MONETIZING THE IoTSPONSORED BY FLEXERA SOFTWARE

INTRODUCTIONAs businesses in all corners of the world grapple with theFourth Industrial Revolution and digital transformation, it’s clearthe Internet of Things (IoT) will continue to play a fundamentalrole. However, IoT is still maturing and, while initial trials andpilot projects are proving the value IoT apps can add, moreneeds to be done to enable better IoT business models and toachieve optimized monetization. This new report by IoT Nowwith support from Flexera Software explores the challengesthat enterprises face in developing business and monetizationmodels for IoT.

Many industries, including telecommunications, medical, manufacturing, retail andtransportation are undertaking IoT initiatives to capture their share of the trillion dollarIoT market. Some IoT deployments are moving beyond initial trials to implementationand some are just getting started. The challenge now, is how businesses cangenerate revenue from these IoT initiatives. Revenue in this case encompassesefficiency gains, cost savings and net new IoT profits.

The vendor landscape is also transforming. Traditional hardware manufacturers thatare looking to become IoT providers and offer hardware, software, connectivity andservices to enterprise organizations will be presented with a series of monetizationchallenges. There is much to consider and several different business models andapproaches are emerging to take organizations into the profitable world of large-scaleIoT offerings.

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MONETIZATION FOR MANUFACTURERS

Why are traditional device manufacturers transitioning to IoT offerings?Overall, the consensus among most analysts is that IoT will be the new norm. IoT isincreasingly cited by management as critical to the future success of theirorganizations. For many traditional manufacturers, this means becoming a softwareand services provider to support their IoT offerings. Manufacturers are making theleap so they can:

• Grow profits by driving top line growth and recurring revenue streams – to survive in this fast paced and emerging IoT world, manufacturers need to rethink and transform their business models to create new IoT offerings through product innovation and differentiation via software, services and data. The value is no longer in the device but in the software, services and data and manufacturers that capitalize on this by offering and monetizing service models can build recurring revenue streams through subscription models as well as usage or outcome-based business models.

• Streamline manufacturing costs and operational efficiencies – in today’s highly competitive market, devices are commoditized and manufacturers are seeking ways to reduce manufacturing costs and simplify hardware production processes. Many manufacturers are adopting technology to electronically control and provision device capability and capacity while at the same time implementing remote device monitoring to streamline support and service processes. This is a baseline for success for IoT solution providers.

• Deepen relationship with customers and deliver an excellent customer experience – with software and services playing a major role in IoT offerings the requirements regarding customer experience change completely. Manufacturers, channel partners and customers alike need complete visibility into what each customer owns and is entitled to in terms of upgrades, maintenance and services – through multiple tiers of distribution.

Hardware to Software + Services transition is critical for IoT successManufacturers that can become more strategic and provide IoT solutions to deepenrelationships with customers will be well positioned to grow profits and trulycapitalize on the IoT. For many traditional manufacturers the transition to software,services and data will not be easy. This shift brings with it a whole new set ofbusiness requirements that are very different from managing a traditional hardwarebusiness. Couple that with an expectation of increased pace of IoT innovation andhigh customer expectations; it’s a daunting task.

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THE POTENTIAL FOR THE IOT MARKET IS ENORMOUSResearch firm IDC’s Vernon Turner has said that, by 2025, approximately 80billion devices will be connected to the internet. Today, about 11 billion devicesconnect to the internet, and IDC predicts that will nearly triple to 30 billionby 2020 before almost tripling again to hit 80 billion devices five years later.

Machina Research has projected that, between 2014 and 2024, there will be atotal of US$1.3 trillion in IoT revenue available to companies that havesophisticated monetization capabilities – a significant part of the totalanticipated revenue opportunity of US$4.3 trillion.

Global management consultancy McKinsey & Company estimates the widerIoT to generate between $4 trillion and $11 trillion by 2025.

In spite of these glowing prospects, there may be a disconnect between theexpectation and the reality. In a recent survey, Cap Gemini Consultinguncovered that while 96% of business leaders globally said their companieswould be using IoT in some way by 2017, 70% of organizations do notgenerate service revenues from their IoT solutions.

The good news is that manufacturers of internet-connected devices are poised toreap the rewards of higher profit margins and recurring revenue streams fromhardware, upgrades, applications, data and services if they can adopt processes andtechnology platforms to drive the transformation. Flexera Software has defined theingredients of a successful formula the combination of a hardware platform,software and services, and a purpose-built software monetization platform:

• Hardware platform – This is made up of the device and its component parts

• Software and services – These enable manufacturers to add value and achieve differentiation by utilizing SaaS, cloud and mobile apps, as well as deriving value from collecting device and software usage data for analysis. Control and provisioning of features and functionality for hardware, software and services are also part of this category

• Software monetization platform – This encapsulates automated and secure processes for licensing, software delivery and updates as well as in-product analytics. In addition, an entitlement management system manages which device features, functions and services a customer has purchased and is entitled to and provides end customers with a self-service portal.

Manufacturers that adopt an approach that encompasses the above are poised tocreate tremendous opportunities for innovation and success in transitioning from atraditional manufacturer to a platform and services provider. Monetizing software andservices is essential to profitability – and the ability to monetize every single productcapability and capacity is key to profitability.

"The IoT is creating a new type of software vendor for whomlicensing and entitlement management (LEM) is vital to protect,differentiate and monetize their offerings," Laurie Wurster, aresearch director at Gartner, has said. "We expect that by 2020,a failure to put in place a LEM (software monetization) systemwill result in a 20% drop in potential revenue generated fromsoftware for device manufacturers connecting to the IoT."

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Figure 1: Softwaremonetization drivesinnovation

NEW IOT BUSINESS AND MONETIZATION MODEL USE CASESIoT offers opportunities across many industries. Some interesting use cases include:

• Anything as-a-service – In this scenario, the producer started to monetize embedded and server software across an entire public safety value chain from radios and cameras to video processing and jail management. In this IoT model, the solution is delivered as a service model and priced per public safety officer per year.

• Expand value with an ecosystem approach – In this scenario, a casino expanded its value within a broader ecosystem and maximised revenue per patron with software-driven gaming machines integrated with casino management software and digital signage.

• Capture usage – In this use case a high-end medical device manufacturer wanted to secure per procedure revenue and utilised metered, pay-per-use or overdraft models, to capture more revenue and make it more affordable to address variable market needs.

• Monetize connected and managed devices – This example involves a medical device manufacturer that embedded software in medical infusion pumps and monetized it based on connection to EMR/EHR systems and management software.

• Improve competitive position – A manufacturer that makes sensors, valves and software to monitor, track and manage the flow of oil and gas pipes started to monetize value-added software via a usage-based model. This enabled pricing flexibility during turbulent times – such as during depressed oil prices – by aligning value to revenue model and enabling customer organisations to adopt pay-as-you-go/grow. They also monetized on optimisation, fault detection and operator training system usage runs thereby enhancing customer lifetime value.

• Reduce manufactured device variants to one – An electronic test and measurement device manufacturer configured devices with software in order to lower manufacturing and inventory costs, turn features on and off for targeted solutions and enable field upgradeable devices.

Figure 3: Layering on additional functions as a means to monetize5 WHITE PAPER

Figure 2: Example for an Anything-as-a-Service model

WHAT SHOULD MANUFACTURERS ASK AS THEYTRANSITION TO IOT OFFERINGS?While many manufacturers are familiar with software and how it interacts with theirhardware, most of them are not yet experienced enough in running a softwarebusiness. The idea of monetizing software, services and data as part of an IoToffering by implementing subscription, consumption models like pay-per-use, pay-for-burst, pay-for-overage as well as outcome- and value-based revenue models isforeign to most manufacturers. When you couple that with managing entitlements,sending software and firmware updates to customers electronically and collectinghow customers use your products through in-product analytics, many manufacturersneed help and guidance in defining a path forward.

One of the first things that traditional manufacturers need to do is to stop thinking oftheir products and offerings as fixed assets, a one and done mentality. They need tostart thinking like a software company and service provider, one that constantlydelivers new value and innovation to accommodate ever-changing customer needs.Flexera Software suggests the following questions for manufacturers to ask in orderto formulate their digital transformation strategy:

• What do I need to run an IoT/software and services business?• How will I protect and monetize my intellectual property (IP)? • How do I implement a supply chain that supports hardware plus software and services?• How do I establish predictable and recurring streams?• What revenue model(s) should I adopt to ensure customer acceptance?• If revenue is based on outcome/value, what metrics should I apply?• How do I get the software to my customers to ensure timely revenue recognition?• How do I make sure only those who purchased the software and/or a maintenance agreement get access to the right software and updates? • How do I give my customers and channel partners 24x7 visibility into what is owned, entitled and consumed?• How do I capture how customers are using my products and features and turn that insight into new products and services?• How will my customer support organization need to change?• Will I need to adjust my sales compensation plan to support my IoT initiatives?

HOW TO TRANSITION FROM HARDWARE TO SOFTWARE +SERVICES AND IOT OFFERINGSThis is a complex transition that involves moving from a traditional model ofhardware deployment into a more flexible and agile digital lifecycle. It’s important torecognize that the transition is a journey that needs to be handled in stages in orderto keep the project on track and gain results along the way. Some tips from FlexeraSoftware for starting down the path to success are below:

Understand the value of your software and create new revenue streams• Determine the value software provides to your customers—factor in the value and cost of delivering and supporting your software offerings • Gain visibility into margins and price your software and/or software services to be competitive and profitable• Manage the financial implications of transitioning from a perpetual to a flexible (subscription or pay-per-use) revenue model

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EntitlementManagement

Lifecycle

Harmonize architectures, design principles and development processes• Establish common architectures and shared services for your software products and services to promote reuse, and to accelerate your development and product lifecycles

Get your software as a business model right• Standardize and streamline monetization models (concurrent, subscription, pay- for-use) and delivery models (physical distribution, electronic distribution, SaaS)

Know what your customers are entitled to and get paid for it• Establish comprehensive, full lifecycle visibility of the usage of your software and tracking of licenses to minimize revenue leakage• Institute entitlement and software support strategies to minimize warranty and support costs, and to maximize cost recovery opportunities

SECURITY CONSIDERATIONS IN THE IOT WORLDSecurity and data protection are topics that will have to be considered in every IoTproject. Software can support and contribute to data protection by ensuring thatapplications on devices cannot be hacked easily (through application hardening) aswell as calling home to the manufacturer from the field, so that functionality can bevalidated to protect against piracy. Flexera Software suggests that security can beeffective if it is designed into the product and applied in layers. In the past, hardwarevendors normally would rely on physical security but as more vendors move awayfrom proprietary hardware, security plays an enormous role in both hardware andapplication development. Now manufacturers need to look at all the security layersthat make up the IoT.

Most importantly – because hacking is always a threat and possibility – the keyrequirement is to make sure that manufacturers have self-healing and self-updatingcapabilities so that a secure fix or patch can be deployed to customers quickly. Butthe reality is that many device/IoT manufacturers often don’t have these processesand technologies in place. This is something they should look at sooner rather thanlater.

Figure 4: The digital goods lifecycle

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CONCLUSIONThe IoT train has now left the station and is well on-track to hit the projections ofanalyst and research firms. Perhaps this will take longer than initially expectedbut it is apparent that IoT is already becoming a fundamental business foundationfor the Fourth Industrial Revolution and beyond.

As we have discussed in this paper, this has a huge impact on manufacturers.The shift is seismic and requires them to radically re-engineer their businessmodels away from a traditional model of selling hardware to selling thehardware, plus the software and apps as a service. A good example would beGeneral Motors or Ford moving away from selling you a car and instead chargingyou a monthly fee for using their vehicles. The consumer could be charged on aper mile basis with add-on services such as insurance, infotainment and manyothers bolted-on to the service fee. The car maker continues to be in thebusiness of making cars but the model moves from having customers make alarge capital purchase every few years to one of them paying a continuous fee.

The model shift that manufacturers need to make is the same. If done well, itopens up new opportunities with many more ways to monetize than a simpleone-time purchase. This flexibility and the more granular approach tomonetization models gives organizations a real chance to serve their customers’needs more effectively, to create differentiation in the market place and to enjoythe monetization capability they create by building a better business model forthe IoT age.

This is simply said but challenging to achieve. However, the questions we haveset out in this paper will help manufacturers and others prepare their businessesfor the new models that IoT is enabling. The challenges are significant and manydifficulties will need to be overcome but the upside of highly optimizedmonetization is well worth the effort. In any case, failure to transform will resultin being left behind.

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