RIM recently unveiled a prototype of its new BlackBerry hardware and software that it’s hoping will reignite sales of its smartphones across the globe. Lagging behind Apple and Android-based handsets that have embraced software apps on their devices as a way to improve customer experience and create new revenue streams — it seems that BlackBerry’s focus on its hardware might just prove to be fatal.

Our analysis of the mobile phone market underscores the criticality of applications. As the table below shows, the iPhone and Nokia Lumia cost about the same to manufacture. However, the iPhone is able to command a $200 price premium over the Lumia. While Apple’s brand is part of the reason, the iPhone’s application ecosystem, which dwarfs Lumia’s, is also a big contributor.

Manufacturer – Model Apple iPhone 4S Nokia Lumia 900
Component Cost $190 $209
Selling Price $649 $450
Number of apps 652,054 82,234

Besides differentiating mobile phones, applications by themselves are a $10B market, which RIM (in particular) has missed out on so far. This is ironic, considering that the original BlackBerry — a text book disruptive innovation — owed its explosive growth to an email application.

BlackBerry’s historical stronghold as a device embraced by enterprise IT has also been upstaged by the iPhone, which has become the poster-child for Bring Your Own Device (BYOD) programs in which IT departments allow business users to use personal devices to access corporate data and applications. Specialized devices like the BlackBerry are being subsumed by general purpose devices, like the iPhone, powered by applications.

As RIM struggles to catch up and tries to lure application developers with $10,000 guarantees for its new BlackBerry10 platform, it seems timely for manufacturers in other industries to take heed as hardware devices are becoming increasingly app driven. Manufacturer attitudes, such as those exemplified by “If it’s made out of steel, it has value. If it’s software, you give it away” are rapidly becoming not just outdated but disastrous to business success.

So, what are forward-thinking device manufacturers doing? Quite simply, the winners are seeing the value of software and using innovative approaches to monetizing that value. An example in the telecom and networking space is femtocell manufacturer, Ubiquisys.  A femtocell is a small cellular base station that allows mobile service providers to fill gaps in signal coverage (e.g. indoors) by switching cell phone connections that would otherwise be dropped to a broadband network (such as a residential broadband connection).

A software-based strategy has been central to Ubiquisys’ success. Ubiquisys has unbundled the smarts of a femtocell from the underlying hardware by creating a software stack that enables capabilities, including spectrum optimization, self-organizing femtocell grids, content caching, video adaptation, and software lifecycle management. This allows Ubiquisys to mix and match capabilities and deliver products for different market segments (e.g. residential, enterprise, rural).

Ubiquisys’ strategy also enables different pricing models. For example, you can buy a femtocell that can handle 8 or 16 simultaneous cell phone connections without changing the hardware. A software-based approach also allows a femtocell to be embedded inside a broadband router, which helps reduce space, administration, and energy costs for customers. This transforms a purpose-built router into a broad platform for delivering software capabilities including femtocells. In short, a software-based product strategy enables Ubiquisys to maximize revenues by creating product variants quickly and cost-effectively.

Ubiquisys and similar manufacturers illustrate three stages in a software-driven transformation of device manufacturers:

First, manufacturers are unbundling the intelligence in a device from the underlying hardware. Garmin and Magellan have unbundled geo-positioning capabilities from their proprietary devices into apps that power similar features on a smartphone. In the telecom and networking space, companies like Vyatta and Riverbed Technologies, are unbundling routing and security features from the hardware to provide pure software-based solutions that can be “provisioned, licensed, billed, and scaled on-demand, truly presenting the network as an application.” Even Nordictrack, a treadmill manufacturer, has unbundled the smarts of a treadmill into software that runs on an Android tablet.

Second, unbundling of device smarts from the underlying hardware allows an application ecosystem to emerge. Software-driven networking, as exemplified by Vyatta and Riverbed Technologies, is enabling an “app store for networking” with capabilities such as routing, switching, firewall, load balancing, and wide-area network optimization available as apps to be mixed and matched on off-the-shelf servers. In the industrial automation vertical, manufacturers like Cognex are unbundling machine vision capabilities from the underlying hardware to enable an open ecosystem of factory floor equipment and applications that plug and play with each other.

Third, ubiquitous Internet connectivity of devices is enabling “hardware plus software plus services” models. Ford, with its Sync dashboard system, offers personalized traffic alerts and vehicle health reports by transmitting data to and from cars. Ford also has partnered with an auto insurance provider to track and transmit mileage data, which can result in better insurance rates for drivers. Nordictrack treadmills transmit your workout data to a cloud-based application, where you can also program and download custom workouts to your treadmill and compete with other runners.

Such smart services are additional revenue opportunities beyond the initial hardware sale and applications. One medical device manufacturer plans to flip its revenue mix from 60% equipment, 40% services by developing Internet-enabled proactive maintenance services for hospitals. It’s no surprise that mobile operators like Verizon are expanding into machine-to-machine services. Verizon acquired Hughes Telematics to enter the automotive infotainment and mobile health services.

We see a tremendous opportunity for device manufacturers to grow revenue by transitioning to software-driven businesses. The remaining question is how one goes about it. In our experience, a software-driven business transformation requires device manufacturers to:

  • Protect intellectual property. This may be obvious to software vendors. However, this is a new concern for device manufacturers, especially for those that are pursuing an “all software, no hardware” approach, such as Vyatta.
  • Re-think business models based on how customers want to use and pay for products. A software-driven business has enormous flexibility, ranging from try-before-you-buy, subscription models, freemium models, pay-by-use, perpetual licenses, and so on. In a telling symptom, Google Play has announced that it’s added subscription business models, so that “developers can use In-app Billing to sell monthly subscriptions from inside of their apps. All subscriptions are auto-renewing, for every app and game and every type of subscription product. Developers just set the price and billing interval and Google Play manages the purchase transactions for them, just as it does for other in-app products and app purchases.”
  • Automate the entire software, device, and entitlement lifecycle from an end user’s perspective. These lifecycle processes include software installation, device provisioning, software activation, subscription management, software updates, upgrades, and other changes to entitlements. Internet connectivity is a key enabler for firmware updates and software updates, in addition to data upload/downloads, that are at the heart of smart services.

As we move towards an increasingly software-driven world, manufacturers that fail to acknowledge and act upon the opportunity to grow revenues and streamline customer experience will be left behind. If you fail to prepare, be prepared to fail — and taking a look at RIM’s troubles, it’s certainly advice we’d offer any intelligent device manufacturer who hasn’t devised a strategy in a world that is software-centric.

This guest post was written by Bashyam Anan, Director of Product Management at Flexera Software, which is a leading provider of strategic solutions for Application Usage Management.