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The Software Paradox

Acquisitions Alone Will Not Magically Turn OEMs Into Real Software Businesses

Software is eating the world…. [and] people are asking, “Isn’t this just a dangerous new bubble?” My own theory is that we are in the middle of a dramatic and broad technological and economic shift in which software companies are poised to take over large swathes of the economy. —Marc Andreessen, 2011

OEMs MUST EMBRACE SOFTWARE. BUT HOW AND TO WHAT ENDS?

It hasn’t been ten years since Marc Andreessen made his famous remark about “software eating the world,” but his prediction that software would soon “take over large swathes of the economy” has already come true in spades. The world of pure thought is displacing physical hardware and replacing labor-intensive services in nearly every market and niche application imaginable, and it shows no signs of slowing down. In one form or another, every company is becoming a software company. But not always because they wanted to, and not always with brilliant success.

When we use the term “hardware OEMs” we mean the manufacturers of equipment, machines, and myriad devices that are used in everything from heavy industry, to commercial services, to individual homes. In their world, code continues its relentless march into everything. This fact is indisputably disrupting the traditional profits and revenue models of many industries, from heavy industry to smart homes. The hardware OEMs have literally had no choice but to embrace software.

The questions are: How, where, and to what ends?

Chart of OEM software acquisitions

OEMs have been developing software for decades. But their expertise has always been in purpose-built software embedded in their machines or devices—software that was necessary to make the hardware work. These code-products went by names like firmware, configuration programs, or driver software, and OEMs bundled them with their physical products, usually not even charging money for them. The hardware OEMs grew up in an environment that was all about physical control, and to this day they remain challenged by data acquisition, data value, and data analytics.

But the end-customers of the OEMs’ devices for energy management in the home, patient diagnosis in the hospital, or the behavior of robots on a factory floor have woken up to the extraordinary value represented by networked machines and the applications that run on them.

Engineers and developers working inside OEMs have always wanted to better serve their constituencies by making their equipment and devices do more things, interact with relevant devices or systems, and in general provide new values to the user. But in many cases, that’s been harder to accomplish than anyone imagined.

This has left the OEMs open to disruption from multiple directions. On one side it was the big IT and cloud computing players like Microsoft, Google, and AWS. On the other side it was their own customers, who were now saying, “We’re having trouble continuing to work with you. You’re not providing technologies that allow us to use our data the way we want to, or to integrate with other ‘things’ you don’t make, or to create new application and services values in our world.”

BUY VERSUS BUILD

If the upstream IT and telco arms-merchants are addicted to horizontal technologies like cloud computing and 5G networks, then the true interpreters and vertically skilled translators of these horizontal technologies ought to be the domain-fluent OEMs. Because of the primacy of the machine or device—think automobile, white goods appliance, factory robot—the software revolution should primarily be an opportunity for incumbents, meaning the hardware OEM.

And it is a fact that the continuing expansion of IoT and Smart Systems is opening up many new growth opportunities for OEMs. A diverse range of OEMs and hardware businesses have been investing large sums of money and resources in new software and data analytics solutions. Thus far, however, the results of these efforts have been mixed at best, leaving many equipment and machine OEMs failing to meet their growth revenue goals.

If these indicators are true, and we believe they are, then OEMs need to be thinking about the new business and operating models they need to embrace to capture the value of software. And yet, rather than asking the tough questions that address new software business models and solution-delivery modes, far too many OEMs default to the classic and simpler quandary, “Should we build or buy?”

Since most OEMs don’t know how to develop software on their own, or how to be in the software business, many of them have responded by acquiring software businesses. However, when OEMs buy software companies, they face the challenge of keeping them close enough to get synergy, but not so close that they strangle a strange business that is fundamentally alien to them.

Unfortunately, expecting OEMs to keep their hands-off businesses that they don’t grasp culturally has been too much to expect. And now today many OEMs are realizing that they poisoned the water by not understanding the companies they bought, or the software business in general.

WHAT ROLE SHOULD WE PLAY? WHAT BUSINESS AM I REALLY IN?

As connectivity, sensors, software and new technologies invade virtually every OEM segment across the business landscape, is it time for OEMs to stop thinking of themselves as “hardware” businesses and begin to think of themselves as software systems and solutions businesses?

Because the Smart Systems and IoT opportunity is very complex and has evolved slowly and unevenly, the scale, scope and sophistication of today’s solutions players has not progressed very fast or evolved very far. To the casual observer, there doesn’t appear to be a significant number of OEM players that have systematically addressed this transition. It’s no wonder that there have been so many acquisitions.

While many will point to a specific company’s strategy or potential technical missteps as the cause of such failures, Harbor believes that many of them can be traced to a broader confusion about roles. Sometimes companies need to stop and ask themselves, “Who are we, and what part do we play in the market?”—and their answers to these questions need to be correct. Spectacular failures occur because leadership teams either answer the questions wrong or fail to ask them at all.

With the convergence of information systems (“IT”) and operational technology and systems (“OT”) inherent in the evolution of smart systems and the Internet of Things, many larger diversified manufacturers like GE, Siemens, Bosch, Schneider Electric and ABB are looking to transform themselves into digitally focused software players.

The Smart Systems opportunity presents multiple challenges—from core technology innovation to new business models, different ecosystem and channel relationships, and on and on. This market opportunity represents a very complex set of inter-related elements, but many participants are coming to see the outsized role software will play. Designing a successful “software” business involves optimizing all dimensions, not just the technical elements.

OEMs should be thinking about the new and unique strategic roles and differentiated business models that they can embrace to drive new software opportunities and catalyze growth. Their mindset has to grow far bigger than just software M&A.


“The Software Paradox” is distilled from our research into OEM acquisitions of software businesses.

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Cover of IoT Software Research brochure

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