IoT: Creating new software vendors and need for licensing solutions

The internet of things is creating new software vendors – and a need for licensing and entitlement management solutions, Gartner says.

The research analyst firm says IoT is turning many manufacturers of 'things' into first-time software vendors, and those vendors need licensing and entitlement management solutions (LEM) to monetise their software via the IoT.

Laurie Wurster, Gartner research director, says by shifting product value from device hardware to the software running on the device and applying an appropriate licensing strategy, manufacturing product strategists can maximise revenue potential.

"The IoT is creating a new type of software vendor for whom LEM is vital to protect, differentiate and monetise their offerings.

"We expect that by 2020, a failure to put in place a LEM system will result in a 20% drop in potential revenue generated from software for device manufacturers connecting to the IoT," Wurster says.

She says many makers of things will still apply a traditional 'box' mentality to products and not consider the extra revenue opportunities of licensing-controlled embedded software and applications.

Most of the companies, she notes, are first time software providers, mainly device manufacturers and OEMs who can now monetise their software as well as devices via the IoT.

For these companies, the IoT represents a significant market opportunity, she says.

Monetising the software will enable vendors to increase and drive recurring revenue streams, creating billions of dollars of additional value.

"For example, with an estimated 25-plus billion 'things' in the marketplace, and if manufacturers are able to collect an average of $5 for software from each of these installed units, that translates to additional revenue estimated at $130 billion.

She says IoT will drive business transformation for many device manufacturers for the foreseeable future, enabling them to use software on the device to differentiate product and solution offerings.

However she says device manufacturers need to protect and monetise the intellectual property contained in applications, like vendors in traditional software do.

This can be done by adopting LEM systems that control access to the Internet-connected device, its functions and its features. LEM also enables flexible pricing and packaging, allowing manufacturers to bundle product features, capabilities and capacities, ensure payment, provide verified upgrade paths and create new revenue streams," she notes.

"By controlling product functionality and the features and capacities of Internet-connected devices via flexible licensing, device manufacturers will be better able to compete in current and new markets.

"They will also be able to come to market quicker with new products, new feature combinations and product enhancements," Wurster says.

Software-controlled configuration also gives manufacturers more flexibility to regionalise their offerings and develop niche solutions for specific markets without having to manufacture separate product stock keeping units (SKUs).

"Overall, this reduces the number of SKUs produced, lowering overall manufacturing costs while enhancing manufacturers' ability to customize and regionalize products," Wruster says.

Gartner says its research indicates that the vast majority of device manufacturers do not have, or have yet to implement, commercial LEM systems to monetize the IoT, because, historically, they had little or no software IP to protect.

"Initially, they will look to build LEM capabilities in-house as they already have a technical and engineering background that developed the hardware, and they often believe that these internal resources can also build an efficient LEM system.

"For some, recognising the need for a LEM solution is a viable first step," Wurster says.

"However, manufacturers are starting to question the wisdom of diverting high-value resources to developing and maintaining LEM systems.

"As the need to scale and react quickly to changing market conditions increases, manufacturers may eventually start to buy packaged solutions. Providers of commercial products continue to broaden their set of capabilities and invest in support for new licensing models. This makes these solutions an attractive alternative for device manufacturers that do not want to build and maintain in-house LEM software."