Development and supply models in the Internet of Things


The Internet of Things (IOT), as discussed over the past couple of weeks, is the network of devices which are connected to the internet and which collect data to share and communicate with both other internet-capable devices, and device users. 

The interactions between companies which manufacture various devices, developers who create software to be used in those devices, and companies which analyse and store data from those devices will be increasingly complex. Where there is an interaction there should be an agreement, to allow for each party to understand what they own and what they provide.


Closed development model

Using the example of a refrigerator, a manufacturer – Acme Appliances – may decide that they want to develop software to use in that fridge in a closed model. In that case, Acme hires their own software developers, supplies them with what they need to create the software, and completely owns the output – the software which is developed for them. This has the benefit not only of maintaining intellectual property rights, but also provides a competitive advantage, as none of their rivals will have access to this software. It also means that whatever data Acme’s refrigerators collect will belong to them or their customers. However, a closed development model is expensive, and because the IOT is all about data collection, use and communication, will likely result in software which is incompatible with other devices, significantly limiting the usefulness.


Licensed supply model

In this development model, Acme Appliances can do a couple of things. Acme could contract a software company to develop the software – and the software company could retain ownership of the intellectual property in the software and license Acme to use it. Or if the software is already developed, Acme could buy the license to use the software. This should be significantly less expensive for Acme and more advantageous to the software developer – they can license the software to more than one manufacturer, and defray costs of updates and maintenance amongst all the licensees.

That’s not so great for Acme, if they want to maintain a competitive advantage. So they could go into an exclusive license agreement with the software developer, preventing the software being licensed to their direct competitors – whether that’s in a geographic location, or specifically other fridge manufacturers.

Acme and the software developer would also have to negotiate on what happens to the data collected and processed by the software and what will be agreed with the consumer (without limiting the consumer's legal rights). Should the developer have any entitlement to use of the data, in full or anonymized form?


Open development model

Acme could also treat their refrigerator like a smartphone. Rather than paying to develop software, or paying for the license to use software, Acme could invite developers to develop their own software to be installed in the fridge at the consumer's election. Various revenue models could apply for the developers including the consumer paying for use of the software. Other alternatives could include the developers paying Acme to include their software in the fridge and making their money by either targeting users with advertising, getting users to pay a subscription to use some or all of the functions of the software, or by collecting and selling the anonymized data which the software gathers – or a mixture of all three.

For Acme, this model allows them to make the most money with the least investment, but could cost them in sales if buyers don’t want to have to pay to use software which is available free in another fridge, or don’t want their data used by a third party (even in anonymized form).


This is, of course, a very basic overview. Devices connected to the IOT will have many pieces of software involved in their development and functioning, so all three of these models could be used in the same device. This is where agreements become both very complex and very important. Each party needs to know how their software works within the device and how it is expected to interact with other software from other developers. Wherever there is an interaction, there should be an agreement – even when the relationship is through a third party.

 As the IOT grows, and more everyday devices are connected, the nature of these agreements will be more important and will affect people’s everyday lives more extensively.

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