Capitalizing on the Industrial Internet of Things: Revenue potential
To profit from a software business model transformation, device makers must have the systems in place to monetize the full potential of software investments and protect those investments in intellectual property. Hardware manufacturers must rethink their traditional business models and consider the role that licensing and entitlement management play in maximizing revenue potential. What would a software-centric business model look like?
Connected systems, software-centric approach
Taking a software-centric approach means manufacturers must re-design products from fixed-function, disconnected devices to flexible, seamlessly connected systems. A software-centric approach streamlines all aspects of the supply chain, from manufacturing to monetization.
For instance, let’s say a telecommunications company has developed a "connected" commercial video surveillance camera with 10 features. Using the software-licensing-driven model, the telecommunications company need only manufacture one physical model. Using software and the power of licensing, the device maker then simply turns on features one through three to sell as the "basic" model. It could then turn on features one through six and sell that model as the "premium" model or turn on remaining features and sell it as the "platinum" model. Three models that previously required three manufacturing supply chains are now reduced to one.
Moreover, this software-centric model adds flexibility and nimbleness making it easy for manufacturers to quickly configure products to take advantage of emerging market trends, without having to alter their physical supply chain. For instance, if software features one, four, five, and nine are popular with Chinese customers, a quick licensing reconfiguration results in a model optimized for the Chinese market.
A connected product with a back-end, entitlement-management system also would make it easy for the device manufacturer to generate new revenue streams for the camera. For instance, the user of the "basic" camera could sign on to the device’s portal and purchase a 30-day trial for the "premium" model. Once the credit card data is provided, the system will unlock the premium features in the camera and without so much as a delay, the user has an upgraded device, and the manufacturer has generated a new revenue stream from the additional purchase. Depending on how the trial was set up, at the end of 30 days, the full upgrade charge may be debited, and the camera is fully upgraded. Or, through the entitlement-management system, the camera would automatically revert back to the basic model.
Software-centric, with security
The same principles apply to IoT manufacturers across the spectrum of industry. Markets as varied as building automation, telecommunications, and gaming could benefit from adopting a software-centric business model, as could oil and gas equipment makers, test and measurement device manufacturers, and medical equipment manufacturers.
Although building and creating these devices is a major part of the device manufacturer’s job, installing the software to allow these devices to connect and perform is crucial. The important thing when designing a connected device is to install security measures from the start. In this sense, manufacturers must ensure that applications use tamper-resistant licensing codes to help reduce hacks. Companies need to invest the time to reverse-engineer embedded software on the device and make changes at the machine level if necessary to strengthen protection.
This type of embedded licensing model has been successfully used in many devices: mobile phones with unlockable GPS functionality, routers sold in tiers based on number of supported ports, and cameras with different signal-processing algorithms based on available licenses.
Three ways to monetize Internet-connected devices
Using automated licensing and entitlement-management systems to monetize Internet-connected devices offers many benefits, including:
1. Reduced manufacturing and distribution costs: Internet-connected devices controlled by embedded software significantly reduce manufacturing costs. Companies reduce the number of models they must manufacture by controlling features, capacity, configurations, and throughput via software, licensing, and entitlement management, allowing them to build once and "package" functionality multiple 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.
2. New markets and revenue streams: IoT enables the creation of entirely new revenue streams as well as opportunities to grow the customer base. Using a software-licensing model for instance, manufacturers can easily offer product enhancements through software updates and charge for the enhanced functionality based on a software maintenance and update model. There are opportunities to charge for new levels of software support while simultaneously delivering a better customer experience. And because 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.
3. Product life extension: Licensing and entitlement management extends the life of the manufactured device. 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. This enables the customer to derive more value from the device over a longer period of time with minimal disruption. It’s good for the manufacturer too because it offers more up-sell opportunities for new functionality at minimal expense and effort.
Licensing is the enabler
Licensing and entitlement management software is the enabling technology that helps intelligent device manufacturers to make their products Internet-ready and personalize offerings without having to manufacture multiple models.
Simple changes to the software in the device enables manufacturers to customize the product based on customer needs by managing how it behaves—for example, by activating or deactivating features, setting device capacity, and otherwise controlling the behavior of the product. This greatly simplifies product lifecycle management and facilitates supply chain management.
Big data provides more insight
The usage data provided by the software-controlled device also can offer insight into how customers are using hardware, what software they use most often, and new services that could potentially be created. Furthermore, product usage information enables manufacturers to make conscious choices pertaining to trade-offs between cost and value of service when packaging products and services for customers and markets.
10 software-centric business considerations
There are 10 key points intelligent device manufacturers should consider when making the leap to a software-centric model. Device manufacturers should:
- Secure business buy-in for the transformation-this is broader than just engineering or product management and requires coordination across business groups.
- Understand the traditional software licensing methodology and its proven approaches that can be leveraged in the intelligent device context.
- Determine the appropriate software license compliance policies and enforcement mechanisms among a wide spectrum of available options, anticipating the flexibility needed to make changes later as business conditions change.
- Understand the difference between delivering hardware and digital goods-the distribution mechanisms should be coordinated, but can be unique.
- Understand the software value lifecycle-as opposed to a one-off hardware transaction; it is an ongoing process and is increasingly subscription-based.
- Create business processes to support the value cycle of the software.
- Implement a customer self-service portal-it can reduce operational costs and increase customer acceptance of software.
- Define and execute a product management and go-to-market strategy.
- Implement sales training and compensation policies-selling is not about selling numbers of hardware pieces, but about selling "value."
- Continuously fine-tune strategies for product development, delivery, and execution to optimize revenue and margins.
By using licensing and entitlement management, manufacturers create connected devices that unlock new revenue streams, protect intellectual property, and implement configure-to-order manufacturing-dramatically reducing inventory while facilitating greater responsiveness to changing market conditions.
– Steven Schmidt is the vice president of corporate development at Flexera Software. Edited by Eric R. Eissler, editor-in-chief, Oil & Gas Engineering, firstname.lastname@example.org.
- Hardware manufacturers must rethink their traditional business models and consider using licensing and entitlement management.
- A connected product with a back-end, entitlement-management system would make it easy for the device manufacturer to generate new revenue streams.
- Licensing and entitlement software lets manufacturers personalize offerings without having to manufacture multiple models.
By applying pay-to-unlock-features to physical objects, manufacturers can streamline production, increase margin levels, and quickly add revenue with the swipe of the user’s credit card.
– See related stories about the Industrial Internet of Things linked below.