The emergence of the Internet of Things (IoT) is one of the most significant events to hit the IT sector. According to Gartner, by 2020 there will be approximately 30 billion IoT devices in circulation. The question is: have device manufacturers implemented the changes necessary to profit from the manufacture of IoT devices?
While the majority of device manufacturers are starting to make a play to compete in IoT device market, there is a general misconception that simply selling more devices will produce a massive spike in profits. According to a recent Gartner report, device manufacturers must start thinking and acting more like software companies, leveraging the software applications they build into their products to reduce their costs, make them more innovative, and capture new revenue streams:
“Like vendors in the traditional software industry, device manufacturers need to protect and monetise the IP contained in applications,” Gartner says. “They can do this by adopting licensing and entitlement management systems that control access to the Internet-connected device, its functions and its features… By controlling product functionality and the features and capacities of Internet-connected devices via flexible licensing, device manufacturers will be better able to compete in current and new markets. They will also be able to come to market quicker with new products, new feature combinations and product enhancements.”
Similarly, according to a recent survey from Flexera Software, device makers are aggressively adopting new business models associated with monetising IoT. They are also leveraging software licensing and entitlement management – a mainstay in the traditional software industry. Results from the survey demonstrate that 60 percent of respondents are using licensing and entitlement management systems to develop new offerings that bundle device, services and/or consulting, and 17 percent more plan to do so within the next two years.
How software monetisation increases profits
There are many benefits to be had from leveraging automated licensing and entitlement management systems to monetise Internet-connected devices, including reduced manufacturing and supply chain costs. Companies can decrease the number of models they must manufacture by controlling features, capacity and configurations via software licensing and entitlement management allowing them to build once and ‘package’ functionality in any number of formats. Configuration of the products can be postponed until the exact requirements of the customer are determined. This manufacturing flexibility means that producers, distributors and resellers require fewer inventories, greatly streamlining the supply chain.
In addition, adopting a software monetisation model helps device makers uncover new markets and revenue streams. Manufacturers can easily offer product enhancements through software updates, and charge for the enhanced functionality based on a software maintenance and update model. Since software allows for flexible product configurations, manufacturers can quickly, easily and inexpensively package and price their devices to uniquely address new, emerging or niche markets that would previously have been impractical or prohibitive due to costs. The additional data generated by intelligent, connected devices can also be turned into intelligence and used to identify new potential markets and opportunities.
Finally, software monetisation business models extend product life. Much of the functionality of devices is managed and controlled using software, instead of being hard-coded into the device’s physical components. As a result, product upgrades and enhancements can be delivered using software commands communicated to the device over the Internet. The device then acquires more value to the customer over a longer period of time with minimal disruptions. This is good for the manufacturer too because it presents more opportunities for up-selling new functionalities with minimal expense and effort.
Software monetisation: build or buy?
Because software monetisation is such a critical aspect in driving incremental IoT revenue, the final question is: what is the most efficient pathway device makers should take to adopt this new business model? Software Monetisation is a specialised field that most manufacturers – even those with software development capabilities – don’t possess. So should manufacturers bring this expertise in house and build their own, or should they buy a commercially available solution?
Gartner paints three likely scenarios regarding the direction manufacturers will take. The ‘most likely’ scenario is to leverage a third-party, commercial licensing and entitlement management system:
“Device manufacturers will be dealing with a wide range of components (such as hardware, OS, communications and applications) to bring their IoT devices to market and to advance them,” it says. “Over time, more manufacturers are likely to seek packaged solutions to address LEM [licensing and entitlement management] needs. One reason for this will be greater awareness of this option, by observing fellow device manufacturers and the efforts of the licensing vendors. Another will be manufacturers’ desire to focus on the key requirements of their solution that only they can deliver, rather than on the requirements to protect it. They will source the LEM capability, in the way they source other system components, so they can allocate more resources to areas of core competency and differentiation.”
It’s clear that market forces are changing rapidly and device makers need to start the process of securing new revenue opportunities and efficiencies by leveraging licensing and entitlement management principles. Manufacturers do not have much time to act, and if they have not started adopting these new principles already, are at risk of being left behind.