We recently published a six-part series on the future of robotics including a detailed outlook through 2025 on the five major robotics categories: Industrial, Commercial, Domestic, Military, and Social. Each part highlighted our thesis, outlook and market size for each category of robotics hardware, but we expect robotics software and services to be even larger.

In total, we believe the robotics hardware market will grow from $20.9B in 2016 to $73.0B in 2025, representing a 14.9% 10-year CAGR. However, our estimate only includes hardware sales, not software or other supporting services for robotics. When factoring in these additional markets, we believe the total robotics market value could be 3x larger including $73B in hardware plus $140B+ in software and services. We believe the hardware and components used for robotics will largely be commoditized over the next 10 years. Differentiated hardware will be the exception to the rule and unique value will be driven by software and services.

Advancements in software, including robot control software and data analytics platforms, will be key to improving robot functionalities and, in-turn, drive further adoption. For example, an unmanned traffic management platform to track robots that move autonomously in society will be crucial to large scale deployment of robotics. We view traffic management as one of the more attractive investment opportunities in the robotics space. We also believe robotics as a service (RaaS) will continue to gain momentum and we view this business approach as an attractive value proposition for business of all sizes. In the paragraphs below, we dive deeper into key robot software platforms, as well as robotic services driving growth across all five robot markets.

Robot Control Software

Programming a robot is one of the most challenging, costly and time-consuming tasks involved in creating an autonomous machine. Few companies that employ robotics will build proprietary control software from scratch. Most will lean on standardized, open-source robotics operating platforms to program robots. The Open Source Robotics Foundation has developed the Robot Operating System (ROS), which is a collection of tools to simplify the task of programming robots across a wide variety of platforms. ROS has become the preferred platform for programming and it has significantly accelerated the number of robotics companies coming to market. However, due to advancements in computer vision and artificial intelligence, companies are developing more efficient and cost effective ways to train robots. Because of lower costs and smaller form factors of 3D cameras, LIDAR and RADAR sensors, robots can better understand their surrounding environment. Coupled with machine learning mechanisms, these new technologies are allowing robots to learn on their own. A future in which robots are self-taught in real-time is still many years away, but we believe further advancements in artificial intelligence will significantly narrow this gab and allow robots to become more human-like.

Data Analytics Software

Due to the advanced sensors that robots carry, machines are gathering incredible amounts of valuable data every day. We believe one of the most attractive investment opportunities in the years to come will be companies capable of taking this data and turning it into actionable insights for businesses to improve efficiencies and productivity. Providing enterprises with affordable, real-time intelligence will be a game-changer for many and a driver of robot adoption. In robotics industries, such as the commercial drone market, early adopters have quickly focused less on the drone hardware and more on the data gathered by the drone. We believe that over time this data-focused shift will continue, and robots will be seen as automated data collectors in many industries. Today, it can take days to remotely process data from robots. Cloud computing is helping to process these large data sets, but leaders in the industry will need to be able to process the data in real-time onboard the robots and provide businesses with answers immediately.

Unmanned Traffic Management Software

For robots to be deployed at scale and operate autonomously within society, we believe an unmanned traffic management platform for air, ground and sea is required. In the near term, we believe the focus will be on implementing a drone traffic management system that provides situational awareness for other drone operators and manned aircraft pilots. Unmanned aerial vehicles are used in a growing variety of applications. By 2020, we expect over 400K commercial drones will be sold annually. For manned aircraft and drones to operate together, both will need to be able to communicate on a common platform, which will allow drones to fly regularly beyond visual line of sight. Amazon and Alphabet are both working on proprietary drone management systems, but we’ve seen a handful of smaller companies working on sophisticated software platforms and believe there will be many different services available to provide situational awareness to the aircraft community. Leaders in the space will be able to support management of drone operators, which will include flight planning, flight approval, tracking as well as remote identification. We believe similar tracking systems should also be in place for ground and marine robots, but a system that works for air, land and sea vehicles in conjunction may be the ultimate goal.

Robotics as a Service

While advancements in software are improving robot functionalities, new services will also be a growth catalyst for the industry. Given certain robot-related costs remain high, many companies are starting to offer robotics as a service (RaaS) for more business to benefit from the advantages of robot technology. This model allows for customers to either lease robots and/or the RaaS provider will visit the customer to perform a specific task with a robot and provide the customer with the data gathered. For example, this service model is common within the commercial drone industry, where businesses may not have the pilot expertise to operate a drone and, in the end, the drone user is primarily after the data gathered. We believe robotics as a service (RaaS) is gaining momentum across multiple robotics domains and we view the offering as an attractive value proposition for business of all sizes.

Delivery Robots

Package delivery via drone or ground robot represents one of, if not the, largest opportunity for robotics services. While we do not see robot package delivery being deployed at scale for at least five years in the US due to current regulations in place, we believe package delivery is real and represents a multi-billion-dollar market opportunity.  While most package delivery will be by drone, we see a meaningful opportunity for ground robots to also participate. To allow packages to be delivered by a robot, we believe 2 things need to occur over the next couple years: First, the US and other countries need to implement favorable regulation to allow drones to fly over people and beyond visual line of sight. Second, we believe an unmanned traffic management system needs to be put in place allowing all stakeholders to track all robots in use. Both issues will eventually be resolved in the US, but due to more favorable regulation internationally, we believe robot deliveries could occur much sooner in foreign markets.

Bottom Line

We estimate that robot hardware will represent a $73.0B market opportunity by 2025; however, we believe many robots will be commoditized over time. Instead, the sustaining value add in robotics will come from software and supporting services. For that reason, we believe investing in companies with a software- or service-focused business model will be the more attractive way to play the growing robotics theme given these approaches are more scalable and, arguably, more defensible. We believe the largest software opportunities will be companies that improve the speed at which robots learn, as well as companies turning the data gathered from robots into actionable insights companies can use to improve efficiencies and productivity. In addition, we believe companies working on platforms for an unmanned traffic management system is crucial to accessing new multi-billion market opportunities; e.g., drone delivery. We believe advancements in robotics software platforms will be reliant on innovation in artificial intelligence, cloud computing and computer vision. With regards to services, we believe the RaaS model is gaining momentum, allowing more businesses to adopt robot technologies.

We believe a cultural shift is underway and robots are playing an increasingly crucial role in our everyday lives. Improvements in robot hardware, software and services will positively impact the industry and drive robot adoption globally.

Austin Bohlig contributed to this note.