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The Internet of Things will give rise to the algorithm economy

15 Jun 15

It’s hard to avoid. Almost every CEO’s conversation about how IT is driving innovation inevitably comes back to the potential of big data. But data is inherently dumb. It doesn’t actually do anything unless you know how to use it. And big data is even harder to monetise due to the sheer complexity of it.

Data alone is not going to be the catalyst for the next wave of IT-driven innovation. The next digital gold rush will be focused on how you do something with data, not just what you do with it. This is the promise of the algorithm economy.

Data is the oil of the 21st century

Data is the oil of the 21st century. But oil is just useless thick goop until you refine it into fuel. And it’s this fuel – proprietary algorithms that solve specific problems that translate into actions – that will be the secret sauce of successful organisations in the future.

Algorithms are already all around us. Consider the driver-less car. Google’s proprietary algorithm is the connective tissue that combines the software, data, sensors and physical asset together into a true leap forward in transportation.

Consider high frequency trading. It’s a trader’s unique algorithm that drives each decision that generates higher return than their competitors, not the data that it accesses. And while we’re talking about Google, what makes it one of the most valuable brands in the world? It isn’t data; it’s their most closely guarded secret, their algorithms.

A brave new world of opportunities

Where does this ultimately lead? Software that thinks. Software that does. Cognitive software that drives autonomous machine-to-machine interactions. Dare I say artificial intelligence? I dare. I did.

A little closer to the present day, the opportunities for organisations and technology providers alike are enormous.

For organisations, the opportunity will at first centre on monetising their proprietary algorithms by offering licencing to other non-competing organisations.

Think about a supply chain company licencing just-in-time logistics algorithms to a refrigerator manufacturer that seeks to partner with a grocery chain to automatically replenish food based on your eating habits.

Why invent or slowly develop sophisticated algorithms at huge cost when you can licence and implement quickly at low cost?

For technology providers, a brand new opportunity exists to develop and sell algorithms that help connect their customers’ existing offerings to others via the Internet of Things, or a veritable ‘meshternet’ as it will become, differentiating their services in the marketplace.

This will undoubtedly become a topic of fevered questioning for CIOs at c-suite meetings once media hype increases around initiatives such as the recently announced Google Brillo, a system that allows easy connection between devices.

The growth opportunities and benefits of efficiency that exist when inert things can communicate autonomously to take actions without human intervention will be something every CEO and CIO will want to explore.

The algorithm economy

This will inevitably create entirely new markets to buy and sell algorithms, generating significant incremental revenue for existing companies and spawning a whole new generation of specialist technology start-ups.

Imagine a marketplace where billions of algorithms are available, each one representing a piece of software code that solves a problem or creates a new opportunity from the exponential growth in the internet of things.

As apps have revolutionised human to machine interaction, we’ll see the algorithm economy power the next great leap in machine-to-machine evolution.

Products will be defined by the sophistication of their algorithms. Organisations will be valued based not just on their big data, but the algorithms that turn that data into actions and ultimately customer impact. The bottom line is that CEOs should focus now on their proprietary algorithms, not just their big data.

Article by Peter Sondergaard, Gartner senior vice president and global head of research.

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