We may be in the midst of a third industrial revolution — one driven by intelligent devices connected to the Internet, enabling services, solutions and big data offerings around every day industrial and consumer goods. Software licensing and entitlement management will be the heart of this new industrial revolution, according to a report by Flexera Software and IDC.
"The industrial revolution came about as we moved from human labor to machine automation," says Steve Schmidt, vice president of Corporate Development at Flexera Software. "Then a second industrial revolution came about as systems were put in place and new energy sources became available: railroads, iron and steel production, manufacturing automation, the use of steam power, oil, electricity and electrical communications."
This new and third industrial revolution, Schmidt says, began with the proliferation of computers and software that have digitized our previously analog economy, resulting in new levels of automation, productivity and innovation. And now the rise of embedded software and app-driven hardware in manufacturing devices has created the environment in which device functions and features can be monetized by turning devices into intelligent solutions capable of generating new revenue streams.
Hardware is the Solution
The future that IDC and Flexera are predicting, and which is already manifesting in some areas, like medical equipment, is one in which hardware is more solution than product — Hardware as a Service, if you will.
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"Hardware device makers are faced with a variety of challenges associated with thin margins, inflexible and costly supply chains and limited revenue streams," says Amy Konary, research vice president, Software Licensing & Provisioning, IDC. "By transforming their business models via software, Internet connectivity and licensing capabilities, device makers can enter new markets, diversify and increase their revenue streams, improve margins and differentiate from competition. The survey data indicates that that is exactly what is happening now."
The survey found that 60 percent of device makers are using software licensing and entitlement management systems to monetize their intelligent and IoT devices. An example might be a maker of medical diagnostic equipment that charges per test rather than selling the device itself. Clinicians essentially acquire a license that allows a certain number of tests, and the license can be renewed once the available tests are used.
Manufacturers of these devices could also turn device features and/or capacity on and off as appropriate, allowing them to charge customers for the capabilities they want, while not charging them for the capabilities they don't. In this way, customers don't have to pay for services they don't need, and manufacturers can potentially simplify product lines — they can manufacture a single model that can be customized according to need rather than multiple variants.
Services on the Rise
The report found that the number of device makers who say that 50 percent or more of their revenues come from hardware will decline by five percent over the next two years, while the number of device makers who say that 50 percent or more of their revenues come from services will increase by six percent over the next two years.
"The report supports a long-proven truism in the high-tech arena — that innovation, alone, isn't sufficient to transform an industry," says Vikram Koka, vice president of Intelligent Devices & Internet of Things at Flexera Software. "There must also be a practical means to monetize new technology in order to profit from it. Software- and Internet-enabled products are spawning a vast new category of products and services previously unimaginable."
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For the report, The Third Industrial Revolution: Intelligent Devices, Software and the Internet of Things, Flexera and IDC surveyed more than 583 executives and IT professionals from independent software vendors (ISVs), intelligent device manufacturers and end-user organizations that consume enterprise software.
While there has been a great deal of hype around intelligent devices (physical devices that include embedded software or connect to external software that control product features, functions and/or capacity) and the Internet of Things (IoT), reality is catching up to the hype, especially in the industrial space.
The report found that only 30 percent of device makers currently develop IoT devices, but more than 34 percent more plan to do so over the next two years. Additionally, 50 percent of respondents said they currently develop software-enabled intelligent devices and another 21 percent plan to make their devices intelligent over the next two years.
This has already led to the creation of new product and services categories and there will soon be many more: 79 percent of respondents say they are or plan on delivering remote monitoring and maintenance to their product/service mix; 66 percent will add business intelligence (BI) capabilities; and 37 percent will improve their supply chains with new services, like automatic replenishment of used goods (for instance water coolers that notify the service provider when they're empty).