Thwarting grey market counterfeiting

It goes without saying that the Internet of Things (IoT) made headlines in 2016 from a business-to-business technology perspective, and in 2015 and 2014 for that matter… As we near the end of 2016 and look forward to the vast possibilities of 2017, it is quite apparent that over the next decade, more or less everything interesting from a tech perspective will contain a semiconductor part. 

Most of these components will incorporate connectivity – including Wi-Fi, low-power cellular or other low power, wide-area networking technology. Many of these silicon chips will also integrate energy harvesting capabilities to power themselves (more or less indefinitely) without needing an electrical source or battery change. This will greatly influence the way we build and manage software. A three-tier IoT architecture will more than likely surface, where edge sensors connect to intermediate aggregation points, such as gateways, and then to the data centre or cloud. 

At the same time, distributed and elastic computing will accelerate, and edge and aggregation devices will increasingly become defined by software and virtualise functions. However, the chip business is troubled. The consistent swelling of transistor density each year, known as Moore's Law, that has accelerated computing innovation for the last 50 years appears to be slowing and the investment required to manufacture new semiconductors on the latest leading-edge technologies is growing. At the other end of the spectrum, it is easier than ever to design lower-quality chips or hardware and have them produced by contract manufacturers, predominantly in Asia, using less-up-to-date processes. 

This has led to intense commoditisation in many silicon and hardware segments. It is common practice for semiconductor companies to hire contract manufacturers to outsource production of their silicon components. In order to do so, silicon companies need to present their secret recipe to the contract manufacturers who then act as a factory – producing and shipping units of the design on behalf of the hiring firm.

Spoiling grey market abuse

A very disturbing trend is emerging in contract manufacturing, placing intelligent device manufacturers at risk.  Device manufacturers who outsource their manufacturing process to third parties may realise that some of those third-party manufacturing shops are over-producing the contracted-for device and selling the overage stock on the grey market for personal profit. It is clearly one of the biggest threats of contract manufacturing, because there is no control over how many of these production-run batches are being made, which could conceivably make their way to the grey markets. 

Grey market production is a massive issue for different players along the electronics value chain:

  • Hardware original equipment manufacturers catch contract manufacturers building a few extra runs of the latest, hot device and selling it to a pirate, or to someone who will slap their own logo on it.
  • Fabless chip vendors face the same leakage problem with their contract manufacturing fab.
  • IP vendors who have their product incorporated in a chip, but make money through collecting royalties paid by the final electronics OEM, suffer leakages from the first and second examples.

The craziest aspect of this is that grey market goods are not counterfeit! They are made to the original device manufacturer’s specification and are identical to the legitimate products. 

However, they are sold on the grey market at a fraction of the price and there is no way to distinguish a grey market good from the original – placing the true manufacturer’s brand at risk and profits in jeopardy.

Software monetisation fights back

Thankfully as we move into 2017, manufacturers suffering from grey market abuse can look to the rising role software is playing to control, monetise and protect Internet-connected devices. Increasingly IoT providers are leveraging Software Monetisation technology to control their products’ features and functionality, rather than hardcoding that technology straight onto the device. 

Leveraging software licensing and entitlement management in this way gives manufacturers the flexibility, for example, to build multiple products and product versions by simply governing which features get turned on and off with software. These Software Monetisation concepts can also be applied to solve the grey market problem. For instance, manufacturers can require that any new device act like E.T. and “call home” to a cloud-based license server to acquire an activation license so that the device becomes operational.  If an illegally manufactured device tries to do this, it will not be granted a license and will not function. 

Using this strategy, device manufacturers may not be able to prevent the illegal manufacture of extra-contractual goods by a third-party manufacturer – but they can certainly prevent those devices from functioning. Another common approach is to add a software license during the manufacturing process. The device manufacturer can, for example, deliver a license for 10,000 devices. Once the 10,000 devices are made by the third-party manufacturer, they can no longer obtain licenses and are therefore unable to produce additional product. When the devices wake up, they check for a license before booting up – and will not operate if the 10,000 device licenses are surpassed.   

Software licensing can also be used to turn device features, and/or capacity, on and off as needed. In many cases, it is not the device itself, but the power of the software inside that makes the device valuable and attractive to consumers. Manufacturers and their official dealers or channels hold the keys to turn on capabilities, charge for those capabilities – and when the device is no longer needed, turn those capabilities off.   

To begin, manufacturers can embrace two best practices to realise the full value of the software embedded on their devices or that control the devices:

  • Get smarter about how software licensing strategies can help their business – to foil grey market abuse, and cultivate top-line business performance. While preventing overuse and abuse, software licensing strategies also help monetise the value manufacturers deliver through feature sets, services, volume/user thresholds and upgrade rights.
  • Implement complete systems for accurately tracking and managing software entitlements (use rights and the terms of those rights). Purpose-built entitlement management systems are essential for decreasing operating costs, pinpointing up-sell and renewal opportunities, gaining enhanced visibility into channel sales, and cultivating overall insight into market dynamics.

Together, these two disciplines can have a powerful impact on a device manufacturer’s business performance. Insufficient licensing practices could permit unauthorised resellers to sell devices bundled with software. On the other hand, effective licensing and entitlement controls help prevent these unauthorised grey market activities. 

The net result is that hardware device businesses need to work more intelligently to control, secure and monetise their devices to hinder grey market production. Software Monetisation technologies can help design houses and IP vendors with SKU reduction, feature clipping/add-ons and revenue leakage. Leading silicon companies are latching on to these technologies quickly, and more are predicted to rightly flock to them as we enter 2017.

Image source: Shutterstock/everything possible
Eric Free, SVP, Strategic Growth,
Flexera Software