How can we recognize the real power of the Internet of Things?

If policy makers and businesses get it right, linking the physical and digital worlds could generate up to $11.1 trillion a year in economic value by 2025.

The Internet of Things (IoT) has the potential to fundamentally shift the way humans interact with the world around them. IoT systems, which we define as sensors and actuators connected by networks to software, can monitor and manage connected objects, machines, and even living things. This rapidly advancing technology makes it possible to apply data-driven decision making to new realms of human activity. From monitoring machines on the factory floor to tracking the progress of ships at sea, sensing changes in physical environments to keeping closer tabs on human vital signs, IoT systems can enable companies to get far more out of their physical assets, revolutionize how we run our cities and homes, improve health outcomes, and even save lives.

Much has been written about IoT in the past five years. Advancements such as the development of self-driving cars, fitness bands to monitor physical health, and Internet-connected devices such as smart thermostats to manage our homes have given us a glimpse of what the future might hold. Technology suppliers have begun ramping up their IoT businesses and creating strategies to help customers design, implement, and operate complex IoT systems. Manufacturers, oil and gas companies, and other businesses have already begun to see the initial payoff from introducing IoT systems to their own operations and supply chains.

For all the attention that this emerging technology has received, the hype may actually understate the long-term potential of IoT systems. At McKinsey, we estimate that by 2025 IoT will have a potential total economic impact of as much as $11.1 trillion per year. In fact, IoT will be the biggest source of value of all disruptive technologies, ahead of mobile Internet, knowledge-work automation, cloud computing, and advanced robotics (Exhibit 1).