Jawbone is a traditional hardware business and vulnerable to commoditization. They have a dis-harmonious product line with good distribution but a weak-to-moderate brand. Few consumers recognize Jawbone as the “World’s Greatest X” because speakers, headsets, and fitness trackers don’t tell a cohesive story like Beats does around music or Fitbit does around fitness. Jawbone feels like a distribution company desperately trying to find the Next Big Thing.

What makes today’s hardware successes like GoPro, Arista, Fitbit, Nest, Dropcam, Zayo, and Oculus different?

The modern hardware business is a trojan horse for software.

Every company listed above is really a software company masquerading as a hardware company. The majority of their focus is on the digital aspects of their product and business. Hardware is the enabler. Many have recurring revenue and nearly all have more software engineers than hardware engineers.

As software works into the product equation, companies become less susceptible to commoditization. Software services are harder to copy. They can increase switching cost and provide more opportunities to interact with consumers and build brand. We group new hardware business models in three distinct categories:

1. Hardware-as-a-Service

The most commonly cited business model for connected hardware startups relies on the sale or lease of a device that only works when a recurring fee is paid. Almost always this fee is a software license or service fee, sometimes paid on a time basis (annual, monthly) and sometimes on a metering basis (per byte or user). Hardware as a service companies optimize for high lifetime value through recurring fees rather than a hefty gross margin on the initial sale.