Sun, Aug 16, 2015 - Page 9 News List

Reassessing the potential benefits of the Internet of Things

By Martin Neil Baily and James Manyika

Nearly 30 years ago, economists Robert Solow and Stephen Roach caused a stir when they pointed out that, for all the billions of dollars being invested in information technology, there was no evidence of a payoff in productivity.

Businesses were buying tens of millions of computers every year and Microsoft had just gone public, netting the company’s co-founder Bill Gates his first billion.

Yet, in what came to be known as the productivity paradox, statistics showed that not only was productivity growth not accelerating; it was actually slowing down. “

You can see the computer age everywhere,” Solow said “but in the productivity statistics.”

Today, we seem to be at a similar historical moment with a new innovation: The much-hyped Internet of Things — the linking of machines and objects to digital networks. Sensors, tags and other connected gadgets mean that the physical world can now be digitized, monitored, measured and optimized. As with computers before, the possibilities seem endless, the predictions have been extravagant — and the data have yet to show a surge in productivity.

A year ago, research firm Gartner put the Internet of Things at the peak of its Hype Cycle of emerging technologies.

As more doubts about the Internet of Things productivity revolution are voiced, it is useful to recall what happened when Solow and Roach identified the original computer productivity paradox.

To begin with, it is important to note that business leaders largely ignored the productivity paradox, insisting that they were seeing improvements in the quality and speed of operations and decisionmaking. Investment in information and communications technology continued to grow, even in the absence of macroeconomic proof of its returns.

That turned out to be the right response. By the late 1990s, economists Erik Brynjolfsson and Lorin Hitt had disproved the productivity paradox, uncovering problems in the way service-sector productivity was measured and, more important, noting that there was generally a long lag between technology investments and productivity gains.

Our own research at the time found a large jump in productivity in the late 1990s, driven largely by efficiencies made possible by earlier investments in information technology. These gains were visible in several sectors, including retail, wholesale trade, financial services and the computer industry itself. The greatest productivity improvements were not the result of information technology on its own, but by its combination with process changes and organizational and managerial innovations.

Our latest research, The Internet of Things: Mapping the value beyond the hype, indicates that a similar cycle could repeat itself. We predict that as the Internet of Things transforms factories, homes and cities, it might yield greater economic value than even the hype suggests. By 2025, according to our estimates, the economic impact could reach US$3.9 trillion to US$11.1 trillion per year, equivalent to roughly 11 percent of world GDP. In the meantime, however, we are likely to see another productivity paradox; the gains from changes in the way businesses operate are likely to take time to be detected at the macroeconomic level.

One major factor likely to delay the productivity payoff might be the need to achieve interoperability. Sensors on cars can deliver immediate gains by monitoring the engine, cutting maintenance costs and extending the life of the vehicle, but even greater gains can be made by connecting the sensors to traffic monitoring systems, thereby cutting travel time for thousands of motorists, saving energy and reducing pollution.

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