for anything that could be fully represented, bought or sold entirely online, including: music, movies, traffic information, weather, news, stocks, bonds and even airline tickets. The easier it was to digitally represent the item, the faster a liquid market emerged to support that commodity.

The reach and power of this revolution has had limits, however. And they are primarily to do with the intersection between the digital world and the physical world. The greater the degree to which a marketplace depends on information and actions in the physical world, the lower the impact.

So while industries like newspapers and music have been completely transformed, the impact on industries like retailing and manufacturing has been much less. Companies like Amazon have had a big impact on retailers, bringing price transparency and global inventory availability into markets that were previously fragmented and information poor.

Many industries still retain their essential structure and participants even if the Internet has brought great transparency to the business as a whole. The industries least transformed by the Internet are the ones with the most unstructured or unavailable information.

From real estate to trucking to farming, many industries lack the ability to easily represent all their information digitally and to provide an integrated marketplace in which to build liquid transactions. Once products and assets leave the controlled environment of warehouses, factories and offices, it has traditionally been difficult to digitally represent their identity or status. Without that, it is challenging to create a liquid, digital marketplace for the asset, product or service.

The Internet of Things (IoT) is now poised to bring the same real-time information and liquid marketplaces by enabling searching, managing and monetizing assets in the physical world (see Figure 1). That won’t just mean smart homes that light up when you arrive or washing machines that text you when the cycle is done. The IoT will turn physical assets into participants in real-time global digital markets.

We call this the “liquification of the physical world.” Assets around us will become as easily indexed, searched and traded as any online commodity. The Internet of Things will become the Economy of Things. To explore the impact of this transformation, we first look at a historical case of digital industry disruption, then present the findings of macro-economic case studies that we developed in collaboration with Oxford Economics.

What are the means by which the IoT will transform industries? To answer this and other questions, we developed case study macro-economic models. Each model was designed to best represent the industry and geography being analyzed.

Our models of marketplace transformation were structured in terms of three vectors of disruption from the IoT: asset marketplaces, risk management and efficiency. The creation of asset marketplaces unlocksexcess capacity of physical assets and enables instant search, use and payment for available physical assets. Radical re-pricing of credit and risk supports digitally managed risk and credit assessment, and virtual repossession and reduced moral hazard. Improved operational efficiency allows unsupervised usage of systems and devices, and reduces transaction and marketing costs.

In this report, we feature modeling results for three industries: commercial real estate, SMB lending and farming. While the models are industry-specific, the conclusions are scalable. They support a cohesive and globally relevant argument about digital marketplaces and new economic value from the IoT that companies must begin to prepare for.

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Meet the authors

Veena Pureswaran

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, Associate Partner and Global Research Leader for Quantum Computing, IBM Institute for Business Value

Dr. Robin Lougee

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, Global Research Industry Lead for the Consumer

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Originally published 01 June 2015