Why the Future of Hardware Is Services

For nearly a decade, I’ve had an unwavering belief that all devices will have a connection to the network — wireless or otherwise. Any devices that have software to take advantage of network- and cloud-based smarts would find eager takers. The combination of hardware, software and connectivity would be key to the future of the hardware.

That shift is now happening, as seen in the growing popularity of Wi-Fi and the huge jump in Wi-Fi traffic. Because of this shift, we are seeing a re-definition of the consumer electronics landscape. It’s not a surprise a hardware-centric company like Sony found itself at a disadvantage, and upstarts like music gadget maker Sonos and forward-TV-anywhere device maker Slingbox found success among the enthusiasts. Today, my long-held notion is finding its way into the market. Internet music players, connected televisions, wireless-enabled photo frames and Internet set-top boxes are commonplace, lining the aisles of Big Box electronics stores.

Maybe it’s time for me to amend that long-held belief a little bit. The future of hardware is hardware, software and connectivity combined with specific services. Without the services, the devices may lose our attention and end up at the back of the proverbial drawer.

The idea became crystal clear in a conversation with Hosain Rehman, co-founder and CEO of San Francisco-based mobile device maker, Aliph, well-known for its hit product, Jawbone, a Bluetooth headset. We were talking about his company getting a whopping $49 million from Andreessen Horowitz and existing investors that include Khosla Ventures and Sequoia Capital, when the conversation turned to the proliferation of sensors and software in today’s devices and how they can be used to improve the device experience.

One way to do it is by attaching a service to the hardware. Let’s examine three of the more popular consumer devices of recent times:

  • Amazon Kindle (the device) has software and connectivity (through Whisper Sync), but what makes it really useful is the “service:” the ability to read and buy books easily.
  • Apple TV (version 2) is successful because of two reasons: It allows you to watch iTunes content, but to many of us, it’s the Netflix on-demand service that makes Apple TV worth owning.
  • Sonos is finding growing demand for its S5 music system, thanks to the ability to not only play the music you own, but also get music from a variety of streaming music services such as Spotify. (Read: How to build a consumer platform, lessons from Sonos.)

Sure, there are some devices, like the iPhone, that have managed to combine the hardware, software and connectivity with a screen to create a platform that allows end users to get third-party “services” via the apps. Now, as we all know, these apps are one of the main reasons why Apple has found a lot of buyers for the iPhone and the iPod touch.

The importance of services cannot be underscored. Here’s why: To me, services are a way for hardware owners to increase engagement with their gadgets. When I first got Sonos, I listened to my own library of music. Then I signed up for Internet radio stations, and lately, I’ve been testing Spotify’s streaming service. Result? It’s now playing in the background, pretty much all the time.

Just as on the social web, engagement drives usage and this usage can then be monetized. Apple’s monetization is coming in the form of the increased use of its payment system, which results in a 30 percent cut of the total sales. On a Kindle, the more books you read, the more you buy, and the more money Amazon makes on the sales of these e-books.

I think in our device-infested and attention-deprived lives, services — if built well — foster constant and ongoing engagement. As ngmoco CEO Neil Young recently told me, the longer you have an opportunity to engage with the customer, the more opportunities you have for more monetization. More importantly, a good service turns a good device into a great one. Just look at Sonos!