Smart City Forecasts: How Long is a Piece of String?

14 Jan 2020

You’re at an industry event and the presenter is forecasting HUGE market growth for industry X. You think, “Wow, that market is really taking off!”

Then, you come back to reality and remind yourself that you’ve heard it all before – headline grabbing forecasts seldom live up to the hype.

I have a love / hate relationship with market forecasts. I’ve created and analysed financial models for nearly 30 years. I understand why market forecasts are needed, but more importantly, why they MUST be questioned.

And since I spent a lot of time last year researching Smart City market forecasts, I thought I’d share my findings with you.

How long is a piece of string?

Last week, my article, “Lies, Damned Lies & Smart City Rankings,” discussed that while Smart City rankings are fun to read, they are NOT an accurate reflection of how “smart” a city is.

But what about Smart City market forecasts? Are they any better? In a nutshell, no. And here’s why.

According to the Harvard Business Review, there are four requirements to create a market forecast:

  1. Define the market
  2. Segment the market
  3. Forecast the demand drivers
  4. Conduct sensitivity analyses

Sounds simple, but it isn’t. How do you define the Smart City market? Which government agencies, solutions and use cases should be included? The truth of the matter is that there is no agreed definition of a Smart City and that’s one of the main reasons why the market forecasts vary so wildly.

Note: All the numbers quoted below are publicly available and issued in 2019 – I will list the sources at the bottom of the article. 

The Baseline: How large is the Smart Cities market today?

“The most reliable way to forecast the future is to try to understand the present.”  – John Naisbitt, author of “Megatrends: Ten New Directions Transforming Our Lives”

Before we look at the Smart City forecasts, let’s look at the “actual” market size – the baseline data. You would think that removing the forecasting “guess work” from the equation would provide some consistency. It doesn’t. Because a “Smart City” means different things to different people, reports on actual Smart City market size are all over the place.

I found ten firms that listed Smart City baseline figures for either 2017 or 2018.

The numbers that should be based on “actuals” range from USD 71 billion to USD 900 billion in 2018 alone. That doesn’t mean they are wrong. It means they define a Smart City differently. But that doesn’t make it any easier for those that need the data.

Say, for instance, I run Sales for a tech vendor and need to know the Smart Cities market opportunity to set sales targets. Which baseline should I use?

This choice impacts whether the sales team can achieve their targets, and that has financial (over- / under-payment of bonuses / commissions) and operational (e.g. employee retention) impact on my business.

The Forecasts: How large will the Smart City market be in the future?

“No one can escape the iron rule that once you make a forecast, you know you’re going to be wrong; you just don’t know when and in which direction.” – Edgar Fiedler, Economist

Bad news – the randomness of the baseline figures leads to the exponential randomness of the forecasts. The forecasts below all come from 2019 press releases.

Again, they could all be “reasonable” depending on their inputs. The Smart City market could be as large as USD 3 trillion globally in the coming years, or as small as USD 190 billion, depending on which firm, if any, you believe.

The good news is that if you have an opinion about how large the Smart City market opportunity will be, there’s a forecast to support your confirmation bias.

With the wide range of Smart City market forecasts, it’s impossible to understand the current state of the market and the size of the market opportunity. But these forecasts do achieve one thing – they generate headlines. And speaking of generating headlines…

Ok, so which Smart City forecast gets the prize for being the most ridiculous?

That’s easy. It’s the one that reminds me of playing Snake on my Nokia phone in 2003. Confused? Let me explain.

“The old rule of forecasting was to make as many forecasts as possible and publicise the ones you got right. The new rule is to forecast so far in the future, no one will know you got it wrong.” – Ruchir Sharma, author of “Breakout Nations: In Pursuit of the Next Economic Miracles”

In June 2019, ABI Research forecasted the 5G component of Connected Cities would generate USD 17 Trillion in economic value by 2035. Why do I think this is so ridiculous?

  1. Firstly, 2035 was 16 in the future when they released the forecast. No one can accurately predict 16 years in the future. If you are old enough, think back to your mobile phone from 16 years ago – most likely a Nokia. Back when you were playing Snake on your Nokia phone – do you honestly believe you could have ACCURATELY predicted the market size for ANY industry today? Or the impact from market drivers such as iOS, Android, Uber and Netflix?
  2. Secondly, I find it hard to understand the basis for the forecast when the 5G mobile network equipment manufacturers and operators are still learning which use cases and solutions will drive value and how they will monetise 5G networks across ALL industries, let alone just the Connected Cities component. So, what does ABI know about the longer term that we don’t know?
  3. Finally, the GSMA, which oversees mobile operators globally, states 5G across ALL industries will add USD 2.2 Trillion to global GDP by 2034. I don’t like long horizon forecasts, but USD 2.2 Trillion for everything 5G by 2034 versus USD 17 Trillion for just the Connected Cities component of 5G by 2035 seems like a bit of a discrepancy, don’t you think?

As a side note, I put a reminder in my phone calendar for 2035 to fact-check this forecast, which was stupid. Who knows if we will be using calendars OR phones in 2035?

I still need Smart City forecasts – what should i do?

Here are four recommendations for you.

  1. Understand the methodology – ask the analyst firm what is included in their forecast. And, for good measure, use the forecasts above to ask them why their forecast is higher or lower than the others. Understand what a Smart City means to them.
  2. Focus on the underlying drivers – find out which segments (e.g. security, autonomous vehicles) drive the forecasts in the near term. Those segments should be relatively consistent, even if the forecasts are not.
  3. Fact-check the numbers – firms regularly revise their forecasts based on the latest data, so make sure your numbers are up to date. When I searched for Smart City forecasts released in 2019 only, I found three different forecasts from one firm above – with the largest being 60% bigger than the smallest.
  4. Re-read the press release – press releases can be misinterpreted and misreported. What starts out as a market opportunity of $X “by 202X”, meaning the cumulative value, gets reported later as “in 202X”, a single year’s value. I found examples of this in my research and I’m still confused about what the real size of the Smart City market opp for some of the firms above.

Remember, Smart City market forecasts – as well as Smart City rankings – and this article – should be taken with a pinch of salt. A large pinch.

I’ll close with one final quote, from someone far more knowledgeable than me…

“We really can’t forecast all that well, and yet we pretend that we can, but we really can’t.” Alan Greenspan, Economist & former Head of the US Federal Reserve