How Hardware-as-a-Service will Save IoT

(A version of this post was also published on TechCrunch.)

Photo credit: Karl Baron (Flickr)

Here’s the dirty secret about the Internet of Things: the Things might not work, and you might not use them.

As a consumer, many of your gadgets will collect dust tucked away in your drawer. As a business, many of your devices will not perform as well as expected, turning into maintenance-heavy money pits. Personally, I have a large box full of wearables and other Things with which I don’t know what to do.

This is because it’s hard to gauge the usefulness of a new innovative hardware Thing. Some won’t be useful; others will stop working. Even the ones that you love, the hard-working devices that serve you everyday, will soon become obsolete, replaced by newer, better, shinier Things.

And so we keep buying these Things, seduced by their promises, and later often find ourselves saddled with Buyer’s Remorse.

But soon, thanks to a concept called Hardware-as-a-Service (HaaS), we’ll have fewer of these regrets because we’ll own fewer of these Things. Thanks to HaaS, the way individuals and businesses consume hardware products is changing.

What is Hardware-as-a-Service?

Hardware-as-a-Service, which clearly has roots in Software-as-a-Service, is a business model where companies sell packages that include hardware, software, maintenance, and sometimes installation, for a monthly fee. Under HaaS, customers pay for services, not Things; consequently, HaaS contracts often include a Service-level agreement (SLA).

Here are a few examples:

Vivint is a smart home company that offers security sensors, smart locks, thermostats, installation, servicing, and 24/7 customer support for a monthly fee. Most of this hardware is made by the company. Plans start at around $60/month, with a free trial period and minimum contract length. With over 1 million customers and $650 million in revenue, their strategy seems to be working.

Hitachi recently announced a “Trains-as-a-Service” contract with Virgin in the UK for 65 new high-speed Hitachi trains. Under that deal, Hitachi maintains ownership of the trains, and is paid based on their trains’ reliability.

In fact, transportation is the leading edge of HaaS. Bike-sharing programs like NYC’s Citibike provide access to bicycles for as little as $15/month. In many cities, car-sharing programs like Zipcar and car2go have replaced the need to own a car. Uber recently launched $5 rates to provide an everyday transportation option for commuters, further reducing car ownership needs.

Even the large tech companies are starting to get on board. Earlier this month, Microsoft launched “Surfaces-as-a-Service”, allowing business customers to pay a monthly fee for a Microsoft Surface, unlimited phone/in-store support, and hardware upgrades. HP is reportedly exploring HaaS plans for their device product lines. And some analysts believe that an “Apple-as-a-Service” subscription based revenue model is the answer to that company’s woes.

The Advantages of HaaS

Hardware-as-a-Service is here because it makes sense. Almost all hardware is a depreciating asset: why would we want to own it? For example, a new car loses nearly 10% of its value when driven off the lot. In these cases, it makes simple economic sense not to own.

HaaS also taps into the current zeitgeist of minimalism, where books about decluttering become bestsellers and less-than-400-square-foot tiny houses become the focus of popular TV shows, as well as the growing Sharing Economy.

There are even more advantages for customers:

  • Transform an upfront capital expenditure into an ongoing operating expense. Also allows for more accurate cost/value comparisons: e.g., “Is this worth $X/month to me?”
  • Cheaper operating expenses through shared use. We don’t always use our Things, and so can share them to lower operating costs: e.g., bike/car-sharing.
  • Worry less about maintenance. Bundled-in servicing means any errors, bugs, and other misbehaving gremlins become the headache of the hardware provider. Caps the total cost of ownership: you know exactly how much it will cost for as long as you use it.
  • Problems are fixed faster. Sometimes the hardware provider is not paid if the Thing is not operating (e.g., Hitachi’s trains), which incentivizes them to repair equipment quickly, even proactively (i.e., preventative maintenance).
  • Worry less about obsolescence. You pay for the service, not the hardware. Newer, cheaper hardware often enables the provider to offer a better service to you, which encourages them to upgrade themselves.

HaaS also has advantages for IoT companies, just as software vendors benefited from SaaS. HaaS is easier to sell because of the lowered upfront cost. HaaS contracts generate predictable monthly revenue. HaaS plans create longer customer relationships, which can drive further sales. Bundling hardware, software, maintenance, and installation improves margins: pricing becomes a function of the value provided, not of the underlying (and diminishing) hardware costs. In other words, HaaS can be a shield against the endless march of hardware commoditization.

What is old is new again

Of course, HaaS is not completely new: we’ve already seen a similar transformation with SaaS, which paved the way by making subscription services widespread and generally accepted. HaaS is also a result of the recent flood of innovation released by the lowered barriers for building hardware: cheaper components, easier prototyping, more accessible contract manufacturers, newer distribution channels, and hardware-friendly investors.

It is the next step in the evolution of product delivery models: from buying, to financing, to renting/leasing, and now to HaaS.

The key difference with HaaS is you pay for the usage of thea service, not thean asset. Which is why we see HaaS under a variety of names: Smart-Home-as-a-Service (Vivint), Trains-as-a-Service (Hitachi), Cars-as-a-Service (Zipcar, car2go, Uber), etc.

In other words, HaaS is a new way of thinking. HaaS changes the relationship between the vendor and customer, extending a one-time transaction into a long-term relationship. This means customers need to pay more attention to how their vendor operates, and vendors need to pay more attention to their existing customers.

Of course, HaaS may not fit all hardware products. Some devices will be so cheap that they’re disposable. Some will be so expensive that they’ll require upfront payment just to support cash flow needs (especially for startups). Other businesses will still thrive off of crowdfunded pre-sales.

But HaaS is here, and we are better off because of it.

Thanks to Mike Freedman, Jamie Cuffe, and Nitin Chopra for reading earlier drafts.