Intelligent Hardware – The Next Moat?

In an era where software has dominated the technological landscape, hardware has been quietly evolving, preparing for its moment in the spotlight.

Over the past few decades, software has emerged as the ubiquitous solution, unifying the latest technologies and transforming the global business landscape. Meanwhile, hardware has taken a backseat, receiving only 20% of venture capital funding since 2016.

Looking ahead, we see a new narrative unfolding, with ‘smarter’ hardware expected to generate 60% of the revenue in the technology sector over the next five years. As industries integrate increasingly intelligent hardware, will hardware become the new competitive edge for companies, as software did in the early 2000s? Are we at a similar inflection point? What implications will this have for Industry 4.0, mobility, supply chains, healthcare, and other sectors?

Three key trends suggest that the future will not only be dominated by software solutions, but perhaps also by affordable, smarter and AI-driven hardware.

1.     3D Printing Introduces Cost-Efficient Agility in Hardware

Gone are the days when manufacturing hardware meant building monstrous factories and prohibitive minimum orders. 3D manufacturing has completely disrupted this space.

Today, hardware is smaller, cheaper to build, more flexible, and easier to manage. The margins in hardware are expanding, leveraging reduced manufacturing costs and on-demand production capabilities. Using additive manufacturing, or 3D printing, the cost of producing hardware, updating new versions of the hardware, if needed, are massively reduced. Has 3D printing democratized access to hardware innovation and production in the same way the cloud did for software twenty years ago?

Hardware innovations are also better protected as hardware patents provide a significant competitive moat due to (i) clear eligibility and (ii) the detailed, tangible nature of the innovations they protect. This contrasts sharply with software patents, which face considerable challenges in patent eligibility, given software's algorithmic nature and the rapid pace of software development.

The widespread presence and interconnectedness of mobile networks, sensors, and the cloud are blurring the lines between software and hardware. Now, updates can be wirelessly transmitted, enhancing the user experience and justifying subscription models, as hardware evolves into a continuously improving system rather than a static product.

This evolution is giving rise to the adoption of Hardware-as-a-Service (HaaS) business models, with the market expected to grow from $93.65 billion in 2024 to $330.82 billion by 2029, at a CAGR of 28.71%. The HaaS model offers providers a steady stream of recurring income, improved customer retention, and opportunities for upselling and cross-selling. It also allows providers to retain control over their assets, facilitating efficient management of hardware resale and recycling.

2.     Cloud Integration Brings Hardware and Software Closer

It started with 'Pepper,' the white robot that appeared in bank branches worldwide a few years ago. While Pepper was fun and gimmicky (and perhaps impressive) for a moment, it only scratched the surface of hardware's potential. This signaled that industries lagging in innovation, like banking at the time, might turn to alternative, maybe hardware, solutions to enter the new digital era.

As those businesses strived to enhance production; shorten lead times; maintain cost competitiveness; ensure quality and safety; and move production closer to their home base - improved hardware became an opportunity worth exploring to achieve these goals.

Historically, hardware innovations primarily targeted Business-to-Consumer (B2C) applications. Unlike the early 2000s, when advancements focused on improving quality—like better phone cameras and lighter computer screens—the upcoming wave of solutions will revolutionize efficiency and empower businesses to reach new heights. The coming decade is expected to bring a transformative shift towards Business-to-Business (B2B) hardware solutions, promising to unlock unprecedented potential, driving industries forward and reshaping the future of business operations.

Whereas RADAR (Radio Detection and Ranging), LIDAR (Light Detection and Ranging), sensors, and microprocessors, integrated with software and data systems in robots, wearables, drones, and medical devices, have significantly enhanced productivity, efficiency, and profitability over the years; now, as these devices become more intelligent, mine data more accurately, and integrate with Artificial Intelligence (AI)-led software, businesses can offer personalized products, creating a strong moat of consumer loyalty.

Hardware-led software is not new – the iPhone is a classic case. The exclusivity of the App Store (software) to the iPhone (hardware) allowed Apple to create strong commitment and loyalty to their product. The data captured through the use of this device and its associated software enabled the personalization of all services and products offered to consumers. This principle will now extend to all industries, with smart chips being used in various industrial devices to capture and process data en masse, enhancing business performance. The advancement of these chips, which make hardware smarter, is a key development driving the surge in investment not just in the chips themselves, but in complete hardware solutions.

A case in point within the B2B space is Arrow Labs' wearable hardware through its MIMS solution. This hardware captures real-time data to schedule tasks and creates optimized duty rosters, assigning tasks to employees based on factors such as skills, experience, security and officer safety. By equipping frontline workers with this wearable technology, Arrow Labs enables a 36% increase in daily task efficiency and boosts staff productivity. This hardware-led software solution enhances overall business efficiency by 40% and reduces operating costs by 20% across sectors such as maritime, infrastructure, telecommunications, and logistics.

The shift towards smarter hardware, powered by advanced chips, integrated with cutting-edge software and leveraging the cloud, is revolutionizing B2B operations, making hardware a valuable component within enterprise solutions and driving unprecedented efficiency, productivity, and innovation across various industries.

3.     AI Transforms Hardware into an Intelligent Powerhouse

The current world race towards the most promising AI chips, with Google, Intel, Nvidia, and Meta all announcing the launch of their latest chips into the market epitomizes this shift in focus. This race will accelerate the dynamic of bringing the physical space closer to the AI world, while of course, resorting to hardware.

The parallels between the evolution of software and hardware allow us to see the introduction of AI as one of the critical inflection points for hardware innovation—similar to cloud computing revolutionizing software—enhancing interactivity and unlocking new layers of insight through edge computing, Machine Learning (ML), and the Internet of Things (IoTs).

With the growing integration of AI, hardware is undergoing a fundamental transformation, moving away from human-powered inputs. This shift is enabling hardware to achieve unprecedented levels of efficiency and performance. By leveraging this technology, devices can now autonomously optimize their functions, make intelligent decisions, and adapt to varying conditions in real-time. This results in streamlined operations, increased predictability, reduced human error, and enhanced productivity across various industries.

Predictive maintenance, a prime example of the integration of hardware and AI, can reduce machine downtime by 30% to 50% and increase machine lifespan by 20% to 40% across various manufacturing applications. Some startups are offering comprehensive enterprise solutions that seamlessly integrate with multiple IoT devices. By leveraging proprietary AI and ML infrastructure, companies can achieve real-time asset monitoring and highly accurate failure predictions reducing actual costs, as well as downtime.  The opportunities to create, implement, and realize real business gains are endless.

It is uplifting to imagine how many lives could be saved by avoiding downtime in healthcare, where critical medical devices are always available when needed or how many losses could be prevented, and costs saved in manufacturing plants by minimizing production interruptions. The potential impact across different sectors is immense, promising significant improvements in efficiency, outcomes, and the potential positive impact on lives everywhere.

As AI continues to integrate with hardware, we are witnessing a significant evolution where smart machines not only augment human capabilities but also redefine the possibilities of hardware’s potential.  Hardware’s surprising evolution into an affordable, seamless, and intelligent technology solution instigates a level of curiosity that begs the question: what next?