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CLIENT: prpl FOUNDATION
Oct 27, 2014: EBN
We've all read the ever-increasing projections for Internet of Things (IoT) market growth. As this is occurring, there are a number of significant implications for the semiconductor and device supply industry. The interrelated dynamics between projections for IoT growth and the impact on the supply chain are the subject of the following article -- and are presented as challenges with some possible solutions.
This is pretty much the force of nature in this industry and therefore is inevitable. This implies that everyone in the chain -- IP suppliers, silicon vendors, system designers, industrial design houses, PCB designers, ODMs, OEMs, and ISVs -- will all get squeezed on margins.
We're now in a cycle of commoditization of embedded hardware. As this cycle ebbs and flows, certain verticals are hit with price pressures that usually are usually balanced by volumes to make up for the reduced margin. Unfortunately, in the case of the IoT, there's no single high-volume vertical that allows for leverage across products. Rather, there is more of a spectrum of devices with a wide variety of applications, feature sets, and capabilities that have hugely varied BOMs with differing CPU, memory, connectivity, I/O, capability, and power requirements.
Together these devices represent high volumes but rather low economies of scale due to the varying nature of these devices. Even where there are hardware economies of scale -- such as in industrial automation -- the diverse solution set (monitoring and control, surveillance, M2M) results in many software solutions and multi-year maintenance costs. In other words, while combined volumes are astronomical, costs will grow, and margin pressure will persist. And everyone in the value chain is affected.
In the IoT business, much of the technology is governed by how smart the software is. Hardware, by itself, acts as an enabler, and software makes the solution. In the past, the cost of goods sold (COGS) was a trivial amount in comparison to the hardware. However, it now represents a major chunk of the cost due to the software development and maintenance required. The IoT is mostly about software, so not only are hardware margins squeezed (see Challenge 1), but software will add a tangible, costly, nonscalable element to the cost equation due to the wide selection of systems (and the functions they perform).
Some companies enjoy a horizontal ecosystem of embedded hardware; Microchip is a good example. Others need to build solutions around embedded hardware -- and in some cases even build complete vertical solutions. Since IoT devices can be found in healthcare, industrial, agricultural, surveillance, automation, and many other areas, the software needed is inherently unique depending on the market. Unlike mobile phones, where unprecedented growth and adoption have led to combined efforts around the Android OS, the IoT is not currently at that stage and has multiple, distinct verticals. Consolidation within a vertical is anticipated over time, but costs will be an innovation barrier for many.
In today's design silos=, it's hard to see how one silo in itself can be profitable, given the above two challenges. Without being able to leverage hardware and software across verticals, production costs may exceed revenue, assuming traditional business models.
The rather obvious solution is the creation of a common set of tools to enable:
Collaborative industry activities in support of standards and common technologies will improve profitability for all entities in the supply chain.
The prpl Foundation's efforts will help retain margins in the IoT ecosystem by reducing COGS and exploiting the economies of scale enabled by a foundation. This eliminates the need for individual companies spending considerable resources on ancillary activities such as software development, which is not likely among their core strengths.
The prpl Foundation aims to bring together the minds and capabilities of member companies and create a platform for evolving standards, so that leveraging them across markets and nodes will be possible. One example is building a security framework around virtualization. Companies will be able to differentiate on their core strengths, leading to reduced COGS and ideally improved profitability.
If prpl is successful in creating a consistent set of container APIs across all nodes in the IoT data path, it will allow a new business model to emerge around software-as-a-service (SaaS), platform-as-a-service (PaaS), and infrastructure-as-a-service (IaaS). These models already exist but are expensive to set up due to the silos in the IoT space. For example, Tesla's Over-the-Air (OTA) service is very well thought out, allowing for updates, monitoring, communication, value-added services, etc. But it will be repeated by every other car manufacturer, since there are no standards in software around OTA in the IoT. A lack of standards in the IoT or a lack of APIs adopted by the vehicle OEMs prevents others from building value-added services in the automotive space. Without this open-source development, every car OEM will be forced to invest in and invent its own paradigm for software in the car to talk to the cloud infrastructure. This will only foster fragmentation and slow innovation. And every car manufacturer is looking to deploy OTA updates over the next year.
The foundation's goals are to develop open-source software for the connected world, to promote virtualization for security and multi-tenant devices, and to ensure code portability to keep fragmentation at bay. It's our belief that this is the enablement required to allow the IoT market to flourish and the supply chain to remain healthy as manufacturers, OEMs, and service providers are able to leverage previous products as a direct result of shifting commodity R&D to foundations such as prpl.
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