How Verizon Is Targeting The Most Lucrative Segments Of The IoT Market

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Verizon (NYSE:VZ) announced that it would acquire Sensity Systems, a startup that specializes in Internet of Things (IoT) platforms for smart cities. The wireless behemoth has been investing heavily on the application side of the IoT ecosystem this year, announcing deals to buy Irish fleet tracking firm Fleetmatics last month for roughly $2.8 billion, while acquiring another connected vehicle software firm called Telogis in June. Although these deals aren’t as high-profile as Verizon’s recent purchase of Yahoo’s Internet assets, they could prove lucrative over the long run, given the growth in the IoT space and Verizon’s focus on the most profitable segments of the market.

We have a price estimate of $57 for Verizon’s stock, which is roughly 10% ahead of the current market price.

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Sensity’s Provides Smart City Applications 

Sensity helps build IoT platforms by capitalizing on the shift from conventional lighting to LED, embedding networking technology and sensors within LED lamps. This provides municipalities and other customers the flexibility to add capabilities ranging from public safety, parking control, weather monitoring and asset management via sensors and cameras mounted on light fixtures. These nodes are capable of capturing and transmitting data near real-time, via high-speed wireless networks that support both mesh and point-to-point networks. The company handles the entire platform, ranging from nodes to applications. Sensity already has 42 smart city installations worldwide, and the scope for growth remains strong, given that the migration to LEDs is likely to impact close to 4 billion lights over the next few years. [1]

Verizon Targets The Most Lucrative Segments Of IoT

According to research firm IDC, the worldwide Internet of Things market will grow at a CAGR of roughly 16.9% to about $1.7 trillion by 2020, with the market largely broken down into three segments, namely devices, connectivity, and IT services. [2] While devices will account for roughly 32% of total IoT spending by 2020, we don’t think it will prove a very profitable area, as it’s likely to rely on largely commoditized, low-power hardware and sensor modules.

However, Verizon appears to be focusing on software platforms and connectivity, which could end up being the two most lucrative IoT segments. IT services are crucial to IoT, as customers need software and cloud-based services to manage devices and gather and make sense of data from the IoT network. By acquiring firms such as Fleetmatics and Sensity, Verizon should be able to provide complete solutions, allowing it to bolster margins, while potentially developing deeper customer relationships.

Understandably, connectivity is also a big part of Verizon’s IoT play, given its expansive wireless network in the United States. Although per-device revenues for IoT connections are likely still low, considering the low data transmission, it will be a volumes game. That said, margins should be relatively thick, given that these connections have low incremental bandwidth requirements and leverage the carrier’s existing network infrastructure.

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Notes:
  1. Verizon Press Release []
  2. Explosive Internet of Things Spending to Reach $1.7 Trillion in 2020, According to IDC, IDC, June 2015 []