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High Tech Manufacturing is Transitioning to a Software-Based Model

August 19, 2016

High-tech manufacturing is in a period of transition as hardware-based businesses are shifting to a more software-based model. This is due largely to the influx of hardware solutions being based on off-the-shelf components. The software that runs the hardware is increasingly becoming the real point of differentiation.

This shift toward commoditized hardware is causing companies to base more of their business on software. It is a gradual process, but the transition is happening for many high-tech manufacturing companies, according to a recent white paper by SafeNet (News - Alert), Exploring the Business Model Evolution of High-Tech Equipment Manufacturers.

Evolving from an equipment manufacturer business model into a software company is typically a multi-phase process which begins with integrating solution-specific software alongside the current solution-specific hardware and then offering added value software packages in addition to the traditional hardware-based offering.  

The move to a software-based business model will drive profits and give firms—that transition effectively—a competitive advantage. However, there are still significant challenges.

Intellectual property (IP) theft used to be complicated and involved reverse engineering and cloning of unique machine design. Now stealing IP is simply about being able to access and copy code making it difficult for companies to sustain competitive advantages.

Another challenge is finding a balance between maximizing profits from software investment, and expanding market share by offering solutions at different price points while reducing overhead by scaling back the number of different hardware and software configurations produced. This is becoming increasingly necessary as global competition continues to rise.

To overcome these challenges while transitioning from a hardware company to a software company, traditionally companies have integrated hardware-key solutions to provide off-the-shelf IP and copy protection.

“The licensing mechanism enables vendors to sell a range of products, based on a single codebase, and enables them to monetize the value-added features,” noted SafeNet. “The IP and copy protection mechanisms enable vendors to avoid cloning of their products, and thus maximize the life span of their competitive advantages.”

But, as the paper noted, the introduction of pure software-based solutions poses a challenge in that a company now must have both hardware-based and software-based licensing mechanisms. This adds complexity to the back-office systems and complexity to the licensing and security code that is embedded in shared software components. It results in increased maintenance and operational costs and lack of flexibility for changes to a company’s business model.

The solution is leveraging a similar licensing scheme for both hardware keys and software licenses.

“The more advanced platforms are designed to enable vendors to change from a hardware key to a software license, without changing their product code,” noted the SafeNet paper. “These modern platforms typically contain numerous business models out of the box, so that typically-complex licensing implementations can be spared.”

By using such a platform, a company has the ability to seamlessly progress through the transitional phases from a hardware and software business model to a purely software-based model.

“Equipment manufacturers that embrace this transition,” noted the paper, “will be more nimble and better positioned for the future.”

Sometimes transition can be good.

Edited by Peter Bernstein