How much of hardware is software, and do the differences even matter any more?

The worlds of hardware and software were once quite distinct: hardware products sat on shelves in boxes, while software was something you purchased or downloaded for your computer. However, that dynamic is changing — and fast.

Today, offering consumer hardware without great software isn’t viable anymore. With the emergence of connected devices, consumers aren’t just looking for great hardware or specifications; they expect great, connected experiences – from their televisions, watches, thermostats, cars, phones, etc. As Apple’s success in the market shows, it’s often the overall end-user experience, rather than category-leading specs, that determines a product’s success.

Great hardware and good software make the Nest a success.

Great hardware and good software make the Nest a success.

The experience begins when you open the box

Traditionally, hardware manufacturers focused on getting products to the retail shelf where consumers bought the product, and the cycle ended there. Yet today’s hardware experience is only just beginning when the customer takes the device home and opens the box. Now that everything is connected, consumers expect the experience to extend well beyond the basic function of the hardware sitting in front of them. Great software makes things interesting.

Whether a hardware manufacturer builds its own apps or offers an API, the software experience has become a seamless part of the product. As traditional hardware giants are quickly learning, making only the hardware is a fast race to the bottom.

Combining hardware and software is getting easier

The blurred line between hardware and software is partly driven by
the fact that chip makers are now adding layers of software on top of
their components. This means that instead of hiring a team of driver-level engineers, hardware manufacturers can now turn to software developers who can figure out how to control the hard­ware via standard software protocols. In short, it’s much easier to customize today’s hardware without specialized expertise.

For example, adding Wi-Fi connectivity to hardware used to be a major
endeavor. Now solutions such as Electric Imp let manufacturers spend a little more on the chipset, while saving a tremendous amount of time and money to bring the same functionality to life. It’s now possible to deploy software on hardware without requiring hardcore hardware experts on the team.

But hardware still matters

With new innovations like 3D printing, the Arduino Robot Kit, UDOO, and Spark Core, its easier than ever to build a prototype of a device. Thus, entrepreneurs can walk into a VC meeting with their prototype already in hand. However, developing a prototype is one thing; manufacturing at scale is a whole other story.

Beyond the prototype (that may have been funded through sites like Kickstarter or Indiegogo), hardware manufacturers need to ensure quality by performing rigorous testing at scale. The new crop of entrepreneurial ‘makers’ that sell products are starting to hear complaints back from early customers of failing parts. And cheaper parts from China are showing higher than average failure rates.

Hardware quality still makes or breaks the customer experience. No software, no matter how brilliantly crafted, can make up for faulty hardware or a poor QA process, so entrepreneurs need to invest in strenuous testing procedures which takes time and money. However, taking time for resting is often the antithesis of the fast-paced development cycle that everybody aims for.

The future of “hardware”

Some industry experts predict that hardware will soon be completely commoditized and software will rule the game. While that projection is somewhat likely, there will always be cases where the hardware itself is a master work of art … a thing of beauty that some people will pay a premium for. Nest thermostats are a perfect example.

However, premium hardware will not be the norm. When you can purchase an Android tablet today for $35, you have to wonder what it will cost five years from now. Will tablets be free? Just like the subsidization of mobile handsets by carriers today, we will see a wide range of hardware components given away in the future. And, these subsidized products won’t just be the usual suspects like smartphones and tablets.

For example, imagine roof tile sensors that measure rainfall and temperature. When banded together, these sensors provide data that can help create the most accurate weather forecast models ever. For consumers, the roof sensors might be free; tile manufacturers may even be paid to integrate and promote the sensors. Where’s the revenue source then? Possibly through advertising, mobile apps, and licenses for the valuable data.

In this scenario, hardware is a commodity. “Platform” companies will give away the reference hardware and open source their designs. Great software is needed to complete the experience out of the box. As such, software will carry the premium to lock in customers and money will be made in monthly service fees or access to big data.

While software has driven many of the technological innovations of the last decade, we will see some of the most exciting products when software is connected with the possibilities of hardware. As the lines blur between where software ends and hardware begins, whether it be in the connected home, wearable technology or a tinkerer’s garage, hardware will still play a key role in how technology gets further embedded into our lives.

Boris Wertz is the founder of Version One Ventures and has invested in over 40 early-stage consumer and enterprise companies including several in the maker and hardware space such as Indiegogo, tindie, and Upverter. Follow him on his blog and Twitter.