Internet of Everything coming to change our lives

"When you wake up in the morning … you don't think, what's the killer app? You think, anything is possible," Michael Abrash, chief scientist at Facebook-owned Oculus told Bloomberg earlier this week. But before virtual reality, "we haven't ever had it so tightly coupled to our perceptual system and our environment".

Working out who can win from digital disruption is one of the biggest challenges – and the Holy Grail – for businesses, investors and governments.

Goldman Sachs estimates that virtual reality, which has attracted giants including Facebook, Sony and Microsoft, will be bigger than the TV market by 2025, growing to $US182 billion ($242 billion).

A 30-page report, "I Robot, Who Can Win from digital disruption" by Macquarie Equities, identifies four mega trends that have the largest potential to disrupt the Australian corporate landscape over the next decade. They are the virtual reality, wearables, big data and the Internet of Everything.

To put it into some sort of context, US IT giant Cisco Systems estimates that the next big thing, the Internet of Everything, will increase US corporate profits by a massive 21 per cent in the next eight years and create $14.4 trillion in value. If that is applied to Australia it translates into an additional $20 billion in profits, according to Macquarie Equities.

With an estimated one third of the Australian economy is facing major digital disruption, the challenge is to pick the winners. But just as importantly we need to understand why Australia has been notoriously slow at adopting technology despite a high standard of living and education.

The reason is simple: until now there hasn't been a lot of pressure on Australian companies to be early adopters of technology due to the oligopolistic structure of the market – look at banking, telecommunications, supermarkets and healthcare. But as time marches on, this will change and according to Macquarie, the opportunity cost of being slow to adopt technologies will rise exponentially.

This was tangibly expressed in a discussion paper released on Thursday StartupAUS that warned up to 4.6 million jobs face obsolescence if Australia doesn't prepare its workforce for the digital age.

The Turnbull Government has launched a $1.2 billion innovation program but a lot more needs to be done.

The Macquarie report blames the relative "inertia" of Australian business on a series of factors. These include the relatively high cost of access, and the domination of key markets by a few major players. In 2014, Australia ranked 7th globally for internet penetration but in terms of affordability it ranked 49th.

Other factors include slow internet speeds and delays in NBN and over-regulation.

Then there is a high consumption tax on ICT products, which hasn't helped the situation.

When you wake up in the morning… you don’t think, what’s the killer app? You think, anything is possible

Michael Abrash

And it raises the delicate issue of the average age of Australian directors, which has had an impact on decision-making. "This has meant it has been slow to adapt to changes being driven by Gen Y. Younger directors bring diversity to the boardrooms and fresh insights around business challenges and technologically driven change."

In terms of one of the key mega trends, the Internet of Everything, Macquarie suggests the stocks most leveraged include Carsales, Fairfax (which owns The Age and The Sydney Morning Herald), online jobs site Seek, online advertising site REA Group and outdoor media including oOh!media and QMS Media.

Industries that will face "significant" disruption over a longer period of time include healthcare and utilities. "Australia's century-old electricity market is undergoing structural changes, driven by the rapid development of renewable energy, government mandated energy policy targets and new energy consumption patterns," the report says. "We expect digital disruption from the Internet of Everything to improve utilisation of assets, increase system flexibility, and drive behavioural changes among consumers (smart meters, a subset of the smart grid, will provide better, real time information to customers and operators, enabling a change in consumption patterns and new commercial offers)."

Industries exposed to relatively low levels of digital disruption include mining, manufacturing and insurance. "We expect low levels of digital potential in insurance and mining. Within these sectors we prefer stocks with first mover advantages Suncorp, Fortescue Metals Group and Rio Tinto)." But, it says the Internet of Everything will drive substantial efficiency gains as the industry moves towards an "autonomous mining evolution".

In terms of wearable technology such as wristbands for tracking fitness, smart watches and Google glasses, the biggest sectors to be impacted include healthcare, fitness and insurance. "The healthcare market may be the next leg of growth," the report says.

It might well be right. Tractica forecasts that by 2022 health care wearables will be worth almost $18 billion and IBIS estimates there are more than 3500 medical device companies in Australia and 16 companies listed on the ASX. Not surprisingly, Cochlear and ResMed are identified as best placed to benefit from the emergence of the wearables market.

But the most captivating trend is virtual reality and augmented reality, which have endless possibilities to disrupt most industries.

Mark Zuckerberg, the founder of Facebook took the plunge in 2014 when he spent $US2 billion ($2.66 billion) buying virtual reality business Oculus. "We've connected 1.65 billion people through Facebook," Zuckerberg told Bloomberg this week. "But if you want to help get all 7 billion people connected and make a step function in the fidelity of how people can share and consume content, you need to make significant investments in some of these longer-term things where you actually don't know what the time horizon is. … I don't know who said this first, but it's not hard to predict what the world will be like in 20 years. The hard thing is actually predicting or figuring out how to get there."

While gaming and entertainment is the most obvious industry where virtual reality will thrive, healthcare is likely to be the second biggest industry to adapt the technology, followed by engineering and construction, real estate and retail. According to Macquarie, Myer and eBay recently joined forces to display more than 1200 products via virtual reality. "While it is early days, we see virtual reality to be a major technology game-changer for Australian businesses in the long run."