How Software Licensing Helps Manufacturers Generate Value from Embedded Software

Transcription

1 CUSTOMER NEEDS AND STRATEGIES How Software Licensing Helps Manufacturers Generate Value from Embedded Software Amy Konary IDC OPINION Global Headquarters: 5 Speen Street Framingham, MA USA P F In today's high-tech world, software is inside almost everything we interact with automobiles, vending machines, various mobile devices, building systems, and "smart" devices. In many cases, the value associated with these physical goods is monetized primarily with the sale of that good. Increasingly, software licensing is helping manufacturers generate value from embedded software by: Providing an additional, high-margin revenue stream Protecting intellectual property (IP) from misuse Simplifying product packaging while allowing for more flexible configurations Lowering inventory costs by decreasing the number of SKUs needed to satisfy unique customer demands Filing Information: July 2011, IDC #229503, Volume: 1, Tab: Users Software Licensing and Provisioning: Customer Needs and Strategies

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3 IN THIS STUDY This study describes the ways in which manufacturers of physical goods are leveraging software embedded within their devices to generate and protect value. Various drivers and approaches are discussed. SITUATION OVERVIEW "If we don't have licensing, we don't have the whole picture," says Andrew Gustavsson, manager, Central Licensing Center (CLC), Ericsson. With shrinking margins on hardware sales, manufacturers are increasingly looking to leverage the software assets embedded within their devices in various ways, including monetization as well as using software to protect and control the feature set delivered to customers. In many cases, the software has previously been provided to customers along with the hardware, for no additional charge. Beyond the challenges of establishing value and developing a pricing scheme, these firms find that licensing software is a lot different from selling hardware. For example, unlike physical hardware SKUs, software entitlements have a life cycle that makes it important to manage and track them accurately. In addition, in order to monetize the embedded software separate from the hardware, technology is needed to provide (and deny) access to the software, as well as turn features on and off as appropriate for the purposes of packaging. In addition, this technology can also play a role in reducing excess and obsolete inventory by allowing multiple configurations of the same manufactured hardware. In some cases, firms may decide not to sell the software as an option or part, but instead use the software to activate hardware devices, therefore creating an opportunity for the manufacturer to build a direct relationship with the customer. Case study examples that illustrate some of the ways that manufacturers are leveraging software licensing assets are discussed in the sections that follow. Reduce Physical Inventory Costs Siemens Industry Inc. Building Technologies Division provides products that automate building controls, including fire, security, HVAC, and lighting. Building Technologies Division operates more than 500 branch offices in 51 countries around the world and 8 manufacturing facilities in Europe, the United States, and Asia. The division's offerings include both devices with embedded firmware and standalone software products. The focus of this case study is the products that use firmware. The Building Technologies Division has about 700 variants of firmware, which in the past resulted in 700 SKUs as each variant of firmware carried a different part number. The hardware itself was the same, but custom specifications on top of the hardware would result in a variant. Customers couldn't upgrade or switch from one firmware variant to another. All of these variants had to be stocked in a warehouse, and service technicians in the field also had to stock multiple copies of these variants for any onsite work that they did IDC #

4 Siemens Industry's Building Technologies Division wanted to lower the number of SKUs and to offer customers more flexibility. The company chose technology from Flexera Software ( which has helped change the way the company stocks and delivers firmware variants. Instead of having multiple SKUs, there is now one single version of the product, which is all that needs to be stocked. The Building Technologies Division uses licensing, enabled by FlexNet Producer Suite for Intelligent Device Manufacturers, to make the stock firmware into any variant they need. There is a direct cost savings associated with this benefit, as the reduction in SKUs means a reduction in excess stock. The field organization has seen a productivity benefit as well. In the past, the field had to stock many copies of these variants in its locations. There were times when the field organization would go to use a variant with a customer only to find that the one it had in stock was an older version. Now, it stocks the standard hardware and turns it into anything that is needed via licensing. Revenue Protection Ericsson ( is a global provider of mobile and fixed networks, multimedia solutions, and telecom services. There are various business models at play in telecommunications, from basic traffic monitoring to more complex models that include usage monitoring. User expectations have increased dramatically, and today ubiquitous connectivity is a must. Ericsson utilizes remotely installed software licenses for system configuration as well as revenue protection. The company uses technology from SafeNet ( to help understand the difference between what is being sold and what is being used. In the past, revenue was lost due in part to installation crews that were not configuring product correctly. Now that the product configuration is reliant on licenses, and the licenses are tied to a license generator that verifies what has been purchased with what is being installed and used, there is less room for error, according to Ericsson. Monetize Software Value Founded in 1915 as The Cummings Machine Company, Midmark Corp. is a worldwide manufacturer and distributor of healthcare, diagnostic, and software products for medical, veterinary, and dental markets. The diagnostic devices division of Midmark provides products such as stress test and ECG machines and holter, stress, spirometer, and vital signs monitors to healthcare providers. Midmark has always been a devices company; however, it also licenses software that provides the necessary integration between the medical devices and electronic medical records (EMRs) systems. Midmark licenses this software to its customers via a few models, depending on whether the customer is using a "fat" or "thin" client. Traditionally, most clients used fat clients, which were licensed on a per-installation basis. Increasingly, healthcare providers are using thin clients to access Midmark's devices. This introduces a licensing challenge. 2 # IDC

5 While Midmark has always charged for this software, the charge has been only a fraction of the device's price. Thin-client access model means that multiple users can access a single copy of the software running on the server. Midmark follows a different license model for this type of environment. Midmark adopted a hardware dongle approach supported by Flexera to help protect the software IP. Midmark provides the customer with a dongle that needs to be inserted into the system's USB in order to use the software. The dongle approach is not a perfect one, according to Midmark dongles get lost and broken and support calls increase as a result but it is helping Midmark monetize the software value today. A future consideration for Midmark is a pay-per-use pricing model, enabled by software. Licensing technology would be embedded within the devices to a model where a customer would pay for each ECG exam, as an example. Offer Increased Pricing Flexibility and Protect IP CPU Technology Inc. provides secure processors that protect software and systems from reverse engineering. The company also provides software tools and devices that enable customers to configure security features on the chip itself. CPU Tech has found that the development of higher-security hardware circuits is the simpler of its design problems, and the one where there is less product differentiation. The more difficult development area is in configuration and customization of hardware security, and it is therefore important to differentiate CPU Tech's offering with software. "The software becomes the differentiator, and the bread and butter of the system, and licensing helps us accomplish this," according to CPU Tech. The company's subscription pricing model is tiered to allow customers to license only the features that they need. It can be very expensive to manufacture and then inventory different types of hardware to satisfy customer needs. CPU Tech uses software licensing supported by technology from Flexera to help keep inventory costs down, provide flexibility, and protect its intellectual property from misuse. FUTURE OUTLOOK IDC expects software to continue to be an important way for manufacturers of physical goods to differentiate their offering, reduce inventory costs, protect IP, and offer customers flexible pricing and packaging. In addition, new ways to monetize software intellectual property, including advertising revenue and software appliances, will become more prevalent. More changes are also on the horizon such as cloud services, virtualization, and the increase of appliances and IDC expects vendors will continually need to evaluate their software pricing and packaging strategies. Managing a platform of technologies to support this should be viewed as an ongoing process, and as elements of flexibility 2011 IDC #

6 are added into licensing scenarios, the technology to manage this can become increasingly complex. At the same time, the embedded software space is very different from distributed computing in many ways. There are more operating systems to support, there are more process architectures, and devices are portable. Licensing solutions need to support all of this, yet have a small footprint and be highly portable. ESSENTIAL GUIDANCE Cultural changes may be required for a hardware-oriented company to start valuing software in strategic and monetary ways. For example, if sales had previously given software away that the company now wishes to monetize, value needs to be established internally as well as in the eyes of the customer. In addition, technology to support licensing is an important success contributor. The companies that IDC interviewed for this document used technologies from third parties to help manage software licenses. In addition to looking holistically at what technologies should be a part of a licensing strategy, other factors for manufacturers to consider include: Does your company currently have internal expertise in licensing technologies, and do you wish to expand and maintain this? Does your company have development resources that can be utilized for the development, testing, and ongoing maintenance of licensing technologies? Does your company have resources that can provide support for an internally developed licensing technologies solution? Is your company willing to address the significant requirements associated with the integration of a homegrown licensing technology with other relevant systems in both your internal and the customer's environments? How about the support for the technology across multiple platforms as required by customers? Does your company have an understanding of the evolution of software licensing, including the ways in which your approach may need to change in the future to adapt to new customer demands and market realities? Could an internally developed and supported licensing technology be flexible enough to adapt in a timely manner to new licensing scenarios? This final bullet is a key point, especially in light of revenue opportunities associated with new usage models for software as well as more flexible packaging options. In addition, customers are expressing a desire for the ability to purchase software at a more granular level than in the past. This includes an increased interest in pay-peruse models. Responding to trends like these will require changes to pricing and packaging of software as well as to the underlying license management platform. 4 # IDC

7 LEARN MORE Related Research Worldwide Software Subscription Forecast: A Mainstream Opportunity (IDC #228753, June 2011) Market Analysis Perspective: Worldwide Software Licensing and Provisioning, 2010 The Big Picture (IDC #227447, March 2011) Worldwide Software License Life-Cycle Management Forecast: Your Assets or Mine? (IDC #225868, December 2010) Synopsis This IDC study describes the ways in which manufacturers of physical goods are leveraging software embedded within their devices to generate and protect value. "Software is inside almost everything we interact with automobiles, vending machines, various mobile devices, building systems, and 'smart' devices," said Amy Konary, research VP of Software Licensing and Provisioning at IDC. "Manufacturers are increasingly looking to leverage the software assets embedded within their devices in various ways, including monetization as well as using software to protect and control the feature set delivered to customers." Copyright Notice This IDC research document was published as part of an IDC continuous intelligence service, providing written research, analyst interactions, telebriefings, and conferences. Visit to learn more about IDC subscription and consulting services. To view a list of IDC offices worldwide, visit Please contact the IDC Hotline at , ext (or ) or sales@idc.com for information on applying the price of this document toward the purchase of an IDC service or for information on additional copies or Web rights. Copyright 2011 IDC. Reproduction is forbidden unless authorized. All rights reserved IDC #