Internet of Things (IoT): Boon or Bust for Hardware Vendors?

While analysts are predicting billions of smart devices connected to the internet to drive a new industry, some are saying what has all the markings of a huge boon for hardware vendors is likely to turn out to be a bust.  The problem is that margins on hardware continue to fall.  Manufacturers increasingly are only profitable after selling huge volumes because of the ever shrinking margins on the products that they sell.

For manufacturers to be successful an Internet-of-Things marketplace, they’ll need to derive money not from the hardware, but from the software.  One reason why hardware prices are falling is because of an increasing preference of buyers to buy commodity hardware and to then configure and add intelligence to their system with software.  This has led to a rising interest in things like software-defined networks, software-defined data centers, and software-defined storage.  Even the software-defined enterprise is being promoted.  To make money, hardware manufacturers will need to provide more than commodity devices.

Gartner says that increasingly manufacturers are realizing that they need to develop software and to leverage software licensing and entitlement management as new sources for revenues.

Laurie Wurster, research director at Gartner, said that “if you keep lowering your price you lose out, especially if price goes below the cost of production.  So you need to look for ways to differentiate your device from someone else and the way to do that is going to be with the intellectual property that’s going to be running on that device.”

Mathieu Baissac, VP of product management at Flexera Software, said that “once you build software licensing into your business model, the opportunities to flexibly configure your products and offer value added services is virtually infinite.  And it doesn’t result in an increase in manufacturing costs because you control this all through software licensing and entitlement management.”

Gartner’s Wurster said that “IoT transforms all hardware and appliance OEMs into software providers. Licensing and entitlement management technology provides the locking capabilities that enable manufacturers to protect and monetize the embedded software IP running on connected intelligent devices.  Licensing and entitlement management also enables flexible pricing and packaging, enabling the manufacturer to bundle product features, capabilities and capacities, ensure payment, provide upgrade paths, as well as new revenue streams.”