Device manufacturers face real risks from grey market abuse - and many are fighting back with software licensing and entitlement management.
If you're a manufacturer outsourcing production to a third party, you may be at risk for grey market abuse.
Specifically, many intelligent device manufacturers who outsource their manufacturing processes are discovering that some third-party manufacturing shops are actually over-producing the contracted-for device and then selling the overage stock on the grey market for personal profit.
The grey market goods are not counterfeit per se – they’re made to the original device manufacturer’s specification. Indeed, they are identical in every way to the legitimate products but they are sold on the grey market for a fraction of the price. Unfortunately there is practically no way to differentiate a grey market good from the original which places the true manufacturer’s brand at risk and profits in jeopardy.
How Can Manufacturers Combat Grey Market Abuse?
Unlike the device, the software embedded on the device or that controls the device can be easily modified or updated if the right software licensing technology is implemented. The device and software becomes highly flexible in configuration even after the device is shipped. For example, manufacturers can require that any new device “call home” to a cloud-based license server to obtain an activation license so that the device becomes operational. If an illegally manufactured device tries to do this, it will not be granted a license and, in turn, will not function. Using this strategy, device manufacturers may not be able to prevent the illegal manufacture of extra-contractual goods by a third-party manufacturer – but they can prevent those devices from functioning.
Another common approach is to add a software license during the manufacturing process. The device manufacturer can, for example, provide a license for 10,000 devices. Once the 10,000 devices are made by the third-party manufacturer, they can no longer get licenses and therefore they are unable to produce additional product. When the devices wake up, they check for a license before continuing to boot up – and will not operate if the 10,000 device licenses are exceeded.
Software licensing can also be used to turn device features and/or capacity on and off as appropriate. In many cases, it is not the device itself but the power of the software inside that makes the device valuable and attractive to end-users. Manufacturers and their official dealers or channels hold the keys to turn on capabilities, charge for those capabilities, and when the device is no longer needed, turn those capabilities off.
To get started, manufacturers must embrace two best practices to realize the full potential value of their embedded software to combat abuse and grow profits:
- Become smarter about how software licensing strategies can help their business—as a means to prevent grey market abuse but also to grow top-line business performance. While preventing overuse and abuse, software licensing strategies also help monetize the value manufacturers deliver through feature sets, services, volume/user thresholds, and upgrade rights.
- Implement comprehensive systems for accurately tracking and managing software entitlements (use rights and the terms of those rights). Purpose-built entitlement management solutions are essential for reducing operating costs, pinpointing up-sell and renewal opportunities, gaining better visibility into channel sales, and improving overall insight into market dynamics.
Combined, these two disciplines can have a powerful impact on a device manufacturer’s business performance. Inadequate licensing practices could permit unauthorized resellers to sell devices bundled with software. Effective licensing and entitlement controls, on the other hand, help prevent these unauthorized grey market activities.
Originally published in Manufacturers’ Monthly