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Big data

The internet of things will give rise to the algorithm economy

Data is the oil of the 21st century. For all of its value, oil is useless thick goop until it’s refined into fuel. Big Data’s version of refined fuel – proprietary algorithms that solve specific problems that translate into actions – will be the secret sauce of successful organizations in the future.

Sophisticated, proprietary algorithms are already all around us, impacting the decisions we make every day. Two examples that most people probably experienced recently are Amazon® and Facebook. Once you searched for that smart new coffeemaker, it’s no coincidence that a coffee grinder, milk whisk and endless other expensive stainless-steel accessories were recommended for you to buy. When it arrives, you’ll probably say how much you like it on Facebook and maybe join a community of amateur baristas to get the best tips on creating those elusive small bubbles in your flat white. Your news feed will be forever altered by the clicks, likes and experiences you’ll share.

In a different setting, consider high-frequency trading. A trader’s unique algorithm drives each decision that generates a higher return than their competitors, not the data that it accesses. Looking slightly further ahead, consider the driverless car. Google’s proprietary algorithm functions as the connective tissue that combines the software, data, sensors and physical asset into a true leap forward in transportation. 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. And dare I say, artificial intelligence.

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

For organizations, the opportunity will at first center on monetizing their proprietary algorithms by offering licensing to other non-competing organizations. Think about a supply chain company licensing 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 license and implement quickly at low cost?

For technology providers, a 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. Once media hype increases around initiatives such as the recently announced Google Brillo, a system that allows easy connection between devices, this will undoubtedly become a topic of fevered questioning for CIOs at C-suite meetings. 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 for sale or license, each one representing a unique piece of software code that solves a problem or creates a new opportunity from the exponential growth in the Internet of Things. We’ll see algorithms created and traded as game-changing assets for small and large enterprises alike, commanding prices commensurate to the value they promise. It’s not a giant leap to predict that, as apps have revolutionized human-to-machine interaction, we’ll see the algorithm economy power the next great leap in machine-to-machine evolution that will revolutionize the way we live.

Products will be defined by the sophistication of their algorithms. Organizations 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.

About the author

Peter SondergaardPeter Sondergaard  is senior vice president, global head of research at Gartner and focuses on developing market-leading advice and leading a global organization of more than 1,000 experts across IT, supply chain and marketing. Prior to this position, he was general manager for Gartner Research EMEA. Before joining Gartner, he was a research director at International Data Corp. in Europe. Peter also worked for Scandinavian Airlines System (SAS). He is a thought leader and engages with senior business and government leaders and is frequently quoted in major publications.

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