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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 3
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.
The Third Industrial Revolution: Intelligent Devices, Software, and the Internet of Things 4
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
ma
rgin
s
Red
ucin
g m
an
ufa
ctu
ring
costs
Red
ucin
g t
he
num
be
r o
fp
rod
uct
SK
Us
Red
ucin
g t
ime t
o m
ark
et
for
cre
atin
g n
ew
pro
du
cts
/en
han
cem
en
ts
En
ha
ncin
g a
bili
ty t
o r
ea
ct
quic
kly
to
ch
an
gin
g m
ark
et
nee
ds a
nd/o
r ne
w m
ark
et
opp
ort
un
itie
s Se
cu
rity
Ma
kin
g m
ore
mon
ey
As a device manufacturer, what are the biggest challenges faced by your company?
Major challenge
Minor challenge
Not a challenge
Not applicable
The Third Industrial Revolution: Intelligent Devices, Software, and the Internet of Things 5
• 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
The Third Industrial Revolution: Intelligent Devices, Software, and the Internet of Things 6
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
telli
gence
Sm
art
er
city
develo
pm
ent (i.e
.P
redic
tive a
na
lytics in
garb
age b
arr
els
, re
al-
tim
e tra
ffic
info
rmatio
n)
Deliv
er
conte
nt to
con
sum
er
item
s (
i.e.
Info
tain
ment
in c
ars
)
En
hance s
hoppin
gexp
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?
The Third Industrial Revolution: Intelligent Devices, Software, and the Internet of Things 7
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.
The Third Industrial Revolution: Intelligent Devices, Software, and the Internet of Things 8
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
ensin
g a
nd e
ntitle
me
nt
ma
nagem
ent syste
ms to d
eve
lop
new
offerin
gs that bundle
devic
e, serv
ices
and/o
r consu
ltin
g
We levera
ge d
ata
fro
m s
ensors
em
bedded
in o
ur
de
vic
es to
uncover
new
sale
sopport
unitie
s (
i.e. N
ew
pro
duct sale
s,
upgra
des, busin
ess in
telli
gence, e
tc.)
We levera
ge d
ata
fro
m s
ensors
em
bedded
in o
ur
de
vic
es to
uncover
new
serv
ices
opport
unitie
s (
i.e. D
evic
e r
epair s
erv
ice
s,
etc
.)
We e
lectr
onic
ally
turn
fe
atu
res o
n a
nd o
ffbased o
n p
urc
hases (
i.e. F
or
$5
, you g
et
mu
sic
pla
yer,
for
$10, you
get m
usic
pla
yer
+ r
adio
)
We e
lectr
onic
ally
enable
mo
re c
apacity
based o
n p
urc
hases (
i.e. F
or
$5
, th
is w
illpro
cess u
p to 1
,000 s
ignals
, fo
r $10
, th
isw
ill p
rocess u
p to 2
0,0
00 s
ignals
)
We c
harg
e b
y th
e a
mo
unt of softw
are
tha
tis
used o
n y
our
hard
ware
(i.e. $10 if user
pro
cesse
d <
1,0
00 s
ignals
last m
on
th, $20
if
use
r pro
cessed <
20
,000 s
ignals
)
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
The Third Industrial Revolution: Intelligent Devices, Software, and the Internet of Things 9
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%
The Third Industrial Revolution: Intelligent Devices, Software, and the Internet of Things 10
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%
The Third Industrial Revolution: Intelligent Devices, Software, and the Internet of Things 11
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
loss
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
e a
nd
ma
kin
g c
hanges a
t th
e…
Ea
sy m
eth
od for
updatin
gsoft
ware
/firm
ware
on d
evic
e
En
coura
ge
and in
cent
custo
me
rs to r
egis
ter
their
devic
es
Pro
active m
onitorin
g o
f d
evic
es
for
ap
plic
atio
n issues
Tra
ck w
he
ther
a c
usto
me
r ha
sin
sta
lled p
atc
hes
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
The Third Industrial Revolution: Intelligent Devices, Software, and the Internet of Things 12
Infographic
The Third Industrial Revolution: Intelligent Devices, Software, and the Internet of Things 13
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.
The Third Industrial Revolution: Intelligent Devices, Software, and the Internet of Things 14
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
The Third Industrial Revolution: Intelligent Devices, Software, and the Internet of Things 15
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
The Third Industrial Revolution: Intelligent Devices, Software, and the Internet of Things 16
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)
The Third Industrial Revolution: Intelligent Devices, Software, and the Internet of Things 17
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