2016 trends: The Internet of Things and software monetisation

The Internet of Things (IoT) revolution is set to dramatically alter the manufacturing economy.

Internet-connected devices, and their promise of delivering higher profits, revenues, differentiation and market share means manufacturers are pouring research and development into developing IoT devices.

And as they transform product lines to take advantage of Internet connectivity, manufacturers are transforming their business models to enable innovation, flexibility and new revenue streams.

A Software-Centric Business Models

In many respects, the IoT is fueling a third industrial revolution. The first industrial revolution ushered in a global transformation as the means of production transitioned from human labour to machine driven automation. The second accelerated change through the growth of the railways, iron and steel production, manufacturing automation, the use of steam power, oil, electricity, and electrical communications.

With the introduction of embedded software and app-driven hardware into IoT devices, and the ability, through software licencing, to monetise those device functions and features – devices have become intelligent solutions capable of generating completely new types of revenue streams. Connecting those intelligent devices to the Internet is accelerating the third industrial revolution by enabling services, solutions and big data offerings around every day industrial and consumer goods.

In order to participate in this new industrial revolution rather than be left behind in its wake, IoT makers are becoming software-centric. This is so because the value of physical devices more and more is defined by the embedded software inside them or the control software that helps to manage them. This is obvious when we consider our own smartphones and tablets – they’re valuable to us because of the specific apps we each run on them that make them personal and productive for our own purposes. The same principle applies to any other IoT device – from telecommunications and medical devices to industrial automation and automobiles.

Manufacturers are already starting to think and act more like software companies, leveraging the software applications they build into their products as a driver to reduce manufacturing costs, increase product innovation, and capture new revenue streams. Taking a software-centric approach means device makers are now re-designing products from fixed-function, disconnected devices to flexible, seamlessly connected systems – and in turn making more money.

Reaping the Rewards of Innovation

IoT devices are transforming customers’ relationships to everyday industrial and consumer objects. For instance, an old-world thermostat used to simply allow us to control our heating and air conditioning units may sell for 20 or 30 Euros. Internet-connected (i.e. Google Nest) thermostats have evolved to become part of the home-automation movement – giving us apps, tools and data on our environments – and they sell for five or ten times the price. As IoT manufacturers seek ways to deepen their relationships with customers, technology is allowing them to become more strategic and deliver tailored solutions.

While the IoT opens up myriad opportunities for innovation – it is the lure of money that will drive investment. In last-generation devices, device makers were fairly limited in terms of monetisation options. Now, however, device makers are aggressively monetising the embedded and external software that’s increasingly powering their intelligent and Internet-Connected devices.

According to a recent Gartner report, this requires software licencing and entitlement management automation – a mainstay in the traditional software industry.

Tesla effectively illustrated the power of software monetisation when it recently announced it was offering a software upgrade to its cars to enable a high-speed auto-pilot function. For a fee Tesla licenses the software upgrade to the customer and wirelessly downloads the new software directly to the automobile – essentially modifying the auto’s core functionality. This is great for customers, because they can tailor their IoT device (in this case, a car) on an ongoing basis, without having to replace the physical device. It’s also great for Tesla, because they just added an additional $2,500 in revenue to the existing car sale by delivering the feature – widening its profit per unit.

There is a dark side to becoming an IoT manufacturer, however. IoT devices are by-definition exposed to the Internet and therefore subject to software vulnerabilities and hacking, as illustrated by recent news of a hack into a Jeep Cherokee vehicle, resulting in a recall by Chrysler Fiat. As incidents of these device hacks continue to mount, device makers will need to make security more bullet-proof – both to prevent hacking and to quickly remediate the problem if hacking does occur.

Device makers will need to adopt measures such as tamper resistant licensing code, investing the time to reverse engineer embedded software on the device, monitor and track patch levels to be aware of exposure, and send software and firmware patches to entitled customers using only secure download URLs that expire.

Vincent Smyth, GM & Senior VP EMEA, Flexera Software

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