Introduction to Hardware-as-a-Service: Why IoT's 'Netflix Moment' Is Coming and How You Can Profit
IoT is making it possible for hardware businesses to add a layer of connectivity to physical products and unlock unprecedented sources of value delivered via software. Learn how you can ride these currents and launch your own HaaS products and services.
From the sectors of HVAC and micromobility to oil and gas, incumbents and startups are thinking about how connectivity can enable recurring revenue models over one-off hardware sales. They recognize that this will drive major cost savings via preventative maintenance and remote control while also helping them differentiate themselves by offering premium services and software.
However, other business leaders claim it’s still too early to deploy the Internet of Things in their industry. They’re hesitant to act now because the path ahead is unclear.
In this article, we’re covering how IoT and Hardware-as-a-Service can transform your business model to help you serve customers more effectively. We’re answering the big questions, such as:
- What does IoT’s “Netflix Moment” mean for hardware businesses?
- What is HaaS?
- How can software and connectivity benefit hardware businesses?
- How do you know if your product suits a HaaS business model?
- What’s holding people back from HaaS—and are these reasons valid?
If your enterprise invests in IoT and adopts HaaS business models now, even on a small scale, we're confident you'll be better positioned than those who wait until IoT and HaaS are the new normal in their industries.
IoT’s ‘Netflix Moment’ Is Coming
Let's go back in time to 2000. At a glass table in a Dallas conference room, Netflix co-founders Reed Hastings and Marc Randolph offered to sell their small company to Blockbuster for $50 million. At the time, they were shipping DVDs by mail, but they saw how the Internet was changing their industry and made an offer to develop and run Blockbuster.com.
They were denied, but they were right. The world was changing.
More specifically, the Netflix co-founders took note of how major trends like mobile device ubiquity, LTE network proliferation, and streaming to multiple devices were converging and growing in popularity. They made a big bet on the mainstream adoption of subscription streaming services—and two years later, they went public with a market cap of around $300 million. Today, Netflix's market cap is over $81 billion, and the company is the global leader of media streaming and entertainment.
So, what did Hastings et al. do right? They monitored the trends, took action sooner rather than later, and bridged the gap on the way to the top by using a hybrid model of mail-order DVDs and streaming until 2011.
In contrast, Blockbuster thought streaming was far off despite being on its doorstep, and the video rental company ultimately declared bankruptcy in 2010.
Today, we’re seeing a similar story unfold as IoT approaches its “Netflix moment.”
The Big Convergence Making HaaS Unignorable
IoT—and, by extension, HaaS—is seeing the same convergence of technological, economic, and cultural trends that will enable widespread adoption in the coming years.
It’s been 11 years since Marc Andreessen famously wrote that “software is eating the world.” In that time, an array of industries underwent disruption, including retail, entertainment, financial services, and transportation.
The last holdouts in legacy industries like industrial equipment manufacturing, oil and gas production, and HVAC are quickly waking up to the power of software and what it can do for their customers and businesses. In other words, IoT is quickly advancing through the Hype Cycle in these industries, mostly thanks to a confluence of the following trends:
Digital Transformation Following COVID-19 is Accelerating
The pandemic significantly accelerated the digital adoption of IoT. In fact, according to a 2020 survey from Gartner, 47% of responding organizations planned to increase their IoT investments.
Cellular Technology is Vastly Improving
As their coverage, security, and reliability improve for IoT applications, cellular networks are increasingly becoming a connectivity technology of choice, with growing adoption of cellular-specific IoT protocols and standards like LTE CAT 1 and LTE CAT M1.
Consumer Familiarity With Connectivity is Growing
Physical products with digital interfaces are no longer new to consumers and businesses—in fact, they’re the norm.
Investors' Preferences Are Changing
Mention “recurring revenue” and investors’ ears perk up. IoT opens the door for recurring revenue models that are sustainable and attractive to investors.
Business Strategy is Evolving
At a time when enterprises are making top-line growth investments to future-proof their organizations, an increasing number of business leaders are acknowledging that investing in and implementing IoT boosts connectivity, security, networking and scalability in the long run.
Distributed Computing is More Powerful
Distributed computing is becoming more powerful by the day—in fact, the power of a distributing computing project for disease research surpassed the world’s most powerful publicly known supercomputer (IBM’S Summit) in 2020. In terms of IoT, this means edge devices can now do some heavy duty processing before sending data to the cloud.
IoT Platforms Are Making Building Connected Products More Achievable
Building connected products in-house used to require significant expertise in fields like embedded device hardware and firmware, networking and communications, low power optimization, over-the-air update services, etc., making IoT cost- and time-prohibitive for all but the most well-capitalized businesses. However, IoT platforms like Particle have taken over the hard parts of building reliable connectivity into hardware products, thereby allowing more businesses to benefit from IoT.
The ongoing advancement and convergence of these trends means HaaS isn’t a future trend or a thought exercise, but something that is actively taking hold in hardware-dominated fields.
And just like with Netflix, the conditions for digital disruption in seemingly “laggard” industries are manifesting themselves quickly.
What Is Hardware-as-a-Service (HaaS)?
Before we go any further, it’s important to explain what HaaS is and acknowledge the wide variety of hardware, software, and hybrid business solutions. Particle CEO and co-founder Zach Supalla defines HaaS as “an ongoing service through a hardware product” that involves a business “charging a subscription rather than selling you the hardware.”
Side Note: Sign up for Zach's newsletter, Atoms and Bits, to get insights into building connected products you can't get anywhere else.
One example is jet engines, for which manufacturers charge airlines based on uptime or usage. When Boeing sells Delta an engine and bills Delta for the hours that the engine is in the air or receiving maintenance, that’s HaaS.
Next, let’s explore why software and connectivity have an ever-increasing role in hardware.
How Can Software and Connectivity Benefit Hardware Businesses?
First and foremost, selling hardware with a service component maximizes customer lifetime value. Think about it: Although a piece of hardware that’s produced, sold to a distributor, and then sold to an end customer will generate some revenue if the margins are good, a sale made under this model is a one-time deal that looks good for cash flows in a given quarter but ultimately leaves you with one customer touchpoint (plus repairs/replacements).
Recurring revenue streams like subscriptions and usage charges can make businesses more profitable and sustainable due to increased product stickiness and customer lifetime value—and the same is true for HaaS and IoT.
How to Tell if Your Product Suits a HaaS Business Model
Whether your product can evolve to adopt a HaaS model ultimately depends on your own creativity. That is to say, tons of companies could apply a HaaS model to their products, but first they need out-of-the-box thinkers to identify how to bring this about.
According to Forrester, industries ripe for IoT disruption include manufacturing, distribution, utilities, and pharma.
Those already leveraging HaaS business models include:
- HVAC: Manufacturers in this industry are adding connectivity to condensers, which creates a closed loop of system data.
- Industrial monitoring: When industrial equipment uses a HaaS model to track usage, equipment renters can bill based on that usage.
- Energy production: "Smart" EV chargers unlock data that homeowners can use to track savings and optimize their usage—in other words, data that's worth paying a recurring subscription fee.
Having high-value assets is another solid way to tell if your business could benefit from a HaaS model. McKinsey Senior Partner Mark Patel, who specializes in IoT, shared this advice at our recent Spectra conference:
“If you have high-value assets with defensible value to the customer, you should be figuring out how to further monetize that hardware with services.”
In other words, a $300 pump might not be worth adding connectivity to, but a $10,000 to $100,000+ piece of equipment operating in remote and rugged conditions would certainly benefit from IoT.
That said, avoid zeroing in on a high-value piece of hardware manufactured by your business and instead focus on customer outcomes. By incorporating a service, software, or connectivity component into your product, the resulting variable model of consumption and usage creates buyer demand—and it won’t take long for buyers to recognize the value of the insights generated, the time/labor costs saved, and the accidents and downtime averted. Moreover, customers will be paying less upfront to start using your products, thereby lowering their capital expenses.
Soon, your product will start to feel incomplete without the full service. As a result, existing customers will pay more and new customers will be drawn in.
So, how can you determine what to charge? By design, IoT-connected devices like machinery and servers are measurable and monitorable, so you can track feature usage across systems and then convert that usage data into a model for pricing. While pricing is nuanced, a good rule of thumb is to charge more for what’s most essential and helpful to your customers.
The Jet Engine Example: A Master of HaaS
The “charge more for what matters most” philosophy is behind the jet engine becoming such a shining example of HaaS done well—and here’s why.
Jet engines are:
- A valuable asset with high-stakes outcomes (i.e., they need to work, or people are in danger)
- Materially affected by how they’re run and maintained, as well as where they’re operated
A HaaS model only stops making sense if the cost of the hardware and service combined is so high that a customer no longer sees that level of value, creates a new solution on their own, produces their own goods, or opts for a less connected solution.
As you can imagine, managing jet engine creation and maintenance for major airlines juggling thousands of flights a day is a tall order, so using a HaaS model with a high price works.
With the jet engine example in mind, businesses considering the switch to HaaS need to properly assess how much value they provide in order for the cost to make sense to the customer.
It's also important to understand that connected products are associated with ongoing investments and costs, such as software updates/maintenance, data costs for cellular connectivity, and payroll. The recurring cost for the customer needs to allow for a best-case scenario of 50% to 70% margins to really be viable—in other words, to make the unit economics of the product work.
What’s Holding Back Potential Innovators From HaaS Adoption?
At this point, you might be wondering why anyone wouldn’t want to sell with a HaaS structure. While some are intimidated by the amount of time and investment associated with switching to a HaaS business model, others feel it is “too soon” to do so, as the customers in their industry are not ready to move full steam ahead into HaaS.
Here are four roadblocks that managers and leaders face as they consider taking the leap into HaaS.
Challenges in Building Software and Services as a Hardware-First Organization
1. The development cycle of hardware is longer than software. As mentioned earlier, the development cycle of hardware is currently longer than that of software. Lots of teams are used to release cycles that happen on five- to 15-year intervals, whereas software development cycles typically have quarterly roadmaps with frequent new-feature launches.
2. The quarterly earnings cycle makes leaders feel boxed in. So many businesses run on quarterly earnings cycles—and while they’re helpful at times, companies strive for up-and-to-the-right, steady revenue graphs that show predictable and mature growth. Launching a HaaS model introduces a transition that comes with guaranteed volatility, which is hard for business departments to not only manage but justify.
3. The rollout and go-to-market process is overwhelming. Change management for IoT is no joke. Before an integrated solution ever goes to market, the sales force needs to be equipped to sell the product, the services team must be fully trained on the new offerings, and all distributors and third-parties installing and maintaining the products have to be upskilled and retooled—which is no small feat given how many technicians and engineers are well-established in their areas of expertise. In short, the HaaS rollout and go-to-market process is challenging both strategically and practically.
4. The shift from reactive to preventative maintenance is big. Last but not least, moving from reactive to preventative maintenance is new for many businesses. In reactive maintenance, a team sells a product, the customer says something when they encounter an issue, and then the business provides assistance.
In a HaaS model, reactivity doesn’t cut it, as implementing a new layer to an existing product demands a proactive approach. This article on preventative maintenance shares some good advice on how to bring about this shift at more traditional companies.
Some Businesses Think We’re Just a Hair Too Early
Beyond the aforementioned challenges associated with building software and services as a hardware-first organization, the idea that “it’s too soon for HaaS” might be the most common hurdle to overcome. Although they know some businesses are considering connectivity, many enterprises don’t want to think about connectivity right now—they don’t feel late to the game, so they act conservatively because the path forward is unclear.
The error here is that disruption will be happening in so many industries that eventually, it’ll be too late to catch up to traditional competitors who come to market with a connected solution. Moreover, this disruption is likely to come from a company with an entirely different business model that’s software-enabled from the start.
While the “plumbing” of connectivity isn’t yet perfect (though Particle helps!) and the economics of connected hardware aren’t fully proven in all use cases, there are clear themes starting to come together—for instance, the miniaturization of devices, distributed computing, and more. So, what does this mean for IoT? Simply put, the time to establish a strong IoT foundation is now, not in five years.
Why HaaS Startups Have an Advantage—and How Enterprises Can Match It
Before wrapping up, let’s acknowledge the elephant in the room: Trying to retrofit software and connectivity into an existing hardware line is tough for enterprises, full stop, while startups have the advantage of building processes and products from the ground up.
A great way to mitigate HaaS-related challenges as a large, established organization is to gain executive buy-in and start a separate business unit to explore and test connected products. This startup-at-an-enterprise feel will allow for faster development and validation of the HaaS approach, which sets the stage for eventually bringing more HaaS to the rest of the business.
Here at Particle, we’ll often work with people who have a clear vision and high hopes for what their integrated systems could look like—but trying to layer these aspirations on top of an existing business process, an existing structure, and an existing way of delivering the product is high-effort and high-cost.
That’s why we’re avid proponents of running HaaS as a separate test alongside the existing business. At some point, if the experiment can demonstrate replicable success, the two come together.
So… Where to Start?
If you’re an existing hardware business relying on one-off sales, iterating in your space to incorporate a service or software component is no small feat.
Start small—and when it comes to measuring success, look at the profitability of that HaaS product compared to the rest of your business. Tracking the financial impact of a connected product early on will give you more leverage to expand your IoT use when you’re making the case for a higher budget in the future.
Here are four approaches from McKinsey to spark some ideas for you:
When it comes to connectivity and making sure a machine or sensor is doing its job, align your product development and release cycles around software and data release cycles. Launching a new piece of hardware every five, 10, or 15 years won’t cut it.
Whether you work in operations or engineering, consider leading the charge on more iterative, frequent hardware launches within your business. Yes, it’ll change the way your product development, engineering, IT, and sales/marketing (GTM) teams operate, but in the end, it’s well worth your time.
Oh, and don’t make the mistake of not charging for the software. After all, it’ll only benefit you if you actually charge for it.
As Zach explains it, “Traditional hardware purchases do not support software investments. Companies that are investing money to create ongoing value for customers through software but aren’t charging customers for that value either need infinite cash to support those investments (Amazon/Google) or those products will get shut down (Insteon, Revolv, etc.).”
Key Takeaway: When It Comes To IoT, Don’t Be a Blockbuster
Whether you feel ready or not, IoT’s moment is already here. Businesses that consider implementing a HaaS business model now—even as a trial for some smaller products—will no doubt be ahead of the curve in the years to come.
Want to start developing your own connected products? Consider this your invitation to see if Particle’s best-in-class IoT Platform-as-a-Service could help you connect, manage, extract data, and track the performance of your various hardware solutions.
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