Disclaimer: Currently I am employed by Microsoft, but my views and thoughts are still my own. The reason I joined Microsoft was, the work Microsoft have been doing for last couple of years in Open Source Space. Today I am a advocate for Open Source representing Microsoft.
IoT as a concept is nothing new. Most of the industries has been doing automation for a long time, remember the PLC we had back in the day. IoT is just a new iteration of PLC. No you are not limited to the compute power you have available in your own data-center, you can now scale to the cloud.
In Azure, IoT architecture does not need to be separate from rest of the infrastructure in Azure. As a matter of fact, it should be part of it.
In this session, I talk about how you can add IoT to your existing infrastructure in Azure.