UK: The Internet Of Things - Part 1: Brave New World

The Internet of Things (IoT) is the network of everyday physical objects which surround us and that are increasingly being embedded with technology to enable those objects to collect and transmit data about their use and surroundings. TVs connected to the Internet and refrigerators connected to online delivery services are just the start of it. In the new world of the IoT, the possibilities are enormous, and the technology industry has so far only scratched the surface of what "machine-to-machine" (M2M) interconnectivity could achieve.

But the ingenuity and innovation which companies will apply to turn the IoT into practical reality is constrained by law and regulation. Existing issues may take on new dimensions and, as technologies combine, so will the legal consequences of those technologies.

In this Alert, we look at the prospects for the IoT. In a second Alert to be published shortly, we examine the likely legal and regulatory factors that will affect the development and growth of IoT technology and the markets that such technology will create.

BACKGROUND

The phrase "Internet of Things" was first coined in 1999 to mean the connection of everyday objects and devices to the Internet. The idea was that "If we had computers that knew everything there was to know about things – using data they gathered without any help from us – we would be able to track and count everything, and greatly reduce waste, loss and cost. We would know when things needed replacing, repairing or recalling, and whether they were fresh or past their best. We need to empower computers with their own means of gathering information, so they can see, hear and smell the world for themselves, in all its random glory."1

But back in 1999, the technology required to make the IoT concept a reality was expensive, slow, reliant on dial-up Internet and limited by inadequate storage and processing power. Fast-forward 15 years, and the landscape in 2014 looks very different. All the key factors have converged to create the ideal conditions to harness the power of M2M connectivity: smartphones, Wi-Fi and broadband connectivity are now ubiquitous; storage capacity "in the cloud" is growing rapidly; sensor technology has developed sophistication while becoming cheap enough to deploy in almost any location; and data handling technology makes it possible to process large volumes of data in real time.

Coupled with improvements in the ability to process and analyse vast qualities of data – i.e., "Big Data" – the possible applications for Internet-connected devices are seemingly endless. Imagine stepping through your front door to find that your watch has downloaded to your computer details of your heart rate, pulse and vital signs, the thermostat has turned the heating up because of the cold weather outside, the bath has run automatically, and that later, while you sleep, your baby's clothes monitor her breathing and heart rate while she sleeps. All of this technology is now available, although, in some cases, still at considerable cost: Wi-Fi-enabled Internet fridges currently cost a cool $3,700 (£2,300).

The uses of the IoT in a commercial context are also exceptionally wide-ranging: ATM data can be used to provide location-specific advertising to consumers via their smartphones, logistics companies can provide real-time parcel tracking services, and motor insurance providers can use telematics to monitor driving behaviour in order to charge tailored premiums.2 The IoT also looks set to revolutionise other sectors, including health care, with hospitals providing care via remote monitoring systems, and energy, with the advent of so-called "smart metering".

As with previous waves of technology revolution, the consequences for business will be significant, in ways that are both foreseeable and unforeseeable. Just as the DVD destroyed the market for VHS movie rentals, the huge rise in Internet-enabled TVs seems likely to have the same effect on DVD sales as downloadable video-on-demand becomes ubiquitous. Other outcomes of connecting physical objects in the IoT are harder to predict: not only will existing functionality of separate objects be strengthened by M2M, but new functionalities will be created.

GOVERNMENT ATTENTION

The IoT looks set to be the focus of government attention. In a recent speech at Europe's CeBIT tech conference, UK Prime Minister David Cameron announced that the British government would be spending an additional £45 million in funding for research in areas linked to the IoT, which, following a series of other funding announcements in this area, takes the total pot to £73 million. Mr Cameron stated: "I see the internet of things as a huge transformative development - a way of boosting productivity, of keeping us healthier, making transport more efficient, reducing energy needs, tackling climate change" and Sir Mark Walport, the UK government's chief scientific adviser, is now expected to carry out a review into how these new technologies can be best exploited.

The EU has carried out extensive consultation on the development of the IoT, and the U.S. government, through the Federal Trade Commission, is also tracking the evolution of the market and technology in the sector.

CHALLENGES IN IMPLEMENTATION

The market for the IoT is still in its infancy and there are many challenges involved in deploying a solution. As with any eye-catching new technology, a lot of the hard work that goes into implementation often goes unnoticed.

In the case of the IoT, organizations will have to overcome significant initial hurdles in order to ensure that the solutions adopted are legally appropriate. In many cases, these include a number of the issues that are traditionally seen to be "outsourcing" type problems – e.g., implementing a scheme of contractual relationships necessary to implement and support the technology; choosing whether to partner with a service provider in order to develop and implement a particular solution; and determining whether and how to use an external agency to harness the necessary computing power to implement fully the solution.

One key internal issue that many organizations will also have to address is the question of who within the business is actually responsible for implementation of the IoT as a product solution. A lot of the tasks required for IoT implementation will fall within the traditional roles of a business's ICT leaders, even though the solution itself may be customer-facing. As a result, technology leaders within businesses will need to be heavily involved in evaluating and developing solution requirements. This will continue the progression of the CIO role from overseeing internal enterprise architecture towards an outward-facing role.

Implementation of the IoT will also involve many of the operations parts of a business and this will need to be split appropriately within the architecture that the business employs. The question will be what solutions can be implemented as part of an overall scheme that is flexible enough to work with the types of devices and operating systems that a business has to deploy. Many of the end-to-end solutions that IoT requires involve the following key functions:

  • Device and infrastructure management platform. The IoT requires operators to be able to operate software on devices remotely, without taking the network of sensors out of service. Clearly, where this is performed remotely, security of the device and infrastructure management platform will be crucial.
  • Data Filtering. The IoT relies on sensors that produce vast amounts of data, but not all data will be relevant to any given application. Accordingly, a key challenge facing developers of IoT solutions is how to identify the thresholds and configurations to process only the data that is necessary for a specified purpose, and filter out the data that isn't relevant.
  • Analytics Platform. This is necessary to manage the huge volume of streamed data collected from remote sensors and devices and manipulate it in real time. This may well be integrated with an organisation's approach to "big data" elsewhere in its business. But, whatever the platform (and whether internally provided or outsourced), it should be set up to work with data from different device types and locations and configure it in a way that is useable by the business.
  • Security. If the IoT has a weakness, it's security. Dealing with issues of privacy and data security is essential. Precautions against misuse if data need to be baked into IoT solutions from the outset.
  • Integration. The efficiency and performance of any IoT solution will often depend on the connectors that enable applications to collect and analyse the data and engage in two way communication with the remote sensors where necessary.

The fact that technology is rapidly evolving and the relevant industry players are still changing means that future flexibility is also something that businesses need to focus on. Most large technology businesses have an established approach to the market and, while the first wave of solutions may well be focused on a particular application, businesses should invest wisely to ensure that the same sensor network and data infrastructure can be deployed to take on multiple applications.

The IoT has great potential to generate new sources of revenue, improve efficiencies and allow businesses to both increase profits and cut costs. While it is the internet-enabled products that catch the eye, it is longer term investment in the underlying technology infrastructure itself that is now required and which will ultimately pay dividends. The easy, media-friendly pin-up for the IoT may be the Internet-enabled refrigerator, but the reality is that the average consumer will replace his or her fridge no more than once per decade – and, most likely, not for improved functionality, just to keep the milk cold.

IOT BENEFICIARIES

Apart from humble consumers who might soon start to see practical changes to their daily lives as a result of the IoT, a range of companies in different sectors have already targeted the IoT as a driver of future sales.

If the trajectory of the IoT proceeds in the same way as other disruptive technology developments, the initial winners seem likely to be providers of infrastructure and data centre capacity, as well as microchip designers. Existing businesses with a strong data security element ought to have a key role in the IoT.

Companies that tailor their products to harness IoT capabilities and build in the key elements identified above will be the initial front-runners: so, for example, semiconductors need to continue to evolve in terms of size and power draw as well as enabling functionality to improve connectivity between sensor devices and the cloud, and the continued addition of new devices; infrastructure providers need to integrate their products for maximum flexibility while still ensuring significant levels of data security.

Consumer product manufacturers are perhaps the most obvious potential beneficiaries of the IoT as long as they can devise and roll-out IoT-enabled products whose functionality consumers want to pay for. But if history teaches us anything, it may be that, just as software giants became more valuable than the hardware sellers that capitalized on the first wave of the computing revolution decades ago (Microsoft vs IBM, anyone?), the long-term winners are less likely to be today's major consumer product brands and more likely to be the companies that master and monetize the data to create entirely new markets.

Indeed, Google's $3.2 billion purchase of connected thermostat producer Nest in January 2014 shows that the real market for IoT may take shape in ways that we cannot yet anticipate. That acquisition was less about a cool thermostat and more about disrupting the entire energy supply industry. If the Google and Nest combination can develop a product that proactively saves its users money on their home energy bills by juggling user and utility interaction and harnessing usage data, that puts Google in a strong position to continue its disintermediation efforts into a whole new sector.

LEGAL AND REGULATORY PROBLEMS

The opportunities of the IoT are great, but so are the challenges. The combination of technologies and data multiply the potential legal and regulatory issues.

In a follow-up Alert, we will assess the legal and regulatory factors that will affect the development and growth of IoT technology and help to shape the markets that such technology will create.

Footnotes

1 http://www.rfidjournal.com/articles/view?4986

2 For more on telematics, see our June 2013 Alert Monitoring Your Own Behaviour – Guidance for Insurers on the Use of Telematics

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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D. Reed Freeman, Jr.
Alistair Maughan
 
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