New tech, new revenue

How device manufacturers can monetise the Internet of Things

Vincent Smyth
IoT image via Shutterstock

Talk of a third industrial revolution has swept across the IT sector. But has the Internet of Things really brought revolution to the manufacturers? Is it still in the beginning stages? Or is it all just hype?

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

Pundits argue about the defining attributes and timeline of the third industrial revolution – but few question that it is unfolding before us as we speak.  The proliferation of computers and software digitised the previously analogue economy, and brought with it unprecedented levels of automation, productivity and innovation.  With the introduction of embedded software and app-driven hardware into manufactured devices, and the ability, through software licensing, to monetise those device functions and features – devices have become intelligent solutions and capable of generating completely new types of revenue streams.  Connecting those intelligent devices to the Internet (the “Internet of Things”) is accelerating the third industrial revolution by enabling services, solutions and big data offerings around every day industrial and consumer goods.

So the question remains – has the third industrial revolution already swept through the manufacturing sector, is it just in the beginning stages – or is it still largely promise and hype?

Challenges inviting change

Major technology innovations don’t necessarily usher in technological revolutions. The conditions have to be ripe – businesses must be open to radical change.  One indicator of receptivity is the extent of the challenges they are currently facing.  The more pain – the more open enterprises are to new innovations to remedy existing challenges.

According to a recent survey, The Third Industrial Revolution: Intelligent Devices, Software, and the Internet of Things, published jointly by research firm, IDC, and Flexera Software, device makers are indeed experiencing a broad range of challenges. 48 percent reference the need to make more money among their biggest challenges.

Agility is also a major pain point – 47 percent said reducing time to market for creating new products/enhancements, and 47 percent think enhancing their ability to react quickly to changing market needs and/or new market opportunities are major challenges. Other pain points include security (42 percent) and reducing manufacturing costs (40 percent).

Device makers massively adopting intelligent and IoT capabilities

If conditions are ripe for transformative technologies to take hold, the question remains – are those technologies actually being adopted?

Perhaps the two most revolutionary advances in recent years to hit the device manufacturing industry revolve around intelligent and “Internet of Things” technologies.  Intelligent devices are defined as physical devices that include embedded software (or external software applications) that control product features, function and/or capacity.  Internet of Things devices are Internet-enabled devices that help accomplish specific user scenarios by bringing their data and functionality together with other devices.

According to the above mentioned survey, a significant proportion of device makers have already transformed their product lines to make them intelligent and connected.  50 percent of respondents said they develop intelligent devices today, and 30 per cent said they currently manufacture Internet of Things devices today.

Some examples of how device manufacturers are using Internet of Things to improve their offerings include:

  1. Product Life Extension. It 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.  Finally, it’s good for the environment, as less physical machinery needs to be manufactured and disposed.
  2. Automated Support. The Internet of Things provides enhanced support experience to customers, at significantly reduced costs to device manufacturers.  Manufactured goods have the ability to monitor operations and report back malfunctions and their causes –drastically streamlining the troubleshooting process. Potential problems get flagged by monitoring for trouble signs and patterns, and then resolved by the system by anticipating malfunctions before they actually occur and suggesting preventative remedies.  Many of these problems are addressable remotely through software commands, fixes and upgrades, thus eliminating the need to send personnel onsite to fix the problem.
  3. 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 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.

This trend line is steeply rising – indicating that the third industrial revolution is gathering steam.  21 percent of respondents that don’t offer intelligent devices today, said they plan on doing so within the next 12-24 months.  Moreover, 34 percent of respondents that don’t offer IoT devices today said they plan on doing so in the next 12-24 months.

Monetising embedded and external software apps fuelling new revenues in the third industrial revolution

While the innovations and use cases now possible with smart and Internet-connected devices serve as the fuel for industrial revolution – there must be an accelerant to ignite that fuel.  In a business context that accelerant is the lure of money.

If manufacturers are unable to profit from their innovations– investment in those innovations will cease.  If new revenue streams and higher profits emerge – then the revolution will explode and device makers will charge ahead and compete for first-innovator status and market share.

In last-generation devices, device makers were fairly limited in terms of monetisation options.  Their primary revenues derived from the sale of the hardware device, and perhaps maintenance revenue associated with the purchase.  The next big revenue opportunity typically would arise when that device required replacement.

Device makers must aggressively adopt new business models associated with monetising the embedded and external software that’s increasingly powering their intelligent and Internet-connected devices.  And to monetise the software they’re leveraging software licensing and entitlement management – a mainstay in the traditional software industry.

SEE ALSO: Internet of Things – where does the data go?

Leveraging software, software licensing & entitlement management, and Internet connectivity will also help address many of the big challenges highlighted above.  The Internet of Things enables the creation of entirely new revenue streams as well as opportunities to grow the customer base.  Using a software licensing model, 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.  For instance, rapid uptake of a unique product configuration in a particular geographical market might signal a trend that can be marketed more explicitly and then leveraged for other regions.  With the flexibility to run additional software on the intelligent device, there is also the option of selling loosely related products and services, developed by the same manufacturer or by partners.  In essence, connected devices controlled by software become highly flexible platforms delivering unprecedented value to customers and revenue to manufacturers.

For instance, leveraging software and software licensing, manufacturers can turn device features and/or capacity on and off as appropriate, allowing them to charge customers for capabilities they want, while not charging for capabilities they don’t. Managing entitlements also plays a key role. As an example, knowing which customers have which specific features turned on can allow the device makers to target segments of users for cross/up-sell opportunities.  Leveraging licensing and entitlement management, therefore, gives device manufacturers many more options to monetise features and functionality, allowing them to:

  • Produce different products on the same hardware chassis, driving down costs by eliminating the need for additional production lines and minimising the number of stock keeping units (SKUs) that have to be kept in inventory.
  • Create innovative products on existing hardware chassis. This reduces the cost and time to bring differentiated products to new or existing markets.
  • Up-sell existing customers by electronically activating additional device capabilities or capacity. This makes it easier to capitalize on incremental revenue opportunities.
  • Meet evolving customer needs without requiring them to swap out hardware or otherwise disrupt their operations. This makes for a more positive ongoing customer experience.

Interestingly, 60 percent of respondents in the aforesaid survey are already using licensing and entitlement management systems to develop new offerings that bundle device, services and/or consulting, and 17 percent more plan on doing so within the next two years.

Device makers can also use software to enable usage-based consumption models – allowing customers to pay based on how much they consume – a concept also gaining steam in the traditional enterprise software market.

Enabling shift from products to solutions

As device manufacturers seek ways to deepen their relationships with customers, a key goal is to become more strategic and provide ongoing solutions tailored to evolving customer needs.  Leveraging software, licensing and entitlement management can enable greater agility to flexibly package, deliver and sell intelligent and IoT devices.  Services are also a critical element to selling solutions.

For instance, medical device makers can use big-data to provide better diagnostics based on segmenting national, socio-economic or ethnic characteristics of an overall population pool.  Or auto manufacturers can equip their cars with every feature and upgrade available – and simply turn on or off the feature via software and licensing based on what the customer has purchased.  In these scenarios, the device maker can make a strategic decision about whether or not to monetise a feature or to provide it at no cost.

Security during revolutionary change

Device makers are acutely aware of the risks associated with the rapid change that intelligent and Internet-connected devices are ushering in.  One of the primary concerns associated with internet-connected devices is the risks from hackers exploiting vulnerabilities and using applications on your device as a vector for viruses/malware. To reduce the hacker risk and exposure from their internet-connected devices, device makers must be sure that, for applications that sit at the operating system level, they are using tamper resistant licensing code to help reduce hacks.  They must also invest the time to reverse engineer their embedded software on the device and make changes at the machine level if necessary to strengthen protection.

SEE ALSO: Securing the Internet of Things

Device makers must also ensure that the applications on their devices, mobile device management systems and other systems have an easy, automated mechanism for getting the latest security patches and updates as fast as possible.  It is also helpful for manufacturers to encourage and incent their customers to register their devices, and remind them to upgrade their firmware or software on these devices.  In addition, device makers should be proactively monitoring their devices for application issues, as well as monitoring and tracking patch levels to ensure awareness of their exposure, and to make sure only authorized users are using your applications.  Finally, device makers should have the ability to send software and firmware patches and updates to entitled customers using secure download URLs that expire.

Key takeaways

Device makers are emerging from a period of significant challenge – characterised by low margins, stiff competition and brittle manufacturing supply chains. They must retool their devices to make them intelligent and Internet-connected, opening up new ways of creating value for their customers.  Adopting software, licensing and entitlement management strategies to transform their business models and monetise their innovations is key.  Such an approach will help them move up the value chain to become strategic solutions providers incorporating new products and services into the mix continuously.

Call it evolution or revolution.  The fact remains that device manufacturing is in the throes of massive and accelerating change that is re-forming the marketplace, creating new competitors, new winners and new losers.  And the race is on as existing and emerging competitors jockey to come out on top.

Vincent Smyth
Vincent Smyth is Senior Vice President EMEA at Flexera Software

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