Simply selling more units will not result in the massive spike in profits manufacturers are hoping for as they make a play for the $1.9 trillion Internet of Things (IoT) market, concludes the report: “Software Licensing & Entitlement Management is the Key to Monetizing the Internet of Things“, by Gartner.

In addition to selling more Internet-connected devices, businesses will also have to figure out how to make money from the applications they develop to control and sit on top of those devices. They will also have to figure out how to use software licensing and entitlement management as the mechanism to capture those additional revenues.

Software Creates Incremental Value

Furthermore, the report emphasises that device manufacturers struggling with commoditised products, razor-thin margins and high manufacturing costs must understand that the value of their products is shifting to the software applications (embedded or external) that run on and power their devices.

Increasingly, software is used to turn on and off features and functionality or capacity, requiring the development of fewer models, and controlling what the device does via software. So for instance, instead of having to manufacture a 10 gigabyte model, a 50 gigabyte model and 100 gigabyte model – the manufacturer need only create a single model/device, and use the software to provision the individual device’s capacity (10, 50 or 100 gigabytes).

Also, once you start leveraging the power of software to add value and to control the device rather than hard-coding functionality into the hardware – it becomes very easy to leverage licensing to drive higher value through differentiated offerings, highlights the report.

So, if a decked out camera has ten particular features, the camera-maker could manufacture one model, and turn on features 1-3 and sell it as the “basic” model. It could turn on features 1-6 and sell that model as the “premium” model, and turn on features 1-10 and sell it as the “platinum” model.”

The manufacturer could also quickly configure its products to take advantage of market trends, without having to alter its manufacturing supply chain. For instance, if features 1, 4, 5 and 9 are popular with Chinese customers, a quick software reconfiguration results in a model optimised for the Chinese market.

Licensing & Entitlement Is The New Gate Keeper

The Gartner report points out that in the software-controlled world of the IoT, licensing and entitlement management is the new gatekeeper, ensuring that the manufacturer’s intellectual property (IP) is protected, and is paid for before the device can be used.

For instance, most cars now come with complete infotainment systems built-in, but you can’t use them until you pay for the service (i.e. the GPS maps or satellite radio). Payment gives you access to a licence (the rights to access that functionality), and specific entitlements attached to that licence (i.e. UK maps only or the basic satellite station package consisting of 25 channels).

Software licensing and entitlement management doesn’t just apply to the consumer IoT products we’re all familiar with – infotainment systems, home automation, appliances, wearables, etc. It also applies to the industrial IoT – devices used in all facets of business and industry, including: telecommunications, medical, test and measurement, building technology/automation and gaming. Licensing and entitlement management does, indeed apply to the ‘Internet of Everything’.

Flexible Pricing, Deployment & Enhanced Customer Experience

Software licensing and entitlement management also makes it easier for manufacturers to move into new markets and offer appropriate pricing models to capture new revenue streams. For instance, a small community hospital previously unable to afford a million-dollar MRI machine might be able to acquire one using a pay-per-scan pricing model. Or a telecommunications company could temporarily upgrade signal capacity to its cable customers during high-use events, like the World Cup, and charge a premium for providing that additional temporary capacity.

Entitlement management systems also enhance the customer experience by making it easy, for instance for users to self-serve. Referring back to the telecommunications example above, customers could simply sign on to their portal to pay for and upgrade signal capacity. This provides instant gratification to customers while enabling easy upgrades and upsell with very little overhead cost to the manufacturer.

The IoT requires a rethinking of the traditional manufacturing model to look at new product, data and service offerings – controlled through software and enforced and monetised through licensing and entitlement management. It’s about making products ‘intelligent’ and adopting a ‘solutions provider’ mentality to flexibly deliver goods on-demand in an always on, always connected environment.