ChainLink Research - All Rights Reserved 2015

Passive UHF RFID Market 2015–2018

ChainLink Research

ChainLink Research - All Rights Reserved 2015

Contents

Executive Summary ....................................................................................................................................... 1

State of the Market ....................................................................................................................................... 3

Tags Moving Up the Experience Curve ..................................................................................................... 3

Tag Vendors Maneuver to Maintain Differentiation ................................................................................ 4

Applications are Diverse, but Retail Apparel Stands above All ................................................................. 4

Tag Market .................................................................................................................................................... 5

Continued Strong Tag Growth Expected .................................................................................................. 5

Adjustments to the Forecast since Last Year ............................................................................................ 6

State of the Chip Technology .................................................................................................................... 7

Reader Market .............................................................................................................................................. 8

Reader Growth .......................................................................................................................................... 8

Handhelds Are Not Going Away.............................................................................................................. 11

Fixed Infrastructure for Retail Offers Unique Benefits, Poses Unique Challenges ................................. 11

The Cloud, Software, and the Internet of Things ........................................................................................ 13

Conclusion ................................................................................................................................................... 16

1. Market Race to Transform .................................................................................................................. 16

2. Competition and Differentiation Will Be the Biggest Challenge, Especially for Tag Makers .............. 17

3. Risks .................................................................................................................................................... 17

4. Waiting for the Next Killer Use Case/Industry after Retail—Don’t Hold Your Breath ........................ 17

Outlook ................................................................................................................................................... 17

ChainLink Research - All Rights Reserved 2015

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Executive Summary

Until recently, the UHF RFID market suffered from a variety of issues such as tag costs, educating a new market, developing and maturing standards, and so on. Then there was waiting for customers to recover from the 2008 recession and fending off IP challenges.1 Now, with most of those issues behind us, the technology is experiencing relatively steady adoption at high volumes and healthy grow rates for the first time, founded on stable technology, reduced pricing, and a maturing ecosystem. This report focuses on the UHF RFID Market. Approximately 6.5 billion UHF RFID chips will be sold in 2015. About 6.2 billion tags2 will be sold in 2015, up from 4.9 billion in 2014, representing a 27% unit growth rate.3 Almost two-thirds of these will be used in retail apparel, the fastest growing vertical market for RFID. There are now dozens of examples of retailers generating revenue and gross margin improvements by using RFID to improve inventory visibility. With only a small percentage of suitable apparel items being tagged, we expect growth to accelerate as these use cases move into the steep part of the growth curve with new retailers joining the ranks of users, as well as current customers tagging more apparel. And with the infrastructures paid for through the ROI gained from this initial use case, RFID will be expanding to other use cases and categories. Retail RFID tag consumption should grow at about 34% over the next three years, lifting the overall tag compound annual growth rate (CAGR) to about 29%.4 (See Figure 1)

Figure 1: 2012–2018 UHF Market Growth-Retail vs. Rest of Market (Other)

Retail RFID rides on top of a slower growing but highly diverse base composed of countless applications employed in a dozen verticals. Growth category examples include Asset Tracking and Management, AVI (automotive vehicle identification), Access Control/People Tracking, and Healthcare. The Industrial 1 Round Rock Research announced at the end of 2013 that they had succeeded in getting the majority of RFID suppliers to license their patents. 2 This difference is due to the time lag in the channel as chips get converted to tags for sale to the end-market. 3 Note: in talking to service bureaus, we learned that some had exceeded their tag forecasts for the first half of the year. Year-end sales may exceed forecasts. However, this optimistic scenario was presented last year and did not materialize. 4 Growth on a unit basis.

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Internet of Things (IoT) has a rich diversity of use cases; coupled with the explosion of ‘pairings’ of RFID with other devices such as GPS, Mobile, and Sensors, IoT represents a real opportunity for the market going forward. The diversity of markets and use cases is both driving and benefiting from an evolutionary flowering in RFID readers, with many new, application-specific models coming to market. There are steady improvements in price and performance, which helps the efficacy and ROI of new applications. Tags continue their steady improvement in price/performance. Tag ranges have doubled over the last seven years and could do so again over the next seven. Meanwhile, the 5¢ tag is finally here, thanks in part to relentless efforts of chip, inlay, tag, and component (e.g. antenna) designers and low-cost manufacturing in Asia. As incredibly shrinking prices is not an attractive long term strategy, tag vendors are responding to cost pressures by trying to differentiate, often by layering in more value in the form of solution services and software. While many component providers (e.g. chip makers, reader vendors) remain primarily horizontal, most providers of higher level/whole solutions, systems, and services have already or are pivoting from a mostly horizontal approach to more of a vertical or hybrid (horizontal + vertical) focus. While early solutions required expensive and time-consuming custom software developments, the trend towards vertical solutions is leading many to develop technology and software that is optimized for specific applications. This requires an investment in domain knowledge at all levels of the company, including sales, marketing and R&D—failure to do so means that another company with better focus will win. An alternative, ambitious software strategy is based on a generic Internet of Things (IoT) platform that could, in theory, connect any generic sensor or actuator to any human or software user on the other side of the cloud. With a horizontal IoT platform, providers offer device connectivity, data brokerage and low-level event synthesis for any device at the edge, not only RFID. This strategy is best suited to companies with rich basic technology portfolios. Several technology vendors have placed bets in the form of development projects or acquisitions to pursue this model. We will explore these and other examples later in this report. In this report we will cover:

• Overview of the UHF RFID Market (in ‘State of the Market’) • Tag market size and growth projections • Reader Overview and innovations • The impact of the cloud, software, and the Internet of Things on the RFID Market • Conclusions

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State of the Market

UHF RFID technology has reached a stage of stable performance and reliability. The core technology, based on the UHF Gen 2 standard,5 works well and has entered a phase of incremental evolution aimed at three goals:

• Targeting functionality to fulfill a complete solution • Optimizing price, performance, and ease/swiftness of deployment for a given application • Scaling tag volumes while managing cost and quality

The early focus on technology and performance has given way to ROI-driven attention based on targeted functionality and completeness of solution, as well as lowering deployment barriers.

Tags Moving Up the Experience Curve

Most inlay manufacturing has moved to Asia in the last five years for both cost reasons and, long term, geographic proximity to the majority of apparel manufacturers which will help with the eventual source tagging that is starting to occur. Most vendors of finished tags outsource a portion of their production to Asian contract manufacturers who have been effective at reducing cost. We believe there are lingering quality problems from Asia, but chip and tag makers have delivered steady improvements in reliability and data integrity through improvements in manufacturing of both chips and inlays. This trend will continue. Firms like Alien, with intimate relationships with the producers, have transferred and guided processes to improve the yield coming from chip and inlay manufacturers. As firms like Invengo are starting to gain traction in the US market, it will drive intense benchmarking and competitive comparisons between the leaders to ensure performance. Tag encoding technologies have also made significant advances as new industrial equipment for high-volume encoding and new high-speed printer-encoders for distributed service-bureau operations have come on the market. This reduces the economic drag that RFID encoding has on throughput for garment manufacturers and service bureaus who previously only had to worry about printing.6 As a result, total applied tag costs are declining steadily for those who can tag at the source. When garment manufacturers add RFID to a basic 3¢ retail swing ticket, the RFID portion adds an additional 4¢–6¢ to the cost of the ticket at moderate volumes, fulfilling the promise made in 2003 for a 5¢ tag. While this price should open the door to new applications, our research indicates that, currently, the ROI from RFID for many apparel SKUs is not highly sensitive to tag cost.7 Though cost is important to

5 The standard emerged in 2004 as “EPC Class 1 Gen2,” when it displaced the original Class 1 standard. It was adopted by the International Standards Organization as ISO-18000-6C. After ISO reworked its numbering system came the release of a version two, the current standard that is best known as Gen2V2, and documented as ISO/EIC 18000-63. The new industry marketing association, RAIN, is working to popularize the term “RAIN RFID” to describe the same UHF standard technology. 6 Kirk Rudy, Mühlbauer, and bielomatik have released machines in the last 24 months. In April 2015, Avery Dennison released a desktop printer-encoder that triples encoding speeds. 7 As use cases expand outward, this equation will change. Also, many current apparel use cases are using hard reusable tags.

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retailers, for a variety of reasons many retailers in the US/EU apply tags to their items within the local market (either at the DC or store) where labor costs are higher. Even with that higher applied cost per tag, the ROIs being achieved are impressive—even dramatic. Many retailers desire more broad-based usage of RFID in other categories and use cases beyond apparel inventory management. This will challenge tag vendors to differentiate their products, such as performance with specific challenging application uses, rather than focusing solely on cost, over the long run. Inlays and basic tags are looking more commodity-like lately, especially when much of the functionality is defined by the chip. Service bureaus and providers of label/mobile solutions who provide custom, pre-printed labels and tags will also find challenges in a tag-only strategy. We will come back to this issue later in our discussion of vertical solutions and software.

Tag Vendors Maneuver to Maintain Differentiation

In response, branded tag and inlay vendors have been experimenting with ways to expand their value bundle to protect margins, including moving up the value chain to deliver more of the whole product, including software and services. Avery Dennison sets the bar in retail. As an innovator—from inlay design and manufacturing to branding services to number management—the firm offers the most complete solution to the retail apparel industry, with a corresponding market share leadership. Other vendors seek to match Avery’s success in retail, but a more profitable approach might be to be the first to assemble a complete solution for other verticals coming on line. A potential collision looms as retail solution vendors build out their own tag offerings. Tyco and Checkpoint offer dual technology hard tags that combine traditional EAS and RFID tags to support both loss prevention and inventory management goals. Both companies are positioning for advantage as RFID encroaches on traditional EAS loss prevention technology down the line. Checkpoint offers standard paper tags and tickets as part of a service bureau offering, as well. Netherlands-based Nedap Retail, an innovative and growing number three in the EAS/RFID combination space, offers dual technology readers and software as a future-proofing strategy for their customers.8 Competitors will have to think hard about a one-two punch offering in retail to get a foothold today. Avery, SML and r-pac International were in the branding business before they got into RFID, providing cloth labels and tickets/hang tags, so RFID was a logical extension for them. Their customers can have a discussion with their account rep on a whole range of services. Firms like Tyco, Nedap and TAGSYS offer an integrated software platform across the supply chain and into the store, as well as the tags and the readers to provide that total solution view to customers.

Applications are Diverse, but Retail Apparel Stands above All

Inventory management of retail apparel is the biggest driver of tag growth, contributing about 65% of total tag demand this year, although other categories are clearly important and growing. Retail is important not just because of sales, but because it represents, directionally, the characteristics of a maturing market—use cases and customers who will talk about them; software applications that

8 Tesco recently announced the selection of Nedap for a large-scale deployment across 550 F&F clothing stores in the UK.

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leverage the data in meaningful ways; and strong, demonstrable ROI. Our research indicates that for many categories the ROI is profound. The entry-level use case, handheld inventory counting, is accessible to most apparel retailers. For selected replenishment items that are continuously stocked year-round,9 reported revenue uplift of 5%–15% is common. Our ROI models suggest that for fast fashion and other highly seasonal categories, gross margin increases of 100–300 basis points are achievable.10 As positive reports continue to come out and solutions become more standardized, we expect adoption in retail apparel to accelerate. Early adopters are starting to expand to new categories and use cases such as cosmetics, sports equipment, and general merchandise.11 As good as retail is, reliance on one industry is a risk strategy. The larger deals, which still move the market, often reward the entire business to one provider, although lately, one major retailer did split the purchase between two. At the chip level, diversification, a multi-industry approach, needs to be maintained since ups and downs in one sector have proven to be quite damaging to the industry. For solution providers who sell to the end-market, specialization is required. Examples of specific industry offerings are found within the tag and integrator market from providers such as Avery, Checkpoint, SML, and Tyco in retail; or the Honeywell (Intermec ), Omni-ID, Tego, and RFID Micron in areas including manufacturing, industrial/automotive, AVI, supply chain, and related areas. Zebra’s acquisition of Motorola put them in a cross-industry position with deep sales in retail, manufacturing, and government sectors. A vertical focus requires an investment at all levels of the company, including sales, marketing, R&D, and professional services. Failure to do so means another company with better focus and deeper domain expertise is likely to win. The older and larger companies have a multi-industry presence and can afford to maintain these investments. Channels vary a great deal, but are critical in all sectors of the RFID market. Label makers, service bureaus, converters, and system integrators all play vital roles in growing the verticals.

Tag Market

Continued Strong Tag Growth Expected

UHF RFID chip sales exceeded 5 billion units in 2014, and will reach about 6.5 billion in 2015 (Figure 2). Impinj, one of the top UHF RFID chip vendors, announced that their 10 billionth12 UHF chip was sold in April 2015, a feat that took a decade. We expect they will sell their next 10 billion chips in a far shorter time span. We predict that the industry as a whole will exceed 10 billion UHF chips sold annually within two years, and will ship just under 100 billion chips cumulatively during this decade (2011–2020).

9 Such as denim, women’s intimates and men’s dress shirts. Read RFID—Why Jeans? for an understanding of some of the challenges in replenishment. 10 For more, see Understanding Real-World ROI for RFID in Retail: Characteristics of Good Candidates for RFID 11 This expansion is reflected in recent releases of tags such as SML’s GB3_R6 and MAZE_R6 Inlays which are designed for improved general purpose readability from source to sale and Checkpoint’s Slim and Whisper tags aimed at use with cosmetics and other smaller items. Alien, SML and Checkpoint all have released tags for high-density situations such as closely stacked items (e.g. DVDs) that have been harder to read with existing tags. (For more, see Retailers Continue Moves into RFID.) 12 To be clear, this is 10 billion chips cumulatively sold since the founding of Impinj (not the number of chips sold within 2015), an impressive milestone with more to come.

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Figure 2: RFID UHF Forecast 2012–thru 2018

The growth rate is strong, with a CAGR rising slightly from a robust 28% during the last two years to 29% during the next three, with the main growth horsepower coming from retail apparel. About 4.2 billion retail items will be tagged this year, less than 10% of the global total of apparel items for which RFID makes economic sense (which we estimate at about 50 billion units13). Depending on adoption in other retail categories and in non-retail, the TAM (total addressable market) for tags should exceed well over 100 billion units.

Adjustments to the Forecast since Last Year

Our forecast for 2015 tag volumes is lower by 9% than in last year’s report. This reflects actual shipments of UHF chips coming in below last year’s vendor predictions and a resultant lower base from which to grow into the future. We attribute this to three causes:

• Round Rock IP claims which, though largely resolved by Dec. 2013, still caused sales cycles to be extended and slowed a bit more than expected during 2014

• Longer deployment times than expected due to lack of implementation resources • Slower adoption than expected of non-apparel categories such as general merchandise

We have also added an accommodation for channel lag between chip shipments and tag shipments. In this year’s forecast we used an estimate of tag sales occurring, on average, approximately 90 days after chip sales. At current growth rates this introduces a difference in tag and chip volumes of about 5%.

13 There are about 100 billion apparel items sold worldwide each year. However, not all of these are candidates for RFID tagging.

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State of the Chip Technology

UHF Tag Chips Look for the Next Killer App

The core technology for RFID is the air interface between reader and tags. Historically, chip sensitivity has determined suitability for most applications—insufficient sensitivity for a given application can cause a lack of ROI when read performance falls below a certain required level. Sensitivity has increased at a rate that doubles the range of a tag about every 8 years, boosting efficacy of existing applications and enabling new ones. Recent signals from industry technology leaders suggest that there is no technical reason why this could not continue for another doubling.14

So far there are no permanent leaders in UHF RFID tag chip performance—vendors leapfrog each other every year or two. Currently the three top vendors have products in a relatively narrow, 2 dB window of sensitivity.15 While more sensitivity is always beneficial, all three vendors’ products meet the sensitivity requirements of the basic handheld retail application. We predict that fixed infrastructure solutions imagined for the future may require higher chip sensitivity; however, this will not be a differentiator that impacts sales significantly as long as handheld inventory management continues to dominate, as we expect it to for the next several years.

Data Integrity is Table Stakes

A significant differentiator that has been neglected in the past is the quality metric known as ‘data integrity.’ Earlier in this decade, users could not always rely on the stability of the number they programmed into the EPC memory, nor on the uniqueness of the vendor-programmed tag identifier (TID). Early adopters were tolerant, but as RFID moves to commercial rollouts, data reliability becomes table stakes. Vendors have been taking steps to improve in these areas.

Feature Sets More Targeted Now

In the past, chips included many features that added cost; however, vendors have become more precise lately in targeting feature sets to applications. Impinj’s R6, launched in 2014, was reduced to the minimum feature set for retail-item tagging, throwing inessential functionality overboard to reduce cost and improve performance.16 Now Impinj has followed up with the R6-P, which adds support for RFID-based electronic article surveillance (EAS), anti-counterfeiting, and the ability to switch between long- and short-range modes, enabling consumer privacy. This reflects a growth strategy aimed at claiming more of the retail market.

Similarly, Alien Technology once earned high marks for the market-leading performance of its Higgs 3 chip, but lost share due to cost. The company recently followed up with Higgs 4 that removed unneeded memory to keep costs down, better positioning the chip for retail-item tagging. 14 Chris Diorio, CEO of Impinj, said in September 2014, that for the past eight years tag sensitivity has followed a trend of improving roughly one dBm/year. He also said that in 2014, the best tag sensitivity was roughly -22 dBm. The signaling used in the Gen2 protocol places an upper limit on tag sensitivity of roughly -30 dBm. Assuming there aren't any fundamental physics limitations on tag sensitivity, and there don't appear to be any at the present time, tag sensitivity could reach -30 dBm within another decade. Every 6 dBm sensitivity improvement increases read range by a factor of two; 8 dBm is roughly a 2.5x increase in read range. 15 The three top vendors of chips for item tagging, Impinj, NXP and Alien, all claim sensitivity of between -20 and -22 dBm (with an ideal dipole antenna). 16 Additional circuitry not only adds cost, but consumes precious power required to run the chip, reducing sensitivity.

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In addition to providing item-tagging chips, NXP is the first to deliver a chip equipped with encryption that could open up new markets for UHF RFID. The Gen2V2 standard, ratified in 2012, incorporated a number of security features based on cryptography. However, no chips supporting those features had been produced until NXP launched its UCODE DNA chip in April 2015. The chip is not intended for retail-item tagging, but rather for higher-priced applications like contactless banking, secure identification, and electronic vehicle identification. To deliver this functionality, we estimate the manufacturing cost of the new chip to be five to seven times that of the lowest cost retail-targeted chip, consistent with price expectations for these more mission-critical applications.

Reader Market Reader Growth

Growth in readers and devices with embedded reader capability is slower than that of tags, with a CAGR over the last two years of about 19%, due to the high tag-to-reader ratio (especially in retail), as well as slower hardware turnover for readers as compared with tags.17 Based on market trends, we expect growth to increase slightly to about 20% CAGR, with a possibility for more upside depending on these developments:

• New devices emerging that customers have requested, causing turnover on readers to increase. These are specialized readers designed for specific use cases and markets.

• The penetration of fixed infrastructure RFID solutions for retail and asset tracking, which will lower the tag-to-reader ratio.

• The emergence of ‘embedded RFID,’ or RFID as a feature, in applications such as consumables authentication.

Figure 3: UHF RFID Reader Unit Forecast18

17 Readers can last for several years; whereas many tags are disposable, especially those used in retail applications, which account for the majority of the market. 18 In this chart, devices that have multiple reader chips are each counted as a separate RFID device

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Price/Performance Improvements Continue

The original, general-purpose reader layout had four antenna ports and various I/O and network connections. This design, which persists today, can be used for almost any purpose by connecting it to one or more antennas selected for specific attributes. After designing general readers around reader chips for several years, most vendors have moved back to home-grown designs for their high-end models, joining Impinj’s popular Speedway line. Examples include Zebra/Motorola’s FX7500, Tyco’s IDX-8000, CSL’s CS469, and Alien’s new ALR-F800. These new designs, based on ‘discrete’ radio implementations, deliver higher performance and lower cost compared to their predecessors. We predict that this trend will lead to continued price erosion, especially as volumes rise.

Figure 4: Historical General Purpose Reader Price Erosion Will Continue

Reader chip vendors have focused less on performance and more on developing technology to simplify and de-risk RFID device development. As a result, while reader chips have not contributed to the rising performance of top-of-the-line readers, they have been central to the growing number of application-specific readers. A key development has been the introduction of RFID reader functionality in “system in a package” (SiP) or “system on a chip” (SoC)19 formats that incorporate complex radio-frequency (RF) circuits whose design would require specialized engineering skills not found on many engineering teams, thereby simplifying the design process for many companies. Additionally, because they are soldered down like a chip, SiPs eliminate costly connectors and cables and improve reliability and ruggedness compared to

19 See System in a package and System on a Chip for a description of these technologies.

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traditional reader modules with multiple components. From the component vendor’s perspective, these enhancements will help expand the market by making RFID more accessible to more companies.20 The number of different reader types continues to grow as vendors optimize them for specific applications and jockey for price/performance advantage. In the last 2 years, many new reader devices have been launched for specific applications. Below is a partial list:

Domain Domain-specific Reader Types/Features

Manufacturing • Readers with interfaces for programmable logic controllers, industrial power, and I/O

Logistics/ Supply chain

• Tunnel reader/encoders • GPS-equipped readers for associating location with RFID serial number • RFID + Sensors + barcoding

Retail fixed infrastructure

• Steered beam overhead monitoring/RTLS • Dual technology RFID/EAS portals • Smart antennas with steerable beams • Modular reader systems for retail vendor managed inventory displays • Shelf systems with near-field shelf antennas and 16-port readers

Retail mobile

• Smartphone readers with Bluetooth connections and flexible design to accommodate multiple handsets

• Wand-shaped readers for reading individual small items like jewelry tags • Lightweight, paddle-shaped readers to optimize the ergonomics of handheld reading

Retail source tagging

• Dedicated encoding systems with redundancy and pipelining for speed and quality • Printer encoders that encode tags as fast as they print labels

Embedded RFID (RFID as a feature)

• Solderable system on a chip (SoC) modules that are easier to use than traditional reader chips and provide lower total cost, higher reliability, and quicker development time

• Smaller, less expensive, general-purpose readers that can be incorporated into larger systems

• Secure refrigerators and cabinets for high-value, vendor-managed inventory

Table 1: Domain-specific Readers

Among the most promising new directions in retailer RFID is the use of fixed infrastructure readers mounted on walls, ceilings, and shelves, that will deliver a continuous stream of data, enabling nearly real-time ‘item intelligence.’ The market emerged slowly, initially, with Mojix entering with a new type of technology that also provided location (passive RTLS).21 In the last few years, other vendors have now emerged who either license Mojix’s STAR or have developed their own approach to passive RTLS fixed

20 Leading reader chip vendors include Impinj, PHYCHIPS and Austria Mikro Systeme (ams). Module and SiP vendors include Impinj, ThingMagic, ams, and Microelectronics Technology Inc. (MTI). 21 RTLS = Real-time locating system

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infrastructure, such as Impinj’s xArray and Tyco’s IDA-3100.22 These devices detect motion and directionality, improve read accuracy, and can be useful in situations where handhelds may be impractical or where the need for continuous data streams has value. This new technology necessitates a new software model that we cover below. This concept of continuous data streaming with location has only begun to be explored and has the potential to radically change the passive RFID market in ways we can only begin to imagine. IoT/intelligent applications that understand context, environments, and how people and things interact represent potentially powerful solutions.23

Handhelds Are Not Going Away Handheld RFID solves multiple problems by speeding up inventory counting, thereby providing considerably higher inventory accuracy than barcoding can deliver in retail environments. There are—and will be—dozens of applications that still work better with handhelds. In many cases, the whole site or the specific use case does not require continuous data.24 Furthermore, handhelds require minimal capital investments and fewer disruptions to stores or other sites (compared to fixed infrastructure), and use processes that are similar enough to the existing process of cycle counting using barcode scanners to make the change management manageable.25

Fixed Infrastructure for Retail Offers Unique Benefits, Poses Unique Challenges

As an alternative to handhelds in retail environments, readers can be mounted to fixed locations to continuously monitor tagged inventory locations on shelves and racks, referred to as a “fixed infrastructure.” Fixed infrastructure offers many potential benefits:

• Truly automated, always-on inventory data collection • Elimination of human error from the counting process • Data analytics enabled by a continuous stream of data • Correlation with data from other sensors such as traffic monitors and beacons • Enhancement of the customer experience • Integration with loss-prevention systems

It would be wrong to infer that fixed infrastructure in retail is simply taking handheld inventory counting to the limit. The differences are profound and lead to fundamental changes in the nature of the data,

22 The IDA-3100 is a steerable-beam antenna array used in combination with Tyco’s IDX 2000 or IDX 8000 reader. 23 When Intelligent Things and Intelligent Environments was written in 2012, providers were telling us about these new fixed infrastructure technologies under NDA. In that same year, we met scientist Michio Kaku and futurists like Ray Kurzweil and postulated about a future filled with smart environments and smart things. 24 For more on handhelds vs. fixed infrastructure read: The Evolution of Retail Store RFID Reader Strategies 25 There are differences in using the technology that need to be taught to associates, as well as different software to enable and encourage higher-accuracy counting. Stores need to adjust to much more frequent counting (but much less time per count). In spite of all these differences, having store associates count inventory using handheld scanners is a very common and well-established approach. This lowers the change management hurdles when moving from using handheld barcode scanners to using handheld RFID scanners.

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how it is collected and processed, the solution(s) required to take advantage of it, and the potential value that can be derived.

Comparing Handheld vs. Fixed Infrastructure Data in Retail

A handheld-based physical count, whether via barcode or RFID reader, takes an instantaneous snapshot of inventory. After the count, the inventory system of record is updated with the new data and inventory is momentarily highly accurate (provided associates are well trained and the right processes and software have been implemented). Actual results fall short of the ideal of 100% for various reasons, but accuracy of more than 95% is expected and accuracy of more than 98% is possible with good discipline in both tagging and counting practices. Handheld users know that there are impediments to high read rates including:

• Metal objects that are essentially opaque to RFID signals, like shelves and foil packaging • Heavy materials, such as water and other liquids, that absorb RFID signals • Shadowing of tags in the background by tags in the foreground, which can happen when items

are closely packed • Tag orientation. Most tags and many readers have a preferential orientation. • Hot and cold spots (causing variations in read performance)

A skilled user will move the handheld around to defeat these impediments, and will ruffle and shift the inventory to ensure that each tag is exposed to the signal for the brief moment required for a read. At the end of the process, the reader will have captured most of the tags in the field. In contrast, because the fixed reader is stationary, hidden tags will stay hidden unless a tag’s environment changes. Fortunately, over the course of the day, a given tag’s environment does change in ways that may make the tag momentarily visible to a fixed reader:

• During the item’s journey from the back store to the sales floor, the item will be exposed to different readers in many different orientations and positions

• Customers move items on display while searching through them and may take an item to the dressing room

• Employees shift items while rearranging or tidying inventory • People walking down the aisle will momentarily change the RF environment • Items will be taken to POS

These events are random in nature. Rather than providing item intelligence in the form of a snapshot in time, fixed readers in a retail environment deliver a gradual build-up of tag awareness that changes dynamically. When there is a significant change in the population of tags in a given area, such as when a major replenishment happens or a planogram changes, it takes time to rebuild an accurate picture. Solution providers are working on the algorithms needed to create this inventory picture more quickly and accurately than it happens today. These developments will take time and we expect the performance, accuracy, and timeliness of these systems to steadily improve as this IP is developed and improved, and as lessons accumulate once more real-world usage occurs.26

26 To date, the use of fixed overhead RTLS infrastructure in retail has been quite limited to a very few pilots.

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Fixed infrastructure in retail will provide many benefits, but because the nature of the data delivered by fixed readers is fundamentally different from that of handhelds, different software algorithms are required to boil it down to meaningful business events. Furthermore, a whole new set of applications are needed to take advantage of this new type of data, as well as an awareness on the part of end-users about how to derive new types of intelligence and value from it.

Fixed Infrastructure in Retail Remains to Be Defined

Fixed infrastructure pilots have been performed using one of the following approaches (Table 2) or a hybrid thereof.

Chokepoint Readers are mounted at the store/floor entrances and exits including receiving, POS, front/back, and exits. After an initial physical count, perpetual inventory is maintained by recording tags that enter and exit the floor. Periodic physical counts ‘true up’ accuracy, but are required less frequently than without fixed readers.

Basic Overhead

Many low-cost, closely-spaced readers (or RF emitters with a central receiver) mounted in the ceiling provide a continuous stream of tag reads to a server that reduces the data to useful inventory information, potentially including rudimentary (i.e., zonal) location information based on triangulation and proximity to the reader.

Steerable Overhead

Relatively fewer high-function/high-priced readers with steerable beams or receivers monitor the floor. The dataflow is similar to the basic overhead model, except that beam steering allows the use of fewer readers and provides the potential for more precise location information.

Table 2: Approaches to Fixed Reader Infrastructure

Unlike the handheld use case, no major implementation has been announced that clearly demonstrates a standard method that delivers a repeatable return on investment. Extensive experimentation will have to occur before a standard method is adopted, and vendors will advocate for the one that they have placed bets on. But we believe it is only a matter of time. A key success factor will be the development of software to collect, filter, and analyze the data.27

The Cloud, Software, and the Internet of Things IoT is the natural outcome of cheap, embedded electronics and a maturing global communications network that allows devices to exchange data. Years of standardization, Moore's Law, and protocol development have left us with a growing body of accepted methods and inexpensive components for interconnecting a globally distributed ‘cloud’ of devices. Some of these devices connect directly to the Internet, while others connect via gateways.28 Under this vision, the typical RFID reader is merely an IoT gateway, with RFID just one of many ‘last-meter’ sensors. The analysis and correlation of multiple streams of data offers many opportunities for business benefit.

27 For example, Impinj’s ItemSense software 28 Since RFID tags typically do not have an IP address or direct connection to the internet, they need some sort of gateway (which could be an RFID reader) to participate in the Internet of Things.

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Figure 5: Typical Major Components of an RFID Cloud-based Solution

The IoT market is exploding with IoT Platforms.29 Many RFID solution providers may feel like, “Hey, we were already here first,” with their ability to integrate to any device. Some RFID players will abandon the hardware side of their business altogether to concentrate on software solutions; some will develop vertical solutions where specific devices and analytics complement each other to create a whole solution; some will have a portfolio approach, offering their IoT platforms when they can while still keeping their hardware business, relying mostly on channels for verticalization. Several technology vendors have invested in branded software aimed at fulfilling this vision. Here in Table 3 are some examples:

Company Platforms Description

Acsis, Inc. Serialization, PartnerTrak, Brand Mgmt

Various SaaS and on-premise platforms and applications for serialization, partner/asset tracking, and brand protection applications for process industries such as pharmaceuticals, paper, and food & beverage.

A2B UC! Web™

Cloud-based asset locating and tracking solution which supports specific DoD, A&D, and industrial use cases such has inventory management, tool crib control, compliance labeling, and reporting and control. Integrates to large ERPs like Oracle and SAP. FedRAMP certified (Federal Risk and Authorization Mgmt. Program).

29 To learn more, see the IoT Platforms Series, as well as Distributed Intelligence in IoT and The Impact of IoT.

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Company Platforms Description

Component-Soft

ItemSight

Suite of applications for retail and supply chain visibility. Applications include sample management, source tagging, receiving, and store inventory/shelf visibility. Platform has been honed working with key retailers. Also used by other sectors such as defense and manufacturing.

Globe Ranger

iMotion™ IoT Edgeware Platform

Integrated Development Environment (IDE) with emulation tools to emulate RFID and IoT hardware devices, business intelligence dashboards, and device integration with rich selection of options. On top of this platform, GlobeRanger has created a rich set of complete domain-specific applications for processes that benefit greatly from IoT-based edge-processing solutions. After working on specific customer use cases in defense, service and repair, and procurement, many of GlobeRanger’s apps are ready for use as is and/or can be modified.

HID Global Trusted Tag® Services Platform

A cloud platform developed to enable partner/channel applications in healthcare, security, retail, and other areas. The technology turns NFC-enabled smart phones into verification devices. It is a partner application development platform for Internet of Things (IoT), authentication, and proof-of-presence.

Impinj ItemSense

Beta release of real-time analytics that converts raw UHF RFID data streams (coming from fixed readers) into item-level intelligence such as changes in location or status of items in a retail store, healthcare setting, or other environment.

Intelligent InSites

Intelligent InSites

Multiple-device platform and cloud applications for healthcare and hospital settings. People and asset tracking, room scheduling, environmental monitoring (temperature, CO2, humidity, oxygen tanks), safety, and workflow applications—all developed after working on many customer use cases. Has rich partner network with and is device agnostic—active and passive.

Mojix ViZix

Full IoT Integrated Development Environment (IDE) and applications. Key capabilities include CEP (complex event processing) engine, rules engine, analytics/visualization. Ability to record and playback IoT data of things and people in motion. Can sit on top of Mojix reader hardware as well as other readers and devices.

PTC

ThingWorx, Axeda, ColdLight

PTC has not traditionally been in the RFID business, but has invested heavily in IoT recently, making three major acquisitions. This has given them an IoT development platform, device cloud, and real-time predictive analytics and machine learning. Axeda and ColdLight have been recently rebranded under the ThingWorx moniker.

RFID Global Solution

Visi-Trac

Provides real-time visibility/track and trace for inventory and assets within the enterprise or across the supply chain. Works with various RFID, RTLS, and sensor devices. Vertical-specific applications have been developed in industries such as high tech, manufacturing, and healthcare.

SMARTRAC SMART COSMOS

Developed to enable the partner network. Cloud-based services for system integrators, IT departments, and software engineers to rapidly innovate new solutions that connect physical objects to the digital world.

Savi Savi Insight

Multi-device IoT applications with location-based service, apps, and analytics library. Represents a device-agnostic IoT/RFID breakout strategy on top of Savi’s network architecture. Applications are ready-to-go or as is or with modest modification based on specific customer use cases in Transportation and Logistics, but can also be configured for different use cases.

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Company Platforms Description

SML IIS Clarity Clarity drives retail execution from factory floor to store front door. Developed with specific customers.

Stanly Healthcare, AeroScout Industrial

AeroScout® MobileView®

AeroScout’s platform, initially built to support AeroScout WiFi-based RTLS devices, is being used in both the industrial and healthcare divisions of Stanley. The platform has evolved to be device agnostic and integrates to healthcare/hospital applications. It includes analytics built on top of Tableau software. People and asset tracking, security (people and assets), room scheduling, etc. were all developed after working on many customer use cases. Has rich partner network for devices and enterprise apps.

TAGSYS FiTS FiTS (Fashion item Tracking System) provides supply chain-wide inventory tracking from source tagging to stores, supporting both DC and store operations.

Tyco Retail Solutions

TrueVue

IoT business intelligence platform that integrates data from many store systems including RFID, POS, security and surveillance, traffic counters, video analytics and other sensor data for reporting, visualization, loss prevention, inventory intelligence, and more.

Zebra Zatar Cloud-based IoT infrastructure enables connection and management of devices and enables IoT applications to use those devices.

Table 3 (continued): Software/IoT Examples for RFID/IoT Market

Each of these systems provides multiple layers of a solution that is intended to collect, condense, and interpret data for business purposes; however, it is easy to overstate the similarities. Each platform comes to the market from a different point of origin. Some are device-agnostic IoT platforms. Others have focused in on industry solutions with business applications built on top.

Conclusion

Looking at the UHF passive market going forward, several key factors can lead to more growth. The dollar ‘buckets’ (portion of revenue emanating from different parts of the total solution) will change. Chip prices will decline, especially in higher volumes, though not as rapidly as in the past. Software revenue will grow.

1. Market Race to Transform There are a number of vendors creating ‘whole stack solutions,’ such as in IoT: Savi, Mojix; and for RFID in Retail: Tyco, Checkpoint, and TAGSYS. The creation of whole stack solutions is important to these firms’ hardware business growth. It lowers the barrier to implementation and increases the value proposition for customers. Customers can more quickly and easily envision the use cases and the path to implementation. We used to think that the traditional enterprise software market would wake up and see the value of RFID in conjunction with their applications. Instead, the RFID community has been adding the industry use cases. At this point, there are still markets where the former (i.e., enterprise app vendors entering RFID markets) may yet occur, but with more and more RFID service/system integrators and consultants building solutions, it looks like software will be a major revenue stream for many RFID-centric firms in the future as their customers seek and accept these solutions.

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2. Competition and Differentiation Will Be the Biggest Challenge, Especially for Tag Makers

Standards, while a good thing for customers, lead to less differentiation in products. Unique attributes can be created, such as on-chip diagnostics, dynamic tuning, thinner tags, on-paper tags, specialized antennas, sewn-in fabric tags, and so forth. Some (not all) of these are relatively easily imitated by major competitors, if they so choose. So channels are crucial. They drive the verticalization, the use cases, and in many markets they have the ear of the end-customer.

3. Risks In some cases, new innovations in hardware or software have gotten a bit ahead of the market. That’s capital allocated/spent with the hope of future returns. On the implementation side, physics is still a challenge for many use cases and, therefore, new technologies and implementation talent are needed. Without that, rollouts to non-apparel categories are delayed. Inlay manufacturing has become a risky place to be unless you are the low-cost producer. With China dominating this sector, inlay producers will have to find ways to differentiate on quality, creativity, responsiveness to local/immediate needs, or with total service offerings in order to stay competitive.

4. Waiting for the Next Killer Use Case/Industry after Retail—Don’t Hold Your Breath Many want to know what the next use case will be that will create the type of growth in UHF tag consumption that retail is currently experiencing. As of now, there are some candidates (such as healthcare), but nothing appears to be imminently about to take off at that same pace that retail has.

Outlook

Finally, we can breathe easy. The RFID market is here to stay. With the introduction of highly functional and inexpensive source tagging, tags for cosmetics, and new retailers signing up for RFID, retail will continue to dominate. However, there is important growth in other sections (which we will cover in upcoming reports this year). Retail is significant because it provides the main base of sales and the scale to allow the major firms to feel financially comfortable and sustained, but new territory will have to be developed. The market will inevitably see more changes. In the last few years, a major change was the acquisition of several software solution companies by service bureaus (such as SML’s purchase of Xterprise and r-pac International’s acquisition of Truecount) or by hardware firms (such as the acquisition of TierConnect/ViZix by Mojix). This trend will continue. As well, the number of embedded RFID readers will continue to grow, accelerated by the IoT phenomena. This has long-term benefits for the industry as these embedded features become standard offerings. They also provide decent margins to the RFID providers. In short, there is reason for more optimism, broadly across the UHF RFID industry than we’ve seen in years. This is tempered for some players by commoditization and increasingly fierce cost competition in certain parts of the supply chain (such as inlays and tag antennas), but bright for other players with opportunities for real differentiation and higher margins in areas like software and total solution offerings.

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