The physical thing, whether its an earth mover, container or a kiosk, forms the first layer of the value‐creation model. It supplies the first direct, physical benefit to the user - in the form of storing items in the container, digging a hole for new construction or providing a digital directory in a shopping mall. As these physical entities (or Things) are always tethered to a location it provides benefits at this layer only to to its immediate environment.

In Layer 2, the physical thing is equipped with a purpose built computer and sensor technology. These sensors will measure local data and provides local benefit such as showing the temperature on a screen.

This is the MOST critical layer of the Internet of Things stack. Connectivity doesn't deliver added value, Analytics that provides actionable insights does. This layer includes software and correlation of various structured and unstructured data to give meaningful insights. Within this layer Artificial Intelligence (AI) and popular machine learning algorithms like Deep learning and reinforcement learning reside.