A very interesting read of Dave Sovie on LinkedIn
“Software is eating the world”, as Mark Andreessen, the American entrepreneur and venture capitalist first observed back in 2011. While his comments were originally focused on the growth of a new wave of Internet platform companies, the same logic now applies to physical hardware products. Many hardware products have become ‘containers for software’ with more and more of the product’s value being driven by software functionality.
As Artificial Intelligence (AI) and other advanced digital technologies are increasingly being added to already software-powered hardware, we stand on the cusp of a “living products” era. In this world, the electro-mechanical components of hardware devices such as cars, appliances, medical devices or industrial machinery are becoming more and more immersed in software and AI “tissue” to bring them to life and continually evolve as cooperative tools and problem solvers – just like skeletal bones are animated in a reflected and anticipating way by muscle and nerve tissue in our bodies.
The bigger the muscle packs and neural systems, the bigger the capacities become. This holds true for human bodies as it does for devices. This new era will bring a tremendous shift in the distribution of value. Less than forty years ago, a product’s value was mainly determined by electro-mechanical components. Today, 40 percent of a typical hardware product’s value is already software. In the near future, we estimate this tally will shift to 70 percent of value coming from AI and digital technologies and 20 percent from software, with electronics and mechanical parts each left with five percent. If this vision reflects reality, it is high time for a reinvention of all traditional hardware products not yet matching this formula. The alternative is risk massive share and value loss, and perhaps even be expelled, from a marketplace that is increasingly driven by software content plus AI and the tremendous experience levels it provides to physical products.
Take the shift in the car sector as an example. Only a few decades ago, roughly 90 percent of a vehicle’s value was initially stored in hardware and basic electrical components, primarily found in power trains, the suspension systems, the body construction or the interior features. Only 10 percent of value was stored in software and control modules. In the not too distant future, software and digital technology are forecast to shoot up to around half of a car’s value. If we think of what software-driven autopilot and driver assistant technologies do for the massive experiential advancement of a century-old invention such as automotive vehicles, we get an idea on the plausibility of this shift across a wide range of product categories.
In my opinion, the following four traits – all tracing back to software – will define future products.
1. They will be connected to the cloud and in many cases even directly to other devices, allowing for continuous software updates and upgrades.
2. They will be rendered smart via sensors and on-board processing capabilities (which in many cases will exceed the processing power of a super-computer from twenty years ago).
3. They will be enabled to continuously learn and adapt via AI, voice recognition and other cognitive technologies.
4. And crucially, they will no longer be sold in a traditional “product sale” fashion, but rather via an outcome-based, “as-a-service” business model.
This next generation of “living products” will be enabled by the software that is indeed already devouring the world, and soon AI and digital technology will surpass software as the driver of value. In the process, new types of products, new business models and new industry winners will be spawned.