How flexible licensing models create new opportunities in iot

HOW FLEXIBLE LICENSING MODELS CREATE NEW OPPORTUNITIES IN IoT

BY GEORGE MALIM, MANAGING EDITOR, IoT NOW

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INTRODUCTION Although much of the developments in Internet of Things (IoT) have focused on hardware and connectivity – the things and the internet – it’s actually software in the form of applications, management systems and analytics tools that holds the key to unlocking value from the infrastructure. It is software that is enabling IoT solutions – composed of hardware, connectivity and software – to turn previously unconnected devices into connected devices and enabling monetisable services to be built around those.

The unique and compelling selling point of IoT is that it can enable new models for old services while also creating entirely new business categories. This type of service charge-based model sees a shift toward the servitization of hardware in which product-based offerings turn into as-a-service propositions. In such IoT models the value lies in the software; the devices are just the required foundation over which the valuable service is delivered. In IoT in particular, devices are commoditised with sensors and modules typically costing dollars per unit in the low double digits.

Vendors therefore, in spite of the multi-billion unit scale of IoT, recognise their software, which they have previously bundled in with their hardware at no additional charge as part of a one-time sell propsition, as the main oppportunity for IoT monetisation1. Software and hardware will still be bundled in with the recurring software licensing fees.

For this reason, IoT software providers are assessing how to monetise their intellectual property. One of the challenges they face lies in the sheer scale of IoT endpoint device deployment. When a service scales to hundreds of thousands or even millions of devices, which a connected car service easily could, economies of scale are needed not just in terms of commodity hardware but also in terms of software licensing.

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1. This is an inversion of the traditional business model in which software, such as Microsoft Word, was bundled with a PC so the user could extract value from their $1,000 investment in laptop hardware.

What is clear is that IoT services will not necessarily remain static. New services will launch and retire rapidly and those that are successful will accelerate from very small start points to become mass market phenomena, sometimes overnight, sometimes over the course of many years. Flexible licensing models are therefore a prerequisite for enabling changes to how vendors monetise and how enterprises are being enabled with new ways to address markets.

Advanced

Figure 1: Monetization opportunities

Ecosystem Monetization

IoT Adoption Level

Types of IoT Monetization Models

Basic

Services Monetization

Data Monetization

Companies can select one or more monetization models to match level of IoT maturity, business needs and the type of customer relationship.

Device Monetization

Basic

Monetization Complexity Advanced

WHY FLEXIBLE LICENSING MODELS MATTER Flexibility, coupled with agility, is of paramount importance in IoT but views on flexible licensing shouldn’t just be confined to licence volumes – numbers of devices or numbers of users. There are other dimensions in which licensing can be flexible.

An obvious example is time such as when farm machinery is only used at specific times of the year. Service providers in this sector could utilise flexible licensing to charge farmers only for the hours or days in which they use machinery. In this case, if the equipment maker is expected to move to a business model that bases charging on when the equipment is used, so too should the software provider.

Flexible licensing therefore means new models which enable charging based on the number of devices, the amount of time software is used, a combination of both and the added flexibility of being able to scale up or down on-demand. Offering this capability could enable software providers to become an active part of service provision rather than simply selling their software in a passive way – that is, by demanding payment for each device when it is initiated and on an annual or monthly basis. The software providers that are able to support new models of this type are well positioned to help their customers develop specific offerings and business models for the overall service.

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Naturally, especially if this is to gain uptake among them, customers will benefit through the increased functionality, cost efficiencies and the ways to better serve their own customers and the end users. Flexible licensing can be a springboard to new models and greater customer satisfaction.

NEW BUSINESS MODELS Flexible licensing, along with other ingredients, is a key part of enabling new business models across the IoT value chain. An important point to consider is the need for software and hardware – typically IoT devices and gateways – to work together, sold as a pre-integrated bundle. This is seeing hardware vendors develop and offer software to manage their equipment, thereby becoming software vendors for the first time.

Moving from selling hardware bundled with free software to a model that accommodates customer demands for a more transactional, customer-driven or recurring type of business is a significant transformation. The only way hardware companies can meet these demands is by utilising their software to offer more flexible business models. Doing so by implementing a licensing technology for the software they currently give away for free can provide flexibility for packaging solutions.

For example, licensing can enable different configurations in the software while utilising the same hardware. Another example is feature-based licensing which can enable a pay-per-feature model. Many other business models can be addressed and help vendors move to a recurring revenue model versus a one-time sale of hardware.

A good example of an industry set to benefit from new models would be in the automotive industry. Traditionally, this has focused on selling a car to a consumer with a limited portfolio of services such as servicing, finance and dealer-fitted upgrades being the only way for car makers to sell more to their customers and strengthen their relationships.

Now consumer attitudes to cars are changing; car makers are faced with a market that doesn’t necessarily want to own a car all of the time. Drivers increasingly realise that 90% of the time the money they have invested in a car is sitting in the street or garage constantly decreasing while they are not driving the car. This has seen car sharing clubs emerge in which users pay a monthly subscription to gain access to a vehicle when they need it.

Of course, not everyone wants to do without the convenience of a car always being on their driveway and available to them but the concept of paying a car maker a monthly fee for a car, insurance, navigation and infotainment services without maintenance or upgrade headaches is appealing and is likely to become the new model for automotive industry. The product in this example, the car, becomes secondary to the software-enabled services: the right to drive the car enabled by access control, the navigation, the predictive maintenance enabled by analytics, the entertainment services, the usage based insurance (UBI) and many other service propositions that form the future automotive ecosystem.

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The old approach of charging per user or per device will be hard to sell to IoT service providers. Many will be unwilling to buy a one million dollar user licence before their service has proven uptake – so software vendors will need to flexible. In addition, different players in the value chain may want or need to have a share of licensing

costs apportioned to them. In a car-as-a-service example, an insurance provider may have specific software that needs to be charged for via a licensing agreement but its element of the complete service may also utilise part of the connected car’s noninsurance oriented systems and the insurer may need to pay part of the cost of those.

Equally, the car maker may seek to profit from providing all the enabling technologies to the insurer, creating further pricing and monetisation complexity for the software providers to engage with.

STRATEGIC CHOICES Device makers therefore have a wide range of strategic choices open to them. They can enable new models for the software they already provide for free as part of their existing hardware plus software propositions as detailed earlier. They can acquire and integrate additional software from other vendors to assemble an enhanced offering, although their business model will have to accommodate that of the additional software vendor. Alternatively, they can become suppliers to other providers in the value chain, providing their hardware and software to companies that provide complete solutions or to new types of third party businesses. Beyond these strategic choices, which may alter from IoT application to IoT application depending on which method serves the market best, vendors need to consider what their monetisation model will be. Capgemini Consulting has suggested four principle models, although it acknowledges that overlap can exist between them: • • • •

Ecosystem building Organisations create a platform so they can generate profits from other product vendors and end users.

Service revenue Organisations convert what has been a traditional product into a service by rolling out a recurring pricing model for specific features.

Hardware premium Organisations charge a price premium for the product’s connected features.

Data revenue Organisations generate revenues by selling packaged data gathered from sensors.

Organisations are not limited to which model they engage with and may blend several approaches to achieve the perfect mix for a specific proposition. An IoT logistics service provider, for example, may generate revenue from selling sensor data to its customers while also charging them service revenue on a recurring timebased model. The options remain open.

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Effective software monetisation involves all organisational business units, processes and information systems so business units need to ensure they adopt adequate processes, tools and methods to generate recurring sales. These are fundamental to the success of moving away from one-time charging to a more on-demand oriented business model.

Figure 2: Organisational co-ordination Software Monetization Involves All Organization Business Units, Precesses and Infornmation Systems

Order Fulfiment

Finance Department

Organization Systems, Processes Business units need to adopt adequate processes, tools and methods to generate recurring sales

Information Technology

Marketing & Sales

Research & Development

Product Management

Customer Support

CASE STUDY: A NEW MODEL FOR MEDICAL EQUIPMENT PROVISION Stryker Corporation, one of the world’s leading medical technology companies, has evolved into a maker of intelligent medical devices that rely on the software it develops. The software is an integral component to the operation and maintenance of the medical devices it brings to market. The company is now in the midst of another transformation – moving its medical device hardware to a services- based model in order to meet the demands of hospitals and surgeons where capital expense budgets are shrinking.

BUSINESS CHALLENGES Stryker had been using Sentinel hardware dongles from Gemalto to enable and enforce licensing of its SDC3 product, used by surgeons in theatre to enable improved surgical experiences. Through HD video capture, HIS integration, and device management that expands sterile field control and streamlines setup, the use of SDC3 leads to increased consistency and personalisation.

The use of Sentinel hardware dongles was effective for enforcing licensing of the SDC3 product, but there were operational challenges. Issuing dongles for its software was costly and time-consuming. Stryker estimates that the internal costs associated with preparing and shipping each dongle were approximately US$400 and from order date to deliver date it took a minimum of three days to reach the customer.

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“It was frustrating for our customers. The hospital would have the SDC3 box sitting in front of them but would have to wait for us to ship the dongle in order to use specific features,” said Saeed Elfadil Saeed, a senior manager at Stryker Corporation.

There were also dongle management issues and support costs associated with lost dongles and replacement dongles. In addition, Stryker was unable to offer trials of SDC3 and specific features.

“With capex budgets shrinking, we knew we needed more flexibility in licensing our high-value devices – for example, instead of purchasing the device upfront, hospitals could pay only when they used the device,” added Saeed. “It was time for a change.”

REQUIREMENTS The company needed to minimise the need to ship licence dongles for software orders and to allow for same-day ordering and activation. The new licence management platform would need to allow Stryker to establish an enterprise entitlement and licence management system for all of its products and easily integrate with the company’s Oracle and Salesforce.com implementations. To meet market demand, the new system needed to enable Stryker to adopt new licence models including trials, concurrent users, subscriptions and usage-based charging. The new system also needed to support isolated networks. “We considered building the licensing system ourselves,” said Saeed. “But we quickly realised that it was not our core expertise. Our expertise is in helping surgeons. We are not licensing experts.”

THE SOLUTION After researching and evaluating three commercial licensing technology vendors, Stryker chose Gemalto’s Sentinel solution. The Sentinel solution consists of Sentinel EMS and cloud-based licensing capabilities hosted by Gemalto. The Sentinel team conducted a Licensing Workshop with the Stryker licensing project team in order to identify and work through relevant use cases. The team segmented the use cases into two project phases. Next, Gemalto delivered a Licensing Blueprint based on the outcomes of the workshop.

“We decided to take a phased approach to implementation in order to quickly show value and secure executive buy in for the second phase of the licensing project,” said Saeed.

THE IMPLEMENTATION In phase one of the implementation, which supports 20 different licensing use cases, Stryker implemented Sentinel EMS with cloud-based licensing as its licensing backoffice platform, for managing all licence definition, licence generation and collection of licence usage data. Stryker also transitioned from hardware dongles to cloud licence enforcement for its SDC3 product with plans to implement Sentinel EMS licensing for all of its products. This first phase enabled SDC3 systems to use cloudlicensing infrastructure to enable and enforce the current Stryker licence models and add new trial licensing.

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In phase two, a direct integration between Sentinel EMS and Oracle and integration between Sentinel EMS and SalesForce.com will replace the current batch job script.

The second phase will also introduce new licence models including subscription and a post-paid usage option as well as support for more use cases including isolated network environments.

RESULTS Since implementing Sentinel EMS with cloud licensing, Stryker has streamlined its operational processes and reduced costs significantly. The ability to trial Stryker products and features before buying and instant electronic product activations have has also enhanced the customer experience. The addition of subscription licensing and usage based pre- and post-paid licensing will allow hospitals and surgeons to use the latest Stryker medical devices while preserving tight capital expense budgets.

“Phase one of the cloud-based licensing implementation has been so successful that we had no problem showing the value and getting the executive support we needed to begin phase two,” concluded Saeed.

BY GEORGE MALIM, MANAGING EDITOR, IoT NOW

CONCLUSION Flexible licensing is opening new doors for enterprises and enabling new business models for old services, breathing new life into well-established offerings. This new life takes many forms including turning traditionally sold hardware into a pay-as-yougo service. In addition, vendors can find new opportunities and make themselves indispensable in the IoT market by creating attractive, flexible business models that bundle in software that is currently given away with security and storage to add to their commodity device offerings as part of an as-a-service proposition. Such an offer would enable customer to scale up their usage of software and have the flexibility to address the specific requirements of each of their IoT deployments. This can keep them in game – the commodity devices can get them through the customer organisation’s door but the additional capabilities and willingness to engage in flexible business models can keep them there.

MARKET INDICATORS These changing business models bring with them more complex monetization requirements. Machina Research has looked at its global IoT forecasts through the prism of monetization and identified that a large, and growing proportion of the revenue associated with IoT is related to more sophisticated monetization opportunities. Specifically, between 2014 and 2024, there is a total of US$1.3 trillion in IoT revenue that is available to companies that have sophisticated monetization capabilities.

Global management consultancy McKinsey & Company estimates the wider IoT to generate between $4 trillion and $11 trillion by 2025. This revenue isn’t going to come from device sales alone – it’s going to come from using software as the new supply chain. www.gemalto.com

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According to a recent Capgemini survey, 70% of organisations don’t generate service revenues from their IoT solutions, making those who can offer a complete end-to-end IoT solution all the more valuable.