The Third Industrial Revolution: Intelligent Devices, Software ......implementing for your devices? The Third Industrial Revolution: Intelligent Devices, Software, and the Internet

2012 Key Trends in Software Pricing & Licensing Survey

Sponsored by Flexera Software

The Third Industrial

Revolution: Intelligent

Devices, Software, and

the Internet of Things

Sponsored by

The Third Industrial Revolution: Intelligent Devices, Software, and the Internet of Things 2

Contents

Introduction .......................................................................................................................... 3

Challenges Inviting Change ................................................................................................. 3

Vive La Revolution: Device Makers Massively Adopting Intelligent and Internet of Things

Capabilities .......................................................................................................................... 4

A Revolution in Value Creation ............................................................................................ 5

Monetizing Embedded and External Software Apps Fueling New Revenues in the Third

Industrial Revolution ............................................................................................................ 6

Third Industrial Revolution Enabling Shift from Products to Solutions .................................. 8

Security is Top of Mind Amidst Revolutionary Change ....................................................... 10

Conclusion ......................................................................................................................... 11

Infographic ......................................................................................................................... 12

Survey Background ............................................................................................................... 13

Methodology and Sampling ................................................................................................... 13

Survey Demographics ....................................................................................................... 13

Location of Respondents ................................................................................................ 13

Respondents’ Vertical Market ......................................................................................... 14

Software Licensing and Provisioning Research at IDC .......................................................... 16

About Flexera Software ......................................................................................................... 16


The Third Industrial Revolution: Intelligent

Devices, Software, and the Internet of Things A Report by Flexera Software with input from IDC

Introduction The first industrial revolution ushered in a global transformation as the means of production transitioned

from human labor to machine driven automation. The second industrial revolution accelerated change

through the growth of the railroads, iron and steel production, manufacturing automation, the use of

steam power, oil, electricity, and electrical communications.

Pundits argue about the defining attributes and timeline of the third industrial revolutions – but few

question that it is unfolding before us as we speak. The proliferation of computers and software

digitized the previously analog economy, and brought with it unprecedented levels of automation,

productivity and innovation. With the introduction of embedded software and app-driven hardware into

manufactured devices, and the ability, through software licensing, to monetize those device functions

and features – devices have become intelligent solutions and capable of generating completely new

types of revenue streams. Connecting those intelligent devices to the Internet (the “Internet of Things”)

is accelerating the third industrial revolution by enabling services, solutions and big data offerings

around every day industrial and consumer goods.

So the question remains – has the third industrial revolution already swept through the manufacturing

sector, is it just in the beginning stages – or is it still largely promise and hype? That is the question

addressed by this report.

Challenges Inviting Change Major technology innovations don’t necessarily usher in technological revolutions. The conditions have

to be ripe – businesses must be open to radical change. One indicator of receptivity is the extent of the

challenges they are currently facing. The more pain – the more open enterprises are to new

innovations to remedy existing challenges.

According to the survey, device makers are indeed experiencing a broad range of challenges. 48

percent1 reference the need to make more money among their biggest challenges. Agility is also a

major pain point – 47 percent say reducing time to market for creating new products/enhancements,

and 47 percent say enhancing their ability to react quickly to changing market needs and/or new market

opportunities are major challenges. Other pain points include security (42 percent) and reducing

manufacturing costs (40 percent).

1 For ease of viewing all data presented in charts for this report are rounded to the nearest whole percentage point.

http://en.wikipedia.org/wiki/Industrial_Revolution

http://en.wikipedia.org/wiki/Second_Industrial_Revolution


Vive La Revolution: Device Makers Massively Adopting Intelligent and

Internet of Things Capabilities If conditions are ripe for transformative technologies to take hold, the question remains – are those

technologies actually being adopted?

Perhaps the two most revolutionary advances in recent years to hit the device manufacturing industry

revolve around intelligent and Internet-connected “Internet of Things” (IoT) technologies. Intelligent

devices are defined as physical devices that include embedded software (or external software

applications) that control product features, function and/or capacity. Internet of Things devices are

Internet-enabled devices that help accomplish specific user scenarios by bringing their data and

functionality together with other devices.

Intelligent and IoT devices also leverage software, software licensing & entitlement management, and

Internet connectivity in ways that address many of the big challenges respondents reported earlier in

this report. For instance, leveraging software and software licensing, manufacturers can turn device

features and/or capacity on and off as appropriate, allowing them to charge customers for capabilities

they want, while not charging for capabilities they don’t. Managing entitlements also plays a key role.

For instance, knowing which customers have which features turned on allows the device makers to

target segments of users for cross/up-sell opportunities. Leveraging licensing and entitlement

management, therefore, gives device manufacturers many more options to monetize features and

functionality, allowing them to:

12% 15% 20% 10% 9% 8% 10%

13% 10%

23%

7% 10% 13% 14%

45%35%

38%

35% 34% 37% 29%

30%40%

19%

47% 47% 42% 48%

0%

20%

40%

60%

80%

100%

Low

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rgin

s

Red

ucin

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an

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ring

costs

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As a device manufacturer, what are the biggest challenges faced by your company?

Major challenge

Minor challenge

Not a challenge

Not applicable


• Produce different products on the same hardware chassis, driving down costs by

eliminating the need for additional production lines and minimizing the number of SKUs that

have to be kept in inventory.

• Create innovative products on existing hardware chassis. This reduces the cost and time to

bring differentiated products to new or existing markets.

• Up-sell existing customers by electronically activating additional device capabilities or

capacity. This makes it easier to capitalize on incremental revenue opportunities.

• Meet evolving customer needs without requiring them to swap out hardware or otherwise

disrupt their operations. This makes for a more positive ongoing customer experience.

According to the survey, a significant proportion of device makers have already transformed their

product lines to make them intelligent and connected. 50 percent of respondents say they develop

intelligent devices today, and 30% say they currently manufacture Internet of Things devices today.

But the trend line is steeply rising – indicating that the third industrial revolution is gathering steam. 21

percent of respondents that don’t offer intelligent devices today, say they plan on doing so within the

next 12-24 months. Moreover, 34 percent of respondents that don’t offer IoT devices today say they

plan on doing so in the next 12-24 months. Vive La Revolution!

A Revolution in Value Creation Industrial revolutions don’t simply improve what exists – they enable producers to create new value not

previously possible – and as a result new products, services, and enter new markets. The survey

confirms that device manufacturers already, or plan to, leverage their smart and Internet-connected

devices to create a range of services and solutions that would not have been possible with last-

generation “dumb” technology.

For instance, 79 percent of respondents say they are or plan on delivering remote monitoring and

maintenance. This would enable them to leverage data from sensors on their devices to, for instance,

29% 36%

21%

34%

50%30%

0%

20%

40%

60%

80%

100%

Intelligent devices Internet of Things (IoT)devices

What types of devices do you currently or plan on manufacturing?

Currently manufacture today

Do not manufacture but plan to doso over next 12-24 months

Do not manufacture and have noplans to


anticipate the breakdown of equipment and maintenance needs before the breakdown becomes a

problem. 66 percent are or plan on delivering Business Intelligence to their customers – leveraging the

tsunami of data their devices and sensors generate to deliver actionable intelligence for customers. 37

percent are or will improve their supply chains with these new capabilities – such as automatic

replenishment of a depleting product – such as water coolers or printer cartridges. Other value-added

scenarios include enhancing the shopping experience (i.e. providing the ability to look up store offers as

shoppers pass by) (26 percent), offering content delivery (i.e. infotainment systems in cars) (25

percent), and smart-city use cases (i.e. real-time traffic information) (23 percent).

Monetizing Embedded and External Software Apps Fueling New

Revenues in the Third Industrial Revolution While the innovations and use cases now possible with smart and Internet-connected devices serve as

the fuel for industrial revolution – there must be an accelerant to ignite that fuel. In a business context

that accelerant is the lure of money.

If manufacturers are unable to profit from their innovations– investment in those innovations will cease.

If new revenue streams and higher profits emerge – then the revolution will explode and device makers

will charge ahead and compete for first-innovator status and market share.

In last-generation devices, device makers were fairly limited in terms of monetization options. Their

primary revenues derived from the sale of the hardware device, and perhaps maintenance revenue

associated with the purchase. The next big revenue opportunity typically would arise when that device

required replacement.

79%

37%

66%

23% 25% 26%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Rem

ote

mo

nitorin

gand m

ain

tenance (

i.e.

Pre

dic

tive

ma

inte

nance)

Su

pply

chain

impro

vem

ent (i.e

.A

uto

ma

tic

reple

nis

hm

ent of

wate

r coole

rs)

Bu

sin

ess in

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gence

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art

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pm

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.P

redic

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, re

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tim

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s (

i.e.

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ars

)

En

hance s

hoppin

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erie

nce (

i.e.

Lookin

g u

p o

ffers

insid

e the s

tore

)

What use cases are you implementing or considering implementing for your devices?


According to the survey, device makers are indeed aggressively adopting new business models

associated with monetizing the embedded and external software that’s increasingly powering their

intelligent and Internet-Connected devices. And to monetize the software they’re leveraging software

licensing and entitlement management – a mainstay in the traditional software industry.

60 percent of respondents use licensing and entitlement management systems to develop new

offerings that bundle device, services and/or consulting, and 17 percent more plan on doing so within

the next two years.

Software is the vehicle enabling device makers to bundle product offerings, services and feature sets in

new and creative ways. For instance, 32 percent of respondents use software to electronically turn

features on and off based on purchases (i.e. for $5 a customer can purchase the music player, for $10

the customer can purchase the music player and Internet radio capabilities). 19 percent more plan on

doing so within two years. 31 percent use software to leverage data from sensors embedded in

devices to uncover new services opportunities (i.e. device repair services, etc.). 28 percent more plan

on doing so within two years. 29 percent use that data uncover new sales opportunities (i.e. new

product sales). 27 percent more will do so within two years.

Software is also enabling usage-based consumption models – allowing customers to pay based on how

much they consume – a concept also gaining steam in the traditional enterprise software market. For

instance, 27 percent of respondents monetize their devices by charging by the amount of software that

is used on the hardware, and 22 percent more will do so within two years. 22 percent of respondents

use software to enable more capacity based on purchases, and 16 percent more will do so within two

years.


Third Industrial Revolution Enabling Shift from Products to Solutions As device manufacturers seek ways to deepen their relationships with customers, a key goal is to

become more strategic and provide ongoing solutions tailored to evolving customer needs. As noted

earlier in this report, leveraging software, licensing and entitlement management is enabling greater

agility to flexibly package, deliver and sell intelligent and IoT devices. Services are also a critical

element to selling solutions. For instance, medical device makers can use big-data to provide better

diagnostics based on segmenting national, socio-economic or ethnic characteristics of an overall

population pool. Or auto manufacturers can equip their cars with every feature and upgrade available –

and simply turn on or off the feature via software and licensing based on what the customer has

purchased. In these scenarios, the device maker can make a strategic decision about whether or not to

monetize a feature or to provide it at no cost.

23%

43%41%

49%

61%52%

17%

27% 28%19%

16%

22%

60%

29% 31% 32%22% 27%

0%

20%

40%

60%

80%

100%

We u

se lic

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ntitle

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and/o

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ensors

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ur

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ew

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ensors

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i.e. D

evic

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etc

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We e

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i.e. F

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for

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+ r

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We e

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based o

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or

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20

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ignals

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How do you monetize the software running or controlling your devices?

Currently do this

Will do this over next12-24 months

No plans to do this


According to the survey, over the next two years the proportion of revenue associated with services is

poised to increase for device makers – indicating device makers’ commitment to evolve into solutions

providers. 38 percent of respondents say that half or more of their revenues derive from hardware

today. That proportion will decrease to 33 percent in the next 12-24 months. 32 percent of

respondents say that half or more of their revenues currently derive from services today. That figure

will increase to 38 percent in the next 12-24 months.

19%12% 9%

13%

17% 24%

13%15%

13%

10% 15%13%

7%

9% 9%9%

9%13%

11%7%

8%3%

6%

3%9%5% 2%

4% 2% 1%

3% 3% 5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

% Revenue from Hardware % Revenue from Software % Revenue from Services

What is/will be your organization's revenue breakdown between hardware, software and services

Today

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%


Security is Top of Mind Amidst Revolutionary Change Device makers are acutely aware of the risks associated with the rapid change that intelligent and

Internet-connected devices are ushering in. It is clear from the survey that device makers are

considering the various security risks as they transform their business models.

79 percent of respondents cite secure communications, and 75 percent cite prevention of data leakage

and loss, as paramount security concerns. 52 percent say having easy methods for updating

software/firmware on a device is critical. This is clearly important to mitigate hacker risk by having easy

methods to update vulnerable or compromised software on customers’ devices.

50 percent of respondents say they are concerned about regulations and certification (HIPPA, PCI,

FISMA, FIPS, etc.). Nearly half of respondents, 48 percent, are concerned about embedded software

IP protection, and 46 percent say proactive monitoring of devices for application issues is important.

15%11%

6%

14%

15%

15%

13%15%

18%

15%14%

13%

11% 14%

10%

5%10%

14%

8%

8%7%

9%5% 6%

5% 5%1%

2% 3%

1%

4% 2%7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

% Revenue from Hardware % Revenue from Software % Revenue from Services

What is/will be your organization's revenue breakdown between hardware, software and

services? Within 12-24 months

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%


Conclusion Device makers are emerging from a period of significant challenge – characterized by low margins, stiff

competition and brittle manufacturing supply chains. Increasingly they are retooling their devices to

make them intelligent and Internet-connected, opening up new ways of creating value for their

customers. They’re leveraging software, licensing and entitlement management strategies to transform

their business models and monetize their innovations. And they’re moving up the value chain to

become strategic solutions providers incorporating new products and services into the mix. Through it

all, device makers are also keeping an eye on the danger spots – looking at security from all angles.

Call it evolution or revolution. The fact remains that device manufacturing is in the throes of massive

and accelerating change that is re-forming the marketplace, creating new competitors, new winners and

new losers. And the race is on as existing and emerging competitors jockey to come out on top.

4%3%

7% 5%13%

5%17%

5% 10%2%

4%9% 9%

24%

10%

20%

12%

16%16% 18%

34% 38%

32%

33%

35%

37%

42%

79% 75% 50% 48% 31% 52% 28% 46% 32%

0%

20%

40%

60%

80%

100%

Se

cure

com

munic

atio

ns

Pre

ventio

n o

f d

ata

le

akage a

nd

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Regula

tory

and c

ert

ific

atio

n(H

IPP

A, P

CI, F

ISM

A, F

IPS

,etc

.)

Em

bedded

soft

ware

IP

pro

tectio

n

Revers

e e

ngin

eerin

g o

fsoft

ware

on the d

evic

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nd

ma

kin

g c

hanges a

t th

e…

Ea

sy m

eth

od for

updatin

gsoft

ware

/firm

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on d

evic

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En

coura

ge

and in

cent

custo

me

rs to r

egis

ter

their

devic

es

Pro

active m

onitorin

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f d

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for

ap

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Tra

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Intelligent devices are becoming more connected. How important are the following for ensuring

intelligent device security?

Very important

Somewhatimportant

Not very important

Not at all important


Infographic


Survey Background

This report is based on the 2015 Application Usage and Value survey, conducted by Flexera Software

with input from IDC’s Software Pricing and Licensing Research division under the direction of Amy

Konary, Research Vice President - Software Licensing and Provisioning at IDC. This annual research

project looks at software licensing, compliance and installation trends and best practices. The survey

reaches out to executives at software vendors, intelligent device manufacturers as well as the

enterprises that purchase and use software and devices.

Methodology and Sampling The data contained in this report is based on three Application Usage and Value surveys, one targeted

at independent software vendors (ISVs), one targeted at intelligent device manufacturers, and one at

end-user organizations that consume enterprise software. More than 583 respondents participated,

including executives and IT professionals from 264 software vendors, 172 hardware device

manufacturers and 147 enterprise organizations.

Survey Demographics

Location of Respondents

Of the 583 respondents to the survey, 53 percent reported their division headquarters as being

located in the United States. 6 percent were from India, 4 percent from the United Kingdom, 4

percent from Australia & New Zealand, 3 percent from Germany and 1 percent from France.


Respondents’ Vertical Market

Respondents fell across a wide array of vertical markets. With respect to Enterprise Respondents, 20 percent were from the Business/IT Consulting Services industry, 12 percent from the Government/Public Sector and 10 percent were from the education, Financial Services, healthcare, Oil/Gas/Utility industries respectively.

53%

6%4%

3%3%

2%1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%1%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%0%

Respondents Division Headquarters

United States

India

United Kingdom

Germany

Australia

Italy

Canada

New Zealand

France

Netherlands

Brazil

China

Finland

Mexico

Pakistan

Sweden

Croatia


With respect to software vendor respondents, 17 percent were from the financial industry, 16 percent from consumer, and 13 percent from Healthcare/Medical industry.

With respect to hardware device maker respondents, 23 percent are from the telecommunications/network equipment providers industry, 20 percent from the computer

2%3%

6%

12%

10%

10%

10%10%

10%

7%

20%

Which of the following best describes your organization’s vertical market?

Automotive

Aerospace/Defense

Consumer Goods

Government/Public Sector

Education

Financial Services

Healthcare

Oil/Gas/Utility

Technology

Manufacturing

Business/IT Consulting Services

10%2%

13%

17%

7%8%

5%

11%

2%

6%

6%

16%

Which of the following best describes the type of enterprise software your company develops?

Electronic Design Automation (EDA)

Human Resources Management (IncludingPerformance, Payroll and Talent Management)Healthcare/Medical

Financial (Including Accounting, Billing,Forecasting)Enterprise Resource Planning (ERP)

Customer Relationship Management (CRM)

Product Lifecycle Management (PLM)

Business Intelligence

Database Management (Including MasterDatabase Management)Project Management

Retail

Consumer


equipment and peripherals space, and 20 percent from the industrial/manufacturing automation space.

Software Licensing and Provisioning Research at IDC IDC's global Software Licensing and Provisioning research practice is directed by Amy Konary. In this

role, Ms. Konary is responsible for providing coverage of software go-to-market trends including volume

license programs, evolving license models, global price management, and licensing technologies

through market analysis, research and consulting. In her coverage of software maintenance,

subscription, electronic software distribution and licensing technologies, Ms. Konary has been

instrumental in forecasting future market size and growth. Ms. Konary was also the lead analyst for

IDC's coverage of software as a service (SaaS) for eight years prior to focusing exclusively on pricing,

licensing, and delivery. International Data Corporation (IDC) is the premier global provider of market

intelligence, advisory services, and events for the information technology, telecommunications, and

consumer technology markets. For more information about IDC, please see www.idc.com

About Flexera Software Flexera Software helps application producers and enterprises increase application usage and the value

they derive from their software. Our next-generation software licensing, compliance and installation

solutions are essential to ensure continuous licensing compliance, optimized software investments and

to future-proof businesses against the risks and costs of constantly changing technology. Over 80,000

23%

20%

20%

10%

12%

4%

5%6%

Which of the following best describes your organization’s vertical market?

Telecommunications/NetworkEquipment Providers

Computer Equipment andPeripherals

Industrial/ManufacturingAutomation

Building Automation

Healthcare/Medical Devices

Electronic Test andMeasurement Equipment

Automotive (IncludingInfotainment)

Consumer Electronics (IncludingHome Automation)

http://www.idc.com/


customers turn to Flexera Software as a trusted and neutral source for the knowledge and expertise we

have gained as the marketplace leader for over 25 years and for the automation and intelligence

designed into our products. For more information, please go to www.flexerasoftware.com.

Flexera Software, LLC

(Global Headquarters)

+1 800-809-5659

United Kingdom (Europe,

Middle East Headquarters):

+44 870-871-1111

+44 870-873-6300

Australia (Asia,

Pacific Headquarters):

+61 3-9895-2000

For more locations visit:

www.flexerasoftware.co

http://www.flexerasoftware.com/

The Third Industrial Revolution: Intelligent Devices, Software ......implementing for your devices? The Third Industrial Revolution: Intelligent Devices, Software, and the Internet

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