Analyst Insight: The huge surge of item-level tagging in 2010 has produced an intense renewed interest in EPC/UHF RFID. This is resulting in an increase in R&D investment by many firms, which will bear fruit in 2011. Expect to see significant new innovations and cost reductions in the RFID world this year.

-Bill McBeath, chief research officer at ChainLink Research

2010 will be seen by many as the year that RFID finally started taking off, particularly item-level tagging in apparel. We reached a milestone: over 1 billion EPC tags were sold, well over double what was purchased in 2009. Growth is being constrained by industry capacity rather than demand.  While apparel was the big story, other industries, such as pharmaceuticals, are also seeing strong growth. Some niche and not-so-niche areas - like ID badges, ticketing and cattle - are also doing well.

The growth has spurred revitalized interest in this sector by investors. A number of firms received new funding in 2010. This is spurring a "renaissance" in RFID development.  We saw many innovations coming out last year and expect even more this year. For example, for RFID readers, it used to be that you had basically two choices: either A) your standard issue one-size-fits-all readers, which tended to be rather large and expensive square boxes, or B) custom-built readers, that were aimed mostly at the embedded reader marketplace and were completely customized to be used within a specific piece of equipment or device. Now we have reached a critical mass in the size of the market that is enabling off-the-shelf readers to be offered in a much richer variety of form factors and price points, optimized for a specific market segment or application. This type of innovation helps drive further adoption.

We see similar levels of innovation in tags, RFID-related software applications, integration with mobile devices, integration with enterprise systems, and RFID-related services. While the hype is not quite at the same level as the headlines of 2003, all of this buzz, as well as innovation, is getting the attention of customers and prompting them to reconsider the technology.

Eight years ago, when Walmart and the DoD made their big announcements about using RFID on all inbound shipments, tags were quite expensive, individual installations had to be practically hand-engineered, and performance of the systems and components was spotty.  The industry has matured a lot since then - tag prices have come down by a factor of 10, read rates are much more reliable, and the tools and ecosystem are in place to make installing these systems much more routine.  All of that bodes well for RFID in 2011.

The Outlook

We expect 2011 to build upon the growth from 2010 for the EPC RFID world. Order backlogs are very healthy for the major chip makers. Growth may not exceed 2010 in percentage terms, but should match or exceed it in absolute number of units shipped. Most of the growth will continue to be in apparel retail, but other sectors, such as pharmaceuticals and retail electronics, will also see healthy growth.