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We Accelerate Growth www.frost.com
Investing in Financial Technology &
Consumer Digital Technology Companies
www.frost.com
1 Investing in Financial Technology & Consumer Digital Technology Companies
Copyright © 2015 Frost & Sullivan. All rights reserved.
We Accelerate Growth www.frost.com
TABLE OF
CONTENTS
1. OBJECTIVES 3
2. INTRODUCTION TO DIGITAL ERA 4
– CONSUMER TECHNOLOGY TRENDS
3. INTRODUCTION TO DIGITAL ERA 6
– FINANCIAL TECHNOLOGY TRENDS
4. INTERNET OF THINGS 7
5. WEARABLES 15
6. EMERGING SOCIAL MEDIA 26
7. ECOMMERCE 33
8. EPAYMENT 44
9. CROWDFUNDING 53
10. BIG DATA & PREDICTIVE ANALYTICS 64
11. CYBER SECURITY 73
12. DATA CENTRE & CLOUD SERVICES 85
13. BLOCKCHAIN 95
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1.
OBJECTIVES
Technology today is radically transforming our lives in Investors in these companies have so far been
a way we have not envisioned before. Smartphones, venture capital firms that understand technology
Internet of Things (IoT), Bitcoin, ecommerce, and trends and valuation parameters well. While most of
smartwatches, among others, are changing the these technologies have an exciting future, there are
way we live. At the same time, technologies like Big significant risks involved as well. Hence, it is desirable
Data and cyber security are transforming the way for retail investors to understand the technologies,
businesses are run. trends, and potential risks before investing in these
companies.
The promise of new technologies is capturing
tremendous investor interest. In fact, it is estimated This research paper aims to provide retail investors
that approximately US$120 billion will be invested with valuable information on 10 key technology areas,
by Venture Capital firms (VCs)1 in 2015, with the including the major trends, business models, risks,
bulk of funding going into technology companies. and valuation drivers. The overall goal is to equip
Private companies with more than US$1 billion in prospective investors with basic knowledge on the
valuation, termed unicorns, are increasingly common potential of emerging technologies to enable them
today. There are more than 140 technology unicorns to make well-informed investment decisions about
globally as of September 20152. It is expected that these technology companies. The technology areas
many of these companies will go for public listing covered in this research paper include:
in the near future, drawing significant interest from
retail investors.
Figure 1: Technology Coverage3
CONSUMER TECHNOLOGIES FINANCIAL TECHNOLOGIES
INTERNET OF THINGS EPAYMENT
WEARABLES CROWDFUNDING
SOCIAL MEDIA BIG DATA & PREDICTIVE MODELING
ECOMMERCE CYBER SECURITY
CLOUD & DATA CENTRE
1
Source: cbinsights, 2015 BLOCKCHAIN
2
Source: cbinsights, 2015
3
Some technologies may have a broader set of applications but only
the financial or consumer aspects are covered in this research paper.
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2.
INTRODUCTION TO THE DIGITAL ERA –
CONSUMER TECHNOLOGY TRENDS
The past 20 years have been a remarkable era of rapid chess match in 1997, had a performance figure of
improvements in digital consumer technology. Digital 11.38 GFLOPS or Giga Floating Point Operations Per
technology, once limited to the confines of enterprise Second versus the 69 GFLOPS of a Xiaomi Mi4i).
and big business, has now reached consumers
worldwide at an unprecedented pace. Even poor While the smartphone and PC markets are considered
people in emerging markets who may not even relatively mature, the rapid pace of technological
have access to electricity, may own mobile phones advancements remains unabated and set to reinvent
that have more processing power and memory than the way we work. These technologies and their
the supercomputers of the 1990s (the Deep Blue enabling drivers are described below.
supercomputer that defeated Garry Kasparov in a
TRENDS SUPPORTING THE GROWTH OF CONSUMER TECHNOLOGIES
Figure 2: Key Trends in Consumer Technologies
FALLING PRICE OF COMPUTATION
CONNECTED INTERNET OF
& STORAGE
SENSORS THINGS
ENABLING DRIVERS
MINIATURISATION
OF PERSONAL WEARABLES
DEVICES
MINIATURISATION OF COMPONENTS
SOCIAL
SOCIAL
INTERACTIONS USING
NETWORKS
MULTIPLE DEVICES
SALES & PURCHASE
RADICAL IMPROVEMENTS IN LAST- FROM COMPUTERS & ECOMMERCE
MILE CONNECTIVITY SMARTPHONES
FALLING PRICE OF COMPUTATION AND STORAGE Declining prices is a major catalyst spurring the
The popular Moore’s Law observes that processors growth of consumer technology applications. More
and memory chip performance will keep doubling consumers across the globe can now afford to own
every 18 months. This indicates that performance a smartphone or PC. What’s more a larger number
increases by 16 times every 6 years. As a result, of smaller devices can be given the same computing
the price of a processor or memory with the same power of smartphones from previous generations,
performance keeps reducing. For example, a US$125 leading to the proliferation of smart sensors and
smartphone today has double the processing speed wearables into our everyday lives.
of the iPhone 3G that sold at US$600 without a
contract at the time of its launch in 2009.
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Figure 3: Average Price in US$ of 1 Megabyte Memory, RADICAL IMPROVEMENTS IN LAST-MILE
2008-2015 CONNECTIVITY
Consumer devices do not only require processing
power and memory; they also need fast connectivity
to be truly useful. With the rapid development
of wireless broadband technology in the form of
ubiquitous and more efficient networks such as 3G,
4G, WiFi and Bluetooth, it is easier for new-generation
consumer devices to be connected to a network
and other devices. For example, modern cars use
concierge and map services using 3G connectivity.
Such solutions would not be possible without near-
ubiquitous 3G connectivity. Similarly, Samsung Gear
and Apple Watch connect with the smartphone using
Bluetooth 4.0 that consumes only a fraction of power
Source: jcmit.com, Frost & Sullivan Analysis compared to previous standards.
With this connectivity, consumers can now shop from
MINIATURISATION OF COMPONENTS
their mobile phones, track their fitness levels using
A direct consequence of improving chip performance
fitness bands, check the security of their homes using
is that similar computing power can now be
connected IP cameras, and even remotely control the
compressed in a smaller chip, which in turn, can be
thermostats of their homes.
fitted into a smaller device. A smartwatch today
has the same memory and processing speed of a
The combination of smaller, cheaper and more
smartphone 3 years ago and of a PC from 6 years
powerful devices with ubiquitous connectivity are
ago. In future, even smaller components used in our
key drivers behind the rapid progress in consumer
clothing or smart glasses can have similar processing
technologies.
power, making these devices more useful to us.
Figure 4: First Devices with 1 GHz processor and Their
Launch Year
COMPAQ TOSHIBA TG01 SAMSUNG
DESKPRO EN Year: 2009 GALAXY GEAR
Year: 2000 Year: 2013
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3.
INTRODUCTION TO THE DIGITAL ERA –
FINANCIAL TECHNOLOGY TRENDS
Financial technology (Fintech) refers to a business enabled by improvements in the cloud and cyber
that provides financial services using software or security technologies.
the Internet. Essentially, it brings many innovations
in consumer technology such as web portals and Leveraging these technologies, innovative fintech
smartphones to the financial world. Smartphones start-ups are revolutionising the once stagnant
are being used to enable payments (epayments), financial services industry by enabling payments,
the web is being deployed to raise funds for ideas loans and other financial services, which so far has
and companies (crowdfunding) while big data been monopolised by banks and other major financial
technology is helping to facilitate credit scoring institutions.
and fraud detection. These advancements are being
TRENDS SUPPORTING THE GROWTH OF FINANCIAL TECHNOLOGIES
Figure 5: Key Trends in Financial Technologies
INCREASING INTERNET &
EPAYMENT CROWDFUNDING
SMARTPHONE PENETRATION
ENABLING DRIVERS
BIG DATA &
CYBER
IMPROVING CYBER SECURITY PREDICTIVE
SECURITY
ANALYTICS
INFRASTRUCTURE
ADOPTION OF CLOUD AND BIG DATA BLOCKCHAIN
TECHNOLOGY
INCREASING INTERNET AND SMARTPHONE fintech areas would not have grown. Without strict
PENETRATION security measures, we would not be able to make
The Internet and smartphone are key enablers payments with our phones.
of fintech. As the medium for crowdfunding
websites, the Internet enables companies to raise Thus, improvements in cyber security play a huge
funds without going to VCs or banks. Similarly, role in the uptake of financial technology.
the smartphone facilitates innovative payment
options like Apple Pay and smartphone-based ADOPTION OF CLOUD AND BIG DATA
card readers like Square. Naturally, the larger Cloud and Big Data are the other two enabling
the user base for Internet and smartphone, technologies powering fintech. On the one hand,
the faster the growth for fintech companies. cloud technologies allow fintech start-ups to quickly
scale up their infrastructure according to their
IMPROVING CYBER SECURITY business growth. On the other hand, start-ups use
Security is the number one concern associated with Big Data and Analytics for fraud detection and credit
performing online transactions, without which most scoring.
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4.
INTERNET OF THINGS
The Internet of Things (IoT) refers to the connectivity to make up less than 10% of total connected devices
of physical objects (as opposed to devices like the by 2020.
smartphone that are directly used by people), that
are able to collect and exchange data. Physical The market size of IoT spending in the Asia-Pacific
devices can be sensors, electronics and other objects region is estimated at US$24.2 billion in 2015. Growth
such as thermostats and IP cameras. In contrast to is expected to be rapid at a compounded annual
how the Internet is a way to connect people via growth rate of 26.8% to reach US$79.3 billion in 5
personal devices like PCs and smartphones, IoT aims years’ time. China is projected to be the largest IoT
to interconnect devices, machines, services, including market in the region at US$36.8 billion in 2020 due
people, allowing for virtually endless connections to numerous smart city developments undertaken
and opportunities to take place. by the government. Japan is likely to follow with
a market size of US$16.1 billion where automation
IoT is expected to accelerate automation of a large is increasingly being adopted to address the
array of domestic and industrial areas such as challenges of an ageing population and rising wage
home appliances, electric grids, agriculture, traffic costs. Emerging countries in Southeast Asia such as
management and automobiles. For example, home Indonesia, the Philippines, and Malaysia are poised to
appliances can be switched off automatically when experience the fastest growth due to their relatively
sensors at the gate detect that users have left the lower starting base in IoT spending.
home. US households are reaping significant cost
savings in utility bills with the installation of home IoT applications are influencing a significant number
motion sensors. While consumers in the Asia- of areas such as home appliances, agriculture,
Pacific region are becoming increasingly aware of automotive, transportation, building management,
the benefits IoT can bring to their lives, with similar factory management, industrial automation,
adoption trends expected as the technology matures. healthcare, energy, and power systems. The
Frost & Sullivan predicts that by 2020, there will technology is enabling banks to monitor and manage
be almost 50 billion connected devices globally, their ATM kiosks. However, the biggest impact of IoT
averaging to approximately 10 connected devices is being seen in the transportation, energy, and home
per person. Although smartphones and laptops form appliance segments.
the bulk of connected devices today, they are likely
Figure 6: Industries Adopting IoT Technology
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KEY DRIVERS & RESTRAINTS
Figure 7: Drivers & Restraints of IoT Industry Growth
GROWTH DRIVERS GROWTH RESTRAINTS
IMPROVEMENTS IN THE COST & SECURITY, DATA PRIVACY AND
FUNCTIONALITY OF SENSORS SOVEREIGNTY CONCERNS
GOVERNMENT SMART CITY CHALLENGES IN JUSTIFYING THE
DEVELOPMENTS DRIVING RAPID IOT RETURN ON INVESTMENT
PROLIFERATION
COMPETING STANDARDS AND
MAJOR IMPACT ON EFFICIENCY & WALLED GARDEN APPROACH
CUSTOMER RESPONSIVENESS OF
INDUSTRIES
UBIQUITOUS CONNECTIVITY AND
THE PROLIFERATION OF SMART
DEVICES
KEY DRIVERS While IoT and smart city are different concepts, IoT
provides the necessary technological tools for policy
1. IMPROVEMENTS IN THE COST AND makers to capture data and arrive at better policies
FUNCTIONALITY OF SENSORS and decisions to improve people’s lives. As part of
IoT involves the use of sensors to capture useful data its ambition to become the world’s first smart nation,
about its environment. Sensors have been around for the Singapore government is undertaking various
some years; a common example is the use of motion smart city initiatives including installing sensors
sensors in public toilets to activate the automatic and cameras in various public infrastructures to
flush, electronic soap dispenser and sensor tap. In collect data on urban density, pollution, and traffic
short, IoT and sensing technologies go hand in hand conditions. Likewise in countries such as Australia,
as it aims to connect these sensors. government subsidies are helping to stimulate the
adoption of Automated Meter Readers (AMRs) for
The declining cost of sensors and increasing the utilities sector.
miniaturisation are key drivers in the uptake of
IoT. Sensors have evolved to become economical To fund the various measures, government agencies
and small enough to be embedded in a range of are striking up partnerships between public
ubiquitous objects. For example, the accelerometer and private sectors. Government initiatives and
(sensor to measure acceleration or movement of consortiums are key drivers in accelerating the
a device) can be easily fitted in a smartphone and development of IoT to reap the critical mass.
costs around US$1. The cost of sensors is expected to
further decline between 25% and 40% over the next 3. MAJOR IMPACT ON EFFICIENCY AND
3 years. CUSTOMER RESPONSIVENESS OF INDUSTRIES
IoT is pivotal in enhancing the competitiveness of
2. GOVERNMENT SMART CITY DEVELOPMENTS industries through the use of enabling technologies.
SPURRING RAPID IOT PROLIFERATION Enterprises have found that IoT brings about better
In many countries, the public sector is leading the utilisation of costly assets such as transportation
way in IoT proliferation with various smart city fleets. With IoT, modern transportation companies
initiatives both at the national and regional levels. can pinpoint the exact location of their vehicles, the
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time taken to travel between locations, resting times, plant or hack into a medical device. For example, the
and even factors such as fuel efficiency, all thanks to Stuxnet virus attack in 2013 that brought down Iran’s
GPS vehicle tracking systems. entire nuclear plant via a cyber worm highlights the
vulnerability of critical infrastructure and importance
As an another example, in early 2014, the US of security sometimes taken for granted in an
National Highways published two automotive recall Internet-driven era. These threats are expected to
announcements – one from Tesla Motors and the slow down IoT deployment until the concept evolves
other from General Motors – due to fire risks. As to become more technologically mature and reliable.
the Tesla cars came equipped with 3G connectivity,
29,000 cars in people’s garages were fixed overnight 2. JUSTIFYING THE RETURN ON INVESTMENT
simultaneously via a software upgrade performed Despite the potential advantages IoT can bring to
remotely. IoT technology enabled Tesla to incur industries, some enterprises struggle to quantify
minimal costs in rectifying the issue. the return on the investment needed to realise
the value of the technology. While in sectors like
On the other hand, General Motors’ cars did not transportation, the virtues of IoT are clear, however,
come with high-speed connectivity at that time. there is a lack of quantifiable benefits and cost
Consequently, 380,000 vehicles had to be manually savings of IoT implementation in other use cases. For
taken to the dealers, incurring a much higher cost. example, smart meters or AMRs were one of the most
The case highlights the tangible benefits of IoT that talked about IoT implementations with governments
enterprises cannot afford to ignore. in the UK and Australia investing billions of dollars
in the endeavour. However, an audit of smart meter
4. UBIQUITOUS CONNECTIVITY AND investments by the State of Victoria in Australia
PROLIFERATION OF SMART DEVICES concluded that any cost saving by smart meters
The use of Machine-to-machine (M2M) is evolving was compensated by the higher cost of the meters.
and converging from a closed network using diverse Due to cases like this, there is little willingness to
technologies such as Ethernet to an all-IP network. embark on costly investments by enterprises in
The use of wireless networks and migration to the certain industries. Moreover, the relatively low cost
IPv64 provide reliable data connection to support of manpower in emerging Asia-Pacific nations
the exchange of data across ubiquitous things signal that enterprises are not prepared to replace
without direct human intervention. The 3G and 4G manpower with autonomous machines.
mobile networks enable cost effective and robust
wireless data connections to end user devices. The 3. COMPETING STANDARDS AND WALLED
pervasiveness of cellular technology coupled with GARDEN APPROACH
the increasing use of WiFi in places with lower The growth potential offered by IoT is attracting the
coverage also provides seamless connection for real- attention of numerous vendors offering proprietary
time exchange of mission-critical applications. At systems around platforms and applications to
the same time, the proliferation of smartphones will enterprises. In doing so, competing standards are
be instrumental as gateways to access and control being established to determine the requirements
other connected devices such as connected home around power, hardware devices, capabilities
appliances. and types of use. At present, enterprises find the
multiple standards confusing, and are concerned
KEY RESTRAINTS about the lack of interoperability among competing
standards. Given the uncertainty of the standards
1. SECURITY AND DATA PRIVACY CONCERNS that are likely to lead the industry in time to come,
Security remains a key concern among people, enterprises are adopting a wait-and-see approach
policymakers, and industries in adopting IoT. for standards to mature. The hesitation is likely to
One of the risks in connecting equipment, public delay implementation plans over the short-term.
infrastructure, and various objects is that data from
those devices can be vulnerable to theft, damage and In addition to the confusion, most vendors adopt a
malicious attacks. From an enterprise perspective, walled garden approach to protecting their territories
IoT has the potential to cripple a manufacturing by selling hardware devices that come with a software
4
IPv6 refers to the latest version of internet protocols which makes it possible to assign IP addresses to a much larger set of devices
compared to the previous versions.
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lock-in. Enterprises that deploy their systems are making system integration a challenge, inevitably
effectively prevented from procuring solutions from delaying decisions in implementing IoT solutions.
competing vendors. The lack of interoperability is
VALUE CHAIN AND KEY BUSINESS MODELS
VALUE CHAIN
The basic IoT value chain comprises five key components as illustrated in Figure 8.
Figure 8: The Internet of Things Value Chain
OBJECTS TRANSLATION CONNECTIVITY PLATFORM APPLICATION
As described above, the IoT value chain has five meters), GE (smart meters and industrial sensors),
components: Cooper Industries (electric grid sensors) and
STMicroelectronics (motion sensors).
1. Objects refer to ubiquitous things that can be
connected to the Internet, encompassing consumer 2. Translation refers to the capturing, storing and
electronics, sensing devices, embedded systems, sharing of data across devices using a local network.
controllers, and virtual objects. Examples include The key components of translation are short range
smart thermostats, IP cameras, and smart meters. wireless sensor networks and wireless transmitting
Leading players in this segment are Cisco, Nest modules. Examples include NFC, Bluetooth, wireless
(Google subsidiary offering smart home solutions), sensor networks and RFID networks.
Samsung (smart refrigerators), Itron (smart
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3. Connectivity refers to the connection of sensors host the IoT platform (e.g., Telstra hosts Jasper’s
in the field, factory or home to the Internet or private IoT platform) to make it easier for IoT device and
networks. They include wired and wireless networks, application providers to use their network and
enterprise and service provider gateways and network manage their apps. AT&T goes one step further
management. Broadband and 3G/4G networks are by offering a built-in wireless home networking
some options. Major connectivity providers are telcos platform covering electrical appliances, security and
such as SingTel, AT&T, and Celcom. digital media entertainment as a single subscription
package (with upfront payment for devices). AT&T
Since most IoT applications require wireless has achieved a one-stop shop approach by entering
connectivity, wireless operators are trying to adopt into partnerships with vendors that are leading
a central position in the value chain. They typically players in their area of expertise.
Figure 9: AT&T Digital Life Platform
SECURITY CONTROL WIRELESS ANALYTICS
SYSTEM PANELS SENSORS
E.g., Honeywell E.g., Cisco E.g., Aeon Labs E.g., Aeon Labs
AGGREGATED BY
TELECOM OPERATORS
AT&T’S DIGITAL LIFE
PLATFORM
A B
RETAIL STORES DIRECT SELLING
DIY package sold at retail Professional installation at
stores home
AGGREGATOR OPERATION AND MAINTENANCE
Telecom vendors Telecom vendors and ecosystem of partners
INSTALLATION ANALYTICS AND MONITORING
Telecom vendors Third-party analytics and monitoring
(or DIY) stations/telecom vendor monitoring station
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4. Platform refers to an infrastructure layer for up selling a remote baby monitoring device, follows
applications to be built on top of it. They include this business model as well.
performance management, device management,
identity management, payment platform and Sometimes customers have to pay an additional
application platform. It is the software that connects one-time fee to get advanced features. For example,
the sensors together, automating them and enabling Fitbit’s (the health band) premium service comes
easy monitoring. Vendors of IoT platforms include with a 12-week training programme as well as
Telenor (Telenor Objects), Jasper Wireless, Ericsson, benchmarking and data export capabilities.
and Tridium.
DEVICE PLUS SUBSCRIPTION MODEL
5. Applications refer to programs designed to solve In this model, there is an upfront fee for the hardware
a particular problem, carry out a function or provide plus a monthly subscription that covers wireless
a service. They include enterprise applications (e.g., connectivity and other costs for the vendors. These
ERP, CRM and SCM), analytics applications, and models are popular for fleet tracking solutions, where
industry-specific applications like fleet management customers pay upfront for the GPS tracker and other
solutions, smart car applications, building automation sensors, and a monthly fee per vehicle to the solution
solutions, and grid management applications. provider. Examples include fleet management
companies such as CarTrack and iTrack.
Industry players across the value chain are fairly
specialised in their offerings. At present, industry SUBSCRIPTION MODEL
players do not have all the capabilities of the value Software only solutions may be sold on a monthly
chain to offer an integrated end-to-end IoT solution, subscription. For example, VersaFleet is a fleet
be it for the consumer or enterprise sector. For tracking software that uses third-party GPS. Since
example, a telecommunications operator focusing on there is no device sold, the pricing is on a monthly
providing broadband connectivity is not well placed subscription basis.
to manufacture chipset modules. Companies are
highly receptive towards greater collaboration within
the industry to supplement their lack of internal
expertise in certain areas. While partnerships are the
most common and fastest way in bringing expertise
together, companies have limited control over their
partners. On the other hand, acquisitions offer
greater control in acquiring capabilities. However, the
risk and uncertainty are also the highest in such an
arrangement.
KEY BUSINESS MODELS
Business models employed by the connected
industry fall into 3 broad categories: Device-centric
Business Model; Device plus Subscription Model; and
Subscription Model.
DEVICE-CENTRIC BUSINESS MODEL
In this model, the prime focus is on selling devices
upfront. Services provided after the sale of the
devices are either free or make up a minimal part of
the overall revenue. A key example is Nest that sells
smart thermostats and surveillance cameras for the
home. Tesla Motors, which sells the IoT-powered
connected car, can also be considered a device-
centric vendor. MNH Labs, a Singapore-based start-
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VALUE DRIVERS & KEY RISKS
Figure 10: Value Drivers & Key Risks for IoT Companies
KEY VALUE DRIVERS KEY RISKS
• Partnerships & Collaboration • Eventual Business Case
• Ease of Use & Design • Competition &
• Installed Base Commoditisation
• Lack of Economies of Scale
KEY VALUE DRIVERS Figure 11: Nest Thermostat
The key value drivers of an IoT company are as
follows:
1. PARTNERSHIPS AND COLLABORATIONS
IoT requires smooth interworking of multiple sensors,
devices, connectivity networks and software. IoT
applications may also need to work with legacy
enterprise applications and networks. In most cases,
a single company may not offer the entire range of
devices and applications. Therefore it is important
to have a wide range of partners that provide
complementary services to seamlessly implement
the company’s solution.
However, partnerships alone may not be sufficient. 3. INSTALLED BASE
The application must also be easy to integrate Like most enterprise applications, the number of
with the sensors, wireless sensor networks, cellular IoT application deployments or installed base of
networks or the IoT platforms of the partners. For the product signifies the efficacy and reliability of
example, AT&T created and opened its IoT platform the solution to potential customers. The larger the
to its partners so they could develop innovative installed base, the higher the chances of finding new
applications for its consumers, and be assured of customers.
seamless integration with the IoT platform and
cellular network. This has resulted in AT&T becoming
KEY RISKS
a leading participant in the IoT segment.
The key risks for a company in the IoT sector include
2. EASE OF USE AND DESIGN
the following:
Companies offering consumer-focused IoT solutions
need to be easy to use and have excellent aesthetic
1. EVENTUAL BUSINESS CASE
design. For example Nest, a smart thermostat and
surveillance camera company, is a successful IoT RISK ASSESSMENT: HIGH (FOR EARLY AND
player thanks to its simple to use device and award- GROWTH STAGE COMPANIES)
winning design. In fact, it became the third most sold IoT applications have the power to revolutionise the
thermostat in the US, 3 years after its launch. world. However, they require a substantial number of
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disparate hardware and software components to work influx of manufacturers from low-cost regions
together smoothly; that may not always be possible. producing similar products at lower prices with entry-
Cost is another constraint potentially hindering the level features. This is resulting in hardware devices
eventual adoption of the technology. Many IoT start- becoming increasingly commoditised – a serious
ups with promising solutions fail to gain sufficient concern for hardware-centric IoT applications.
momentum in the marketplace. For example, the
concept of a connected home was introduced more 3. LACK OF ECONOMIES OF SCALE
than 10 years ago by broadband providers. However, RISK ASSESSMENT: HIGH (FOR EARLY AND
several early start-ups aiming to provide intelligent GROWTH STAGE COMPANIES)
switching to lights and other home appliances failed Start-ups and companies in the early growth
because of the high costs, integration challenges and stages face the risk of poor operating and financial
low eventual benefits to consumers. performance due to the lack of scale. This is prevalent
in the initial stages when the penetration rate of IoT
Similarly, smart meters were a big thing a few years solutions and devices is low. Early adoption by niche
ago due to heavy investments by governments in segments is not sufficient to elevate the business
the UK and Australia. However, the return on these substantially even with a premium placed on the
investments has raised doubts, tapering industry pricing of the solutions. Companies in the software
growth. aspect have a lower operating cost in the early
stages. However, businesses offering devices incur
2. COMPETITION AND COMMODITISATION a much higher cost that translates to higher prices.
RISK ASSESSMENT: HIGH Although growth in adoption could result in greater
Many IoT devices like smart meters and fleet economies of scale, the risk of failure in hardware
management solutions have proliferated with the start-ups is higher.
RELEVANT VALUATION METRICS
IoT vendors have a simple business model of either outright sales or a subscription model. The valuation can
be done based on the revenue (valuation/revenue) of EBITDA (enterprise value/EBITDA) multiple. However,
before investing in an IoT company, it is vital to assess the company based on the key value drivers and
evaluate risks to judge the future prospects of the company.
Table 1: Valuation Metrics for IoT Companies in Various Stages
S. NO. EARLY STAGE GROWTH STAGE LATE STAGE
1. Revenue & revenue growth Revenue & revenue growth Revenue & revenue growth
2. Growth in monthly active EBITDA margin EBITDA margin
users
3. - Profit margin Profit margin
OVERALL CUSTOMER TRACTION TOPLINE & BOTTOMLINE TOPLINE & BOTTOMLINE
FOCUS GROWTH GROWTH
EARLY STAGE: Usually first 2 to 3 years of operations.
GROWTH STAGE: Approximately 3 to 5 years of operations.
LATE STAGE: More than 5 years of operations.
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5.
WEARABLES
The terms “wearable technology”, “wearable devices”, Wearable technology has some form of
and “wearables” refer to electronic technologies or communications capability enabling the wearer to
computers incorporated into items of clothing and access or send information in real-time from the
accessories that can be comfortably worn on the wearable device. Data input capabilities are also a
body. The wearable devices can perform many of feature of such devices, as is local storage. Examples
the same computing tasks as mobile phones and of wearable devices include watches, glasses, contact
laptop computers, but in a much smaller form factor. lenses, e-textiles and smart fabrics, headbands,
Wearable technology tends to be more sophisticated beanies and caps, jewellery such as rings, bracelets,
than handheld technology because it can provide and hearing aid-like devices designed to look like
sensory and scanning features not typically seen in earrings.
mobile and laptop devices, such as biofeedback and
tracking of physiological functions. The figure below provides a classification of wearable
technology based on the various types in the market.
Figure 12: Wearable Technology Taxonomy by Product Type
WEARABLE TECHNOLOGIES
ACTIVITY SMART SMART SMART OTHERS
TRACKERS WATCHES GLASSES CLOTHING
Traditionally A wrist- A wearable All smart Any other
coming in the wearable device clothing and wearable
form of smart device which resembling accessories technology
bands, which offers a wide glasses which including shoes which does
track biometric variety of collects data and jewelry like not fall into the
data upon a functions, on and augments rings four previous
designated top of time- a user’s sight categories
activity telling, and is through an in-
often synced to built display
smartphones
Source: Frost & Sullivan
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While wearable technology tends to refer to items that superimposes a computer-generated image
that can be put on and taken off with ease, there are on a user’s view of the real world, and wearable
more invasive versions such as implanted devices technology can combine to create a more realistic
including micro-chips and smart tattoos. Ultimately, and immersive environment in real-time. The concept
whether a device is worn or incorporated into the is not necessarily new, as augmented reality through
body, the purpose of wearable technology is to create the use of wearable devices has been discussed since
constant, convenient, seamless, portable, and mostly the late 1990s. However, the prototypes are moving
hands-free access to information and insights. away from bulky technology such as large goggles and
backpacks, to smaller, lightweight and more mobile
The implications and uses of wearable technology are systems. If the more sophisticated designs of mobile
far reaching and anticipated to influence the fields phones and digital cameras currently on the market
of health and medicine, fitness, ageing, disabilities, are any indication of the future of wearable devices,
education, transportation, enterprise, finance, gaming then fashion, practicality, function and design will be
and music. The goal of wearable technologies across taken into account as these products advance. This
these fields is to smoothly incorporate functional, consideration for both technology and aesthetics is
portable electronics and computers into individuals’ already evident in devices such as Google Glass that
daily lives. has a sleek, lightweight, and unobtrusive design.
Although wearables could potentially have the CURRENT STATUS
biggest impact in the fields of health and fitness, the The following table summarises the current state of
technology also promises great influence in gaming market development for various device categories
and entertainment. Augmented reality, a technology and the most likely scenarios in the future.
Table 2: Types of Wearable Devices
CURRENT
CATEGORY DEFINITION MARKET STATE REASONS
ACTIVITY Wearable bands and other Fast growing Activity trackers use minimal
TRACKERS devices that can track athletic segment computational power and
activities like running, cycling require a smaller display. They
and walking along with are compatible with the current
measuring heart rate. battery and display technology,
lowering prices. There are multiple
options available for consumers
to choose.
SMART Watches that can connect to Emerging; set Smart watches consume more
WATCHES the smartphone and run third- to grow in a big battery life compared to activity
party applications to take way trackers, making long battery
calls, check messages, find life a challenge. In addition, most
restaurants. applications require the use of
touchscreen; hence, the small
touchscreen size becomes a
constraint. However, aggressive
moves by major players like
Apple have made it an interesting
category to watch.
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CURRENT
CATEGORY DEFINITION MARKET STATE REASONS
SMART Wearable glasses that can Nascent; yet to The challenges in providing an
GLASSES show content in front of the take off in a big unobtrusive display right in front
eye and guide users based on way of the eye with miniaturised
their locations. battery and processing are even
more than the watch. Privacy
of non-users is a major concern
revolving around the usage of
smart glasses. Google Glass, for
example, was a clear failure with
most early adopters giving it a
“thumbs down”.
SMART Clothes that can track body Nascent; just Doubts hover over the durability
CLOTHING temperature, heart rate, beginning to of smart clothing when it comes
intensity of workout, sporting grow to long-term usage. Having
actions. shrunk sensors into thin, flexible,
and comfortable-to-wear forms,
producers also need to ensure
the clothing can withstand daily
wear and tear as well as vigorous
washing machine cycles.
OTHERS Niche applications like the Nascent; just Most wearable devices in this
medical alert system for beginning to category target the healthcare
the elderly, sporting action grow and sports industries. Due to high
monitoring, gait detection price and/or limited customer
for Parkinson’s patients, base that can benefit from the
products, the market for the
vital statistics measurement
devices has been slow to develop.
for workers in hazardous
conditions.
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Figure 13: Wearable Technology Vendors by Product Type
SMART
GLASSES
ACTIVITY
TRACKERS
SMART
WATCHES
SMART
CLOTHING
OTHERS
To date, only smart watches and activity trackers have constituted around 61% of wearable shipments in
gained momentum in the consumer space. However, 2014, in 2020 smart watches are anticipated to be
with continuing improvements in battery life, display the largest segment constituting around 54% of the
and processor technologies, the future of wearable market.
technology is bright. Frost & Sullivan estimates that
wearable devices shipments will grow to 210 million The following figure highlights the companies
units by 2020 compared to approximately 38 million specialising in various categories of wearables.
in 2014. While activity trackers or smart bands
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KEY DRIVERS & RESTRAINTS
Figure 14: Drivers & Restraints of Wearables Industry Growth
GROWTH DRIVERS GROWTH RESTRAINTS
GROWING HEALTH CONSCIOUSNESS BATTERY LIFE & PROCESSING POWER
MINIATURISATION OF SENSORS,
USER INTERFACE CONSTRAINTS
MEMORY AND PROCESSOR
EASIER ACCESS TO THE DEVICE SENSORS
EASY ACCESS TO FUNDING APPS
APPLICATION IN A WIDE RANGE OF
COSTS
INDUSTRIES
KEY DRIVERS Similarly, a decade ago it was difficult to imagine that
motion sensors could be fitted into mini devices like
The figure below provides a snapshot of the key activity trackers.
factors driving the wearables market and challenges
impeding growth. 3. EASIER ACCESS TO THE DEVICE
Smartphones are a revolutionary technology,
1. GROWING HEALTH CONSCIOUSNESS bringing almost the entire information of the world in
Growing health awareness is resulting in more people the palm of our hands. However, smartphones have
being interested in tracking their physical activities an inherent limitation that they need to be pulled out
like walking, cycling and running and comparing of the pocket or bag each time somebody wants to
against their peers. Activity trackers provide an ideal use them. Smart watches and smart glasses do away
solution for such health-conscious individuals. with this limitation, bringing the information to the
user in a more convenient fashion.
2. MINIATURISATION OF SENSORS, MEMORY AND
PROCESSORS 4. EASY ACCESS TO FUNDING
Sensors, memory and processors are becoming more Start-ups mostly dominate the wearable technologies
efficient and smaller, enabling their use in activity industry. The growing prominence of crowdfunding
trackers and smart watches. For example, Samsung sites such as Kickstarter and Indiegogo have driven
Gear, the first-generation smart watch from Samsung the growth of wearable technologies, enabling start-
uses a 800 MHz processor with 512 MB memory – ups to pitch for required funding and seek market
equivalent to the specification of a high-end laptop validation. For example, Pebble Watch was funded
10 years ago. by a campaign on Kickstarter. Also, rising interest
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in wearables from the VC community is providing of wearables provide disruptive potential in many
impetus to the growth of wearable technologies. industries ranging from healthcare to engineering,
and in several application areas. The figure below
5. APPLICATION IN A WIDE RANGE OF illustrates key applications in several industries.
INDUSTRIES
Portable, compact, and with a broad array of
functionalities, the non-intrusive characteristics
Figure 15: Application of Wearables in Various Industries
CUSTOMER REHABILITATION
SERVICE & RECOVERY
PAYMENT UMPIRING
ADVERTISING PERFORMANCE
MONITORING
RETAIL SPORTS
EMPLOYEE STOCK
SAFETY MANAGEMENT
ENGINEERING
REPAIR & LOGISTICS
MAINTENANCE
WAREHOUSING
TRAINING HEALTHCARE HOMELAND
SECURITY
REMOTE USER
PATIENT CARE AUTHENTICATION
DISEASE IDENTITY
MANAGEMENT FITNESS HAZMAT RECOGNITION
DETECTION
Source: Frost & Sullivan
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KEY RESTRAINTS Likewise, due to the need to sense a multitude of
signals, several sensors have to be miniaturised and
1. BATTERY LIFE AND PROCESSING POWER embedded in wearables. However, miniaturisation
Wearables have significantly smaller space than other and the inability to embed sufficient sensors
smart devices to house batteries, presenting serious could affect data accuracy. For example, accurate
constraints to the size of the battery. To make matters movement sensors from companies like APDM may
worse, the energy density of the batteries have not cost thousands of dollars, and are not small enough
shown significant improvements over the years. Also, to be fitted into popular wearable devices.
many do not allow for battery maintenance or repair
due to their inherent design. 3. APPS
Wearables have a highly fragmented ecosystem
Battery limitations also pose restrictions on resulting in the proliferation of distinctly different
processing speed since faster processors consume sets of Software Defined Kits (SDKs) and Application
more battery life. Programming Interfaces (APIs) for each device. This
acts as an obstacle to the growth of the number of
2. USER INTERFACE AND SENSOR CONSTRAINTS apps available for any particular device.
The small size poses a problem in the interaction of
the user with the device. It is much harder to use the 4. COSTS
touch interface on a smart watch compared to the The cost of wearables for more advanced applications
touch interface on a phone. Similarly, smart glasses like healthcare and sports remains prohibitively high.
face significant challenges in displaying content in an For example, a gait detection system for use in sports
extremely small area so that the normal vision of the or certain diseases can cost thousands of dollars.
user is not restricted. Similarly, smart watches such as Apple Watch are
facing lower than expected demand both due to
pricing and functionality.
VALUE CHAIN AND KEY BUSINESS MODELS
VALUE CHAIN
The figure below provides the value chain of the wearable technology industry:
Figure 16: Value Chain of the Wearables Industry
CHIP/SENSOR OEMS/ODMS
DEVELOPERS DEVICE CONNECTIVITY
VENDORS PROVIDERS
APP
OS VENDORS
DEVELOPERS
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CHIP/SENSOR DEVELOPERS seniors, is available for purchase upfront, and can be
Companies that design the chips and components worn around the neck or attached to the wrist. The
that form the nuts and bolts of wearable devices device enables the elderly to contact a 24-hour call
include: centre by pressing a button in case of an emergency
and the call centre will dispatch an ambulance if
OEMS/ODMS required. The call centre service is on a monthly
Participants that create the original device or subscription basis.
equipment and integrate all the components, so they
function as one cohesive unit. SUBSCRIPTION MODEL
A variant of the Device + Subscription business model,
OS VENDORS the subscription model is based solely on subscription
Participants that develop the operating system to and restricted to enterprises. For instance, Catapult
power the wearable devices. Sports from Australia, a manufacturer of sports
wearables provides a subscription service to its
APP DEVELOPERS clients. Similarly, HealthSTATS, a Singapore-based
They develop applications for wearable devices like medical wearables company, sells BPro® wearable
smart watches. devices to monitor heart rate, blood pressure
and other vital information of remote patients on
DEVICE VENDORS subscription.
Participants that design and sell the devices under
their own brand name. Figure 17: Business Models for Smart Wearables
CONNECTIVITY PROVIDERS
Telecommunications operators that provide wireless WEARABLE TECHNOLOGY
connectivity for smart wearables. BUSINESS MODELS
BUSINESS MODELS
There are 3 business models in wearable technology: DEVICE DEVICE + SUBSCRIPTION
device sales, device + subscription sales, and SALES SUBSCRIPTION ONLY
subscription-only model.
DEVICE SALES
In this model, the device is sold upfront along with the
associated software. The accessories, replacement
parts, and extended warranty may be sold separately
or along with the device.
DEVICE + SUBSCRIPTION
Fitbit has an interesting model where customers
can purchase the device and basic features for a set
price. Users then have the option to subscribe to a
premium annual subscription that creates a 12-week
training programme based on the users’ activity
level, provides in-depth data analysis, and ranks the
users against their peers.
This model is also used in medical alert systems like
eAlert! in Singapore. The portable device targeted at
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VALUE DRIVERS & KEY RISKS
Figure 18: Value Drivers & Key Risks for Wearable Technology Companies
KEY VALUE DRIVERS KEY RISKS
• Device Appeal • Device Acceptance
• Cost of Device • Technology Obsolescence
• Customer Traction and Changing Market
• Application & Device Preferences
Ecosystem • Competition
• IPRs & R&D Capability
KEY VALUE DRIVERS 3. CUSTOMER TRACTION
While device appeal and cost are important, the best
1. DEVICE APPEAL method to judge the success of these criteria is to look
Primarily consumer devices, wearables focus on at customer traction. If the adoption of the device
ease-of-use and design. It is important to find out if is growing, it is the best indication that the product
the product appeals to consumers in terms of design, has hit the sweet spot. Customer traction is also
functionality, practicality and ease-of-use. For important since it creates a buzz around the product,
example, Google Glass failed spectacularly due to attracting more partners and future customers. As
bugs in the device and the perceived impracticality a benchmark, Fitbit was selling close to 5 million
of walking around while looking at a screen. On devices a year within 5 years of launching its first
the other hand, Fitbit, which is the most successful device. Apple Watch was expected to sell between
wearable device to date, ticks almost all the boxes for 2.5 million and 5 million units within one quarter of
a successful consumer device. its launch. Both devices are considered to have good
customer traction, although the sales of Apple Watch
2. COST OF DEVICE have been lower than original expectations.
While expensive smartphones have achieved
astonishing success, primarily because of their 4. APPLICATION AND DEVICE ECOSYSTEM
array of functions and subsidisation by mobile Most wearables have limited functionality owing to
operators, it is highly unlikely to be the case with their small size. However, they can become extremely
costly wearables. These devices are not subsidised powerful when paired with a smartphone and other
by operators, and typically perform a limited set of accessories. For example, Apple Watch can be linked
functions due to their inherent size restrictions. Thus to an iPhone to receive calls, messages and calendar
it is improbable that most customers would choose alerts on the watch. Likewise, although many activity
to pay the premium price. An example of cost appeal trackers are standalone devices currently, the number
is the hugely successful Mi Band, a fitness tracker of devices and accessories that work seamlessly with
from Xiaomi priced at only US$13. According to the the wearables will be an important success factor in
company, 6 million units were sold within 6 months future.
of the launch.
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In addition, smart watches are expected to run a of smart watches, there is a high risk that the activity
number of different applications. The larger the app tracker market may stagnate after 2 to 3 years.
ecosystem, the more useful the device will be.
3. COMPETITION
5. INTELLECTUAL PROPERTY RIGHTS (IPRs) AND RISK ASSESSMENT: HIGH
R&D CAPABILITIES As new wearable devices inundate the marketplace,
The greatest competitive advantage of wearable the risk of a company losing its market share to a
technology lies in the strength of its R&D. The competitor with a more compelling value proposition
capability of the existing R&D team is a strong is high. For instance, Xiaomi introduced Mi Band in
value driver for the company. The amount of money Q3 of 2014 and quickly garnered 25% market share
invested in R&D directly impacts the patent portfolio by Q1 of 2015, capturing the market share of other
and trademarks, allowing the company to achieve or vendors.
retain a dominant position in the market. Between
2010 and 2015, there were a number of patent battles
between Apple and other smartphone vendors with
most Android vendors paying out hefty royalties or
penalties to Apple. In such a situation, the existing
set of IPRs is extremely important to determine
global success.
KEY RISKS
1. DEVICE ACCEPTANCE
RISK ASSESSMENT: HIGH (FOR EARLY STAGE
DEVICES)
In its early stages, there is a risk whether the device
will be accepted by the market. First-generation
devices of major companies like Google Glass, Sony
Smartwatch, and Samsung Gear were unequivocal
failures due to challenges in providing attractive
functionality in a small package. Even an established
wearables company like Fitbit experienced issues
when many users reported skin rashes after wearing
its Fitbit Force fitness band.
2. TECHNOLOGICAL OBSOLESCENCE AND
CHANGING MARKET PREFERENCES
RISK ASSESSMENT: HIGH
Wearable technology is an emerging field witnessing
rapid growth and tremendous interest from both
tech enthusiasts and VCs. As more capital is pumped
into new start-ups, there is a genuine risk of a new
emerging technology completely disrupting an
existing product or device. Such disruptions may
be technology-centric (e.g., a new form factor) or
customer-centric (e.g., a new business model). For
example, activity trackers form the largest wearables
product segment today. But with improving appeal
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RELEVANT VALUATION METRICS
Wearable technology companies have a relatively simple business model where they aim to sell as many
devices as possible and achieve profitability when they reach a particular scale. Therefore, once the product
is out of R&D, the company should be tracked on unit sales and revenue in the growth stage and revenue and
profitability towards the later stage.
Table 3: Valuation Metrics for Wearable Technology Companies in Various Stages
S. NO. EARLY STAGE GROWTH STAGE LATE STAGE
1. Paid-up Capital5 Unit sales & growth Revenue & revenue growth
2. Potential Market Size Revenue & revenue growth EBITDA Margin
3. - - Profit Margin
OVERALL RESEARCH & DEVELOPMENT CUSTOMER TRACTION TOPLINE & BOTTOMLINE
FOCUS GROWTH
EARLY STAGE: Usually first 2 to 3 years of operations.
GROWTH STAGE: Approximately 3 to 7 years of operations.
LATE STAGE: More than 7 years of operations.
5
These are the best available metrics at this stage. However, the valuation may change drastically based on the expected competitiveness
of the solutions.
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6.
EMERGING SOCIAL MEDIA
Social media is a platform to share messages, videos, 3. MULTIMEDIA SHARING
pictures and other multimedia with the general Several social media apps focus on sharing
public or a network of the user’s contacts. The best photographs, video clips and special multimedia
examples of social media are Facebook, Twitter and formats. These include Pinterest, Tumblr, Instagram
LinkedIn. Together, the three social networks connect and Vine.
nearly 20% of humanity. Facebook has 1.2 billion
monthly active users (users who use the website at 4. FOCUS ON MOBILE
least once a month); Twitter has 300 million monthly With mobile becoming the primary means of
active users; while LinkedIn has 364 million monthly accessing the Internet in emerging markets, several
active users. Combined, the three companies are mobile-focused social media platforms have sprung
valued at US$318 billion in 2015. up recently. Examples include WhatsApp and
Foursquare.
However, for this research paper, we focus solely on
social media platforms that have emerged after the These examples signify the fast-evolving social
above 3 platforms. The new apps exploit the niche media landscape. It will be interesting to find out the
areas not addressed by the abovementioned major growth drivers of these apps and platforms, and to
platforms. assess their potential.
Among the emerging platforms, Instagram and
WhatsApp gained the most limelight as both were
acquired by Facebook for US$1 billion and US$19
billion respectively. Pinterest, Tumblr, Yik Yak and
Quora are other prime examples of emerging social
media platforms.
Principal characteristics of the new-age social media
platforms include:
1. INCREASED FOCUS ON PRIVACY AND
ANONYMITY
Many emerging social media companies concentrate
on enhanced privacy requirements by featuring
messages that expire after a set time to ensure
privacy and security. Some of these platforms also
feature messages that self-destruct after reading and
anonymous postings. Examples include Snapchat,
Burn Note, and Whisper.
2. LOCALISED SOCIAL MEDIA
Many apps are focusing on localisation by providing
access to anonymous messages in the local area of
the user. These include Yik Yak, Nearby, and Skout.
Apps like Foursquare help users to find places of
interest in their locality.
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