Today we published a report entitled ‘Separation, Innovation, Explosion: how splitting software from hardware is the ultimate tipping point for technology’. This report brings together a lot of thinking about technology evolution across a wide range of different verticals from manufacturing to consumer electronics. The underlying hypothesis is this: to see true innovation in any given technology sector requires the separation of the hardware layer from software/control. This innovation then translates into an explosion of adoption of products and services.
The most prominent example is probably the world of personal computing where hardware and software production were split in the 1980s. It took the separation for real innovation from the likes of Microsoft and, indeed, the hardware manufacturers such as Dell or Compaq. The result was an explosion of adoption, making the PC ubiquitous today and its software the platform for a million start-ups and many of the world's leading companies.
Another slightly different approach is what is termed ‘IT/OT convergence’ whereby back-end operational technology (OT) systems that are used for monitoring industrial equipment or buildings, for instance, are integrated with an organisation’s wider IT systems to allow for more flexibility of control and data gathering. While this is characterised as ‘convergence’ the reality is that it is a subsuming of OT systems within IT. In many IoT applications the edge device is relatively simple and the ‘separation’ is more of an application of more complex software to managing basic devices.
The result of the separation of the two elements has been a higher degree of innovation in both. The fundamental underlying issue is that it is easier to innovate in one area than in more than one. What are the chances that the most innovative company in making the hardware will also be able to match that in software? Separate the two and it allows best-in-class from both. There is a scale issue too. Separation allows for the emergence of larger scale software development environments running across multiple hardware vendors. This simplifies the developer’s job and allows for competition to more readily establish winners (and losers) in both hardware and software categories. What is required for most of IoT to take off, for instance, is for companies making hardware to have access to common large scale software options. Increasingly we’re seeing this from the likes of Amazon Web Services with FreeRTOS and Microsoft with IoT Plug and Play. Most areas of IoT started from a position of separation, and to date the software element has lacked the scale necessary to take off.
Across all technology markets, from industrial machinery to consumer electronics, we expect the long-term trend is for greater technological innovation where there is a separation of the capabilities. We can see it to varying degrees within almost every sector. In industrial robots, for instance, we see a separation of the manufacturers of hardware (e.g. from companies like ABB and KUKA) from software (e.g. from MTEK or Bright Machines). In energy, the increasing complexity of managing the relationships between electricity generation, storage and consumption has necessitated the arrival of Virtual Power Plants, a software overlay to manage data, energy and financial flows.
The chart below illustrates the relative maturity of different sectors and products in separating software and hardware layers:
One of the counter-intuitive elements to this narrative – that tight integration of hardware and software is ‘bad’ for innovation – is that Apple should not be seen as an innovator. It is seemingly one of the most innovative technology companies. However, this is to confuse two things. Firstly don't equate innovation with user experience (UX). Controlling both hardware and software creates an environment where the UX can be very tightly controlled, but this does not optimise for innovation, at least not in the long term. Secondly, historical success is no guarantee of future success. If Apple hit the target in both software and hardware in the past (and you can debate whether it is truly innovative in either or both of these), what are the guarantees that it can do so again in future?
The other two great benefits of managing both hardware and software in an integrated way are security and time-to-market. It is harder to catalyse an ecosystem to work effectively to pump out products, and it is equally difficult to ensure the security of all the elements; a chain is only as strong as its weakest link. However, over the long term the ecosystem tends to emerge and the security challenges are identified and resolved. All this means that the short-term advantages of tightly integrated software and hardware are gradually eroded and the scale and innovation benefits of separate systems come to the fore.
The other prime example of an integrated player is Tesla. Currently it is riding the wave of benefit of integration with faster time-to-market and UX. It may be ahead of the game now, but we doubt that it can continue to be market leading in both hardware and software. Currently the Tesla platform is limited to a handful of devices. Liberated from its hardware platform (and, frankly, limited hardware volumes) and handed to innovative hardware developers at automotive OEMs we would likely see greater innovation. There has long been speculation that as all manufacturers shift to becoming majority electric that Tesla may want to shift its business model to licence its software to other manufacturers rather than making cars itself. The scale this would bring, both for hardware and software manufacturers would encourage further evolution.
One thing is certain in the technology world: being overwhelming market leader is a transient thing. Just ask IBM or Nokia. Neither Apple nor Tesla can guarantee its positions as, respectively, the world’s most valuable company and the world’s most valuable car manufacturer. The long-term technological trend is surely towards more separation of hardware and software and the innovation it brings. Superior UX, security and time-to-market are ephemeral differentiators. Failing to ride that change could be the thing that ultimately brings them down.
