Software Monetization Featured Article

The Evolving Business Model for High-Tech Equipment Manufacturers

April 10, 2017

Properly managing and monetizing high-tech hardware equipment is no easy feat these days. The Internet of Things (IoT), M2M communications and an increasingly mobile and agile device climate have driven changes in the way hardware is architected and a majority of a company’s intellectual property (IP) actually resides in the software powering the equipment.

This challenge is compounded by an increasingly competitive and crowded marketplace marked by low costs, a low barrier to entry and very little product differentiation. Manufacturers are left trying to market and protect their hardware and IP while remaining unique and competitive, something that is simply not possible using traditional hardware licensing and monetization practices. According to Gemalto (News - Alert), the best course of action for manufacturers is to migrate to a new software-based business model to glean the most value out their software-driven high-tech hardware devices.

One of the biggest barriers to moving toward a software-based business model is a relatively low barrier to IP theft. Previously, in the hardware-centric equipment world, IP theft involved reverse engineering and manufacturing actual hardware, a pretty big undertaking. The software-defined model has changed things significantly, and manufacturers need to protect their IP while simultaneously keeping costs low. Gemalto suggests a gradual and progressive shift for companies interested in changing their business models, comprised of five phases.

The first phase is the starting point for most equipment manufacturers, and traditionally involves selling solution-specific hardware. These companies evolve over time to the second phase, in which they offer solution-specific software along with their hardware. By the third phase, manufacturers have developed a solution that incorporates off-the-shelf hardware with solution-specific hardware, packaged with solution-specific software. Pure software solutions are also typically added to the offering during this stage. In the fourth phase, the business has moved on to off-the-shelf hardware packaged with solution-specific software, along with some additional software-only products for enhanced value. And by the fifth and final stage, the manufacturer has moved on to selling solution-specific software, with customers providing their own hardware.

Licensing and monetizing solutions from the third phase on can be a challenge, and practices will need to evolve along with the business model. In phase three, for instance, hardware keys remain the most efficient solution since offerings are still physical and hardware-based. Once pure-software offerings enter the picture, however, manufacturers would do well to implement a software-based licensing system to protect and monetize those solutions. In many cases, this may mean having two types of licensing systems running simultaneously, adding complexity to back-office integrations as well as the entire licensing process.

Fortunately, many licensing platforms exist to overcome this challenge, enabling licensing for both hardware and software-based solutions. These advanced platforms are specifically designed to help manufacturers make the steady migration from hardware key licensing to a software-based approach, accommodating all phases of implementation to remove complexity and integration challenges.

A majority of high-tech equipment manufacturers are already in the process of migrating to a software-centric business model to remain competitive in today’s technology climate. Having the proper tools in place to license and monetize their offerings as they make the transition will be critical to their success and viability in the always-connected marketplace.

Edited by Alicia Young