How software can protect IoT manufacturers from grey market counterfeiting

Author : Eric Free, Flexera Software

05 January 2017

Over the next decade, more or less everything (at least everything interesting from a technology perspective) will contain a semiconductor part.

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Most of these silicon chips will integrate connectivity (such as Wi-Fi, low-power cellular or other low power, wide-area networking technology). Many of these components will incorporate energy harvesting capabilities and will power themselves, more or less indefinitely, without need for an electrical source or battery change.

This will have a profound impact on the way we build and manage software. It is pretty likely we will see the emergence of a three tier Internet of Things (IoT) architecture where edge sensors connect to intermediate aggregation points, such as gateways, and then to the data centre or cloud.  

At the same time, distributed and elastic computing will accelerate, with edge and aggregation devices increasingly becoming defined by software and virtualise functions.

However, the chip business is currently troubled. The consistent increasing of transistor density each year, known as Moore's Law, that has accelerated computing innovation for the last 50 years appears to be slowing and the investment required to manufacture new semiconductors on the latest leading edge technologies is increasing. At the other end of the spectrum, it has never been easier to design lower-quality chips or hardware and have them produced by contract manufacturers, largely in Asia, using less-up-to-date processes. This has led to intense commoditisation in many silicon and hardware segments.

It is common practice for semiconductor companies to hire contract manufacturers to outsource production of their silicon components. Of course, in order to do so, silicon companies need to hand over their “secret sauce” to the contract manufacturers who then act as the factory – producing and shipping units of the design on behalf of the hiring firm.

Enable traceability to prevent grey market abuse

We are seeing a very disturbing trend emerging in contract manufacturing, and it is placing intelligent device manufacturers at risk. Device manufacturers who outsource their manufacturing process to third parties, often in Asian countries, are discovering that some of those third-party manufacturing shops are actually over-producing the contracted-for device and selling the overage stock on the grey market for personal profit. It is indeed one of the biggest threats of contract manufacturing, being you can't control how many “extra” batches of your production runs are being made which could make their way into the grey markets.

Grey market production most definitely is a huge issue for different players along the electronics value chain. Hardware original equipment manufacturers can find themselves catching contract manufacturers who are building a few extra runs of the latest hot device and selling it to a pirate, or to someone who will slap their own logo on it. Second, a fabless chip vendor can face the same leakage problem with their contract manufacturing fab. Third, an IP vendor who has their product incorporated in a chip, but makes their money through collecting royalties paid by the final electronics OEM, can also suffer leakages from the first and second examples.

The grey market goods are not counterfeit. They are made to the original device manufacturer’s specification. Indeed, they are identical in every way to the legitimate products. However, they are sold on the grey market for a fraction of the price and there is no way to differentiate a grey market good from the original – placing the true manufacturer’s brand at risk and profits in jeopardy.

Software Monetisation

The good news for manufacturers suffering from grey market counterfeiting is that the problem is now solvable – thanks to the growing role that software plays in controlling, monetising and protecting Internet connected devices. Increasingly, IoT providers leverage Software Monetisation (software licensing and entitlement management) technology to control their products’ features and functionality – rather than hardcoding that technology onto the device itself. Leveraging software licensing and entitlement management in this way gives manufacturers the flexibility, for instance, to build multiple products and product versions simply by controlling with software which features get turned on and off. 

These Software Monetisation concepts can also be applied to solve the grey market problem. 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 instance, 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 consumers. 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 tap the full potential value of the software embedded on their devices or that control the devices:

• 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 monetise 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 systems 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 unauthorised resellers to sell devices bundled with software. Effective licensing and entitlement controls, on the other hand, help prevent these unauthorised grey market activities. The net result is that hardware device businesses need to work more intelligently to control, secure and monetise their devices to thwart grey market production. Software Monetisation technologies can help design houses and IP vendors with SKU reduction, feature clipping/add-ons and revenue leakage. Leading silicon companies are latching on to these technologies quickly, and more are predicted to rightly swarm to them as we enter 2017.

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