Entitlement and Compliance Management

Differentiating High-Tech Devices with Embedded Software Licensing

By: Randy Littleson

I recently read an article published by  McKinsey & Company, “Tackling IT complexity in product design”, and in the article, McKinsey stated, “The growing demand for electronics-based product enhancements finds companies across industries struggling to keep costs in line amid fast-changing technologies and the constant pressure for product upgrades.” Be sure to check out the article...it discusses how as more products are loaded with technology, tangled IT designs can undermine product strategies...it is a good article on the impact of embedded technology and product design.

What was interesting was that article reinforced what we hear constantly from companies that we talk to... more and more high-tech manufacturers are making the decision to move away from manufacturing multiple (sometimes 100s) unique physical devices and instead are choosing to build a single device (or a significantly reduced number of devices)  and then use embedded software licensing to differentiate their devices with feature segmentation.

Consistently we are finding  that many of today’s high-tech manufacturers are grappling to understand the potentially higher initial cost per unit due to more computing power and memory versus the advantages of purchasing more of the same which creates potential for higher volume discounts from the vendors. In addition, because of device commoditization, they are looking for ways to grow recurring revenue streams rather than selling a static device once. 

We have also found that those high-tech manufacturers who offer more dynamic feature segmentation in the device via embedded software licensing are able to significantly reduce manufacturing and operations costs. And if they are able to electronically update/upgrade devices in the field—and only those devices that are entitled to receive updates/upgrades— they can save considerable time (no longer does the user have to return the device to the manufacturer for the upgrade) as well as protect their revenue by ensuring only those devices that are entitled...are receiving the updates/upgrades.

Case in point, Siemens Building Technologies was able to reduce the manufacturing complexity of a very sophisticated product line down to just a few models.

What steps are you taking to reign in skyrocketing manufacturing and operations costs?

What Licensing Technology is Most Effective—To Dongle or Not?

By John Frame

The interesting aspect of using dongles for software licensing is that most Independent Software Vendors view them as providing portability, not necessarily more security.  Licensing systems allow the software to attach the entitlement rights to a specific machine or user.  The core question is, how do you identify the machine and/or  user in such a way that is reliable (reduces revenue leakage) but at the same time does not create a negative user experience (reduce customer acceptance and drive up costs).  Dongles play a role in this balancing act and it is this balance between revenue and customers satisfaction that independent software vendors and high-tech manufacturers should explore when evaluating a software licensing and protection solution.

There are two general classes for this license identification process, the traditional certificate file based and the more recent license activation style.  In the certificate file based systems one or more identifying characteristics are listed in the file, along with a description of the entitlement rights that the customer has.  The file is then digitally signed so that it can’t be altered.  The licensing system reads the file and checks to see if the signature is valid and then makes a determination if the identifying characteristics listed in the file are the same that it finds in the environment.  If so, then the licensing system serves out the entitlements as they are described.  The identifying characteristics that are commonly used are items such as the Ethernet MAC address, the host name, the display name, or in some cases the ID from a dongle.

A MAC address or host name can easily be modified by a malicious party.  A dongle is stronger but not that much stronger since dongle emulators have been in existence just about as long as the dongles themselves.  What a dongle gives the independent software vendor and the customer is greater portability.  Unlike an Ethernet MAC address, the dongle is easily disconnected from one machine, transported to a second, where the licenses are easily served from that second machine.  The dongle is as strong an identifying factor as any other single characteristic so the entitlement rights are not significantly more secure but they are much more portable.  To increase security independent software vendors and high-tech manufacturers should look at an activation style licensing system.

Using a single identifying characteristic presents an easy method for a malicious person to defeat.  If an independent software vendor increases the number of characteristics then the solution must account for a concept called “machine drift”.  Over time any given machine will change.  Hardware is replaced, components are upgraded, and configurations are modified.  When that happens if the machine drift is not accounted for the licensing system simply refuses to work until new license rights are issued.  Activation style licensing accounts for machine drift by providing a much higher level of confidence on securing the entitlement rights but also by delivering a strong customer experience.

Activation style systems keep a record of both the current machine configuration and past configuration.  The independent software vendor or high-tech manufacturer does not specify any characteristics, it is handled entirely by the licensing system.  If the configuration has changed a little bit but has not changed too much over the past several days, weeks or months, then the drift of the machine is allowed to occur and the license rights continue to be accessible without issue.  Only if the machine drifts too far, too fast does the licensing system require the entitlement to be “repaired”.  In the activation style licensing, dongles don’t play a role since the activation style licensing is looking at the overall machine.

There are several vendors, each with their own twist on the above concepts but the concepts are consistent in what you will find in both commercial solutions and home-grown implementations.  If you are looking for portability, Dongles might be good for you. But if you are concerned about revenue assurance, high customer satisfaction and low cost, an activation style licensing solution should be considered.

What is your experience with Dongles? Do you use Dongles or other methods for software licensing and protection?

Combating Grey Market Abuse - Part II

By: Bashyam Anant

As a High-tech manufacturer, you often struggle with how to cope with grey market activity, and how easily product entitlements can pass from one entity to another. Protecting your products is essential in today’s market. One source of the grey market for your products can often be tied back to abuse of channel incentives by partners, such as misrepresenting or faking end customer information. KPMG notes:

"The grey market has many sources, i.e unauthorized dealers obtain products from a variety of sources normally at a discounted price either due to price arbitrage, abuse of incentive programs, or simply because the products are not what they seem. For example, an OEM may choose to discount products for a particular end customer to increase sales, especially if there is a stiff competition for that customer. To obtain deeply discounted products for open-market speculation, a channel partner may deceive the OEM into deep-discounting products for non-existent customers and then divert those products to the grey market for possibly greater gain. Some brokers may misrepresent themselves in the authorization process and use the resulting relationship to obtain discounted goods that are then diverted into the grey market."

So what can you do?

In our experience, tracking software licensing entitlements (e.g. the name of the customer the device is sold to) as they move through your channel network, along with enforcing product activation is the only sure way to know who the end customer actually is, from who they purchased their products and under what incentive program.

While 51% of high-tech manufacturers collect device serial numbers from channel partners as part of their claims submissions for incentive programs, it is cumbersome or impossible to correlate serial numbers to incentive-eligible end customers till they actually call the manufacturer for technical support. As an example, suppose a manufacturer offers distributors a 10% rebate for units of Product A sold during the month of September. It is difficult to accurately determine actual sales of Product A by the distributor during September. In addition the system is open to abuse (e.g. claiming rebates on serial numbers sitting on the shelf). However, if the vendor tracked software licensing entitlements sold to the distributor and the product activations during September from customers who bought from the distributor, such verification would be easy.

What approaches have you tried? How effective have you found them to be? Let us know!

[1]  Effective Channel Management is Critical in Combating the Grey Market and Increasing Technology Companies Bottom Line, KPMG Grey Market Study Update, 2008

Combating Grey Market Abuse

By: Bashyam Anant

One of our independent software vendor customers recently lamented, with a resigned tone, that their software products are available at a 90% discount in the Chinese grey market. A grey market arises whenever your products have an exploitable price differential. Grey markets are quite well-known in pharmaceuticals where prescription drugs are purchased at steep discounts in one country and sold at below-market prices in another country. They are known to exist in consumer devices and in automobiles.

For software and hardware products, a grey market arises in many scenarios. For example, unauthorized brokers might purchase your products from legitimate channels at steeply discounted prices and target end customers by undercutting your prices. You might also have a price differential in different geographies to account for purchasing power differences or currency fluctuations, making it possible for someone to buy your products in the lower priced country and undercut your prices in the higher-priced country. End customers are buying products that often have no warranty coverage. In fact, most vendors we speak to find out about the existence of a grey market when customers call them for warranty or support.

From all accounts, the grey market for hardware and software products is growing, especially for vendors that expand into new geographies. A KPMG study estimates the value of grey market goods grew to about $58B in 2007, up 80% cumulatively since 2002 (equates to 12.5% year over year growth). This translates to a loss of $10B of gross profits to grey market sales, which is about 4% of high-tech industry profits. On average, grey market prices are 27% lower than the vendor’s pricing, which eats into profits for both vendors and their legitimate channel partners.

Are you losing profits to the grey market? Can you quantify the revenue leakage? What are you doing about it? In the next article, we provide some suggestions.

_{[1]  Effective Channel Management is Critical in Combating the Grey Market and Increasing Technology Companies Bottom Line, KPMG Grey Market Study Update, 2008}