Fueled by improvements in semiconductor technology, the migration to IP-based networks is well under way. In this maturing market, OEMs that design and manufacture carrier infrastructure and enterprise equipment are feeling tremendous cost pressures exacerbated by their dependence on a small number of competing DSP providers. As is sometimes the case in technology, the next level of cost savings will not be achieved by implementing smaller transistors, but rather by applying business models used in other industries and changing the way people buy products.
Equipment manufacturers' main concern today is how to maintain profitable margins despite increasing cost pressures. OEMs can accomplish this in one of two ways: either reduce costs as sales prices erode or add distinguishing features and charge more for the extra value. One simple solution can enable both of these approaches - mass customization.
Mass customization is often defined as the use of flexible manufacturing processes to create products or services that meet each individual customer's needs. The most important part of mass customization is integrating customers into the value chain, allowing them to define or configure products to meet their needs. In the retail sector, for example, merchants peddle customized jeans and made-to-order shoes and eyeglasses.
OEMs should note that mass customization does not necessarily imply higher price levels. In fact, many companies in the software market are applying these techniques to offer optimal price points. When purchasing large-scale EDA tools, software vendors are enabling or disabling certain features through license files. This allows customers to select only the specific features that are required and pay more competitive prices for their products. Additionally, software vendors are enabling users to modify software by adding personalized components, such as windows that display information in a certain way. These customization practices are now being adopted in the media gateway space.
Transforming the software sales model
Media gateway designers are responsible for creating systems that can effectively support a plethora of different protocols. Some systems require audio transcoding, others need video support, and still others must support fax/modems or data encryption. However, as with any engineering project, requirements are not set in stone when the project starts. Therefore, it's important that designers build flexibility into the system to make it future-proof.
Creating flexible designs poses a challenge because of the way software is sold. Most of the time, designers are forced to purchase DSP hardware from one supplier and DSP firmware from another. The software vendor presents the designer with a list of standard firmware builds from which to choose, hoping that their requirements will perfectly match one of the predetermined feature sets. At the same time, the designer must pick a specific hardware device from a list of DSPs with different performance levels.
While this sales model seems acceptable, it requires some adjustments depending on the application. For example, consider a media gateway design that must be scalable. The objective is to create a hardware platform that can scale from 32 channels to a few hundred. Designers in this situation typically create a base system with clip-on modules that allow more hardware resources to be added if needed.
With the advent of software licensing, this provision is no longer essential. Designers can lay down DSPs at minimal cost and then activate the necessary capacity through software licenses. This greatly reduces inventory and upgrade costs as well as design complexity. Companies don't need to send hardware upgrades or on-site technicians when a customer asks to move from 64 channels to 128 channels; uploading a new license file is sufficient.
The financial rewards gained through licensing become clear when analyzing different scenarios. Besides the previous capacity example, vendors can use this licensing mechanism to add and remove features (see Figure 1), aiding customers who find themselves at the mercy of their DSP vendors.
Once customers select and design in firmware, switching costs are quite high, making it difficult to minimize the impact of changes whenever new requirements arrive. In this situation, designers are confronted with two less-than-appealing choices. One option is to pay a steep nonrecurring engineering charge and wait for the supplier to modify the standard firmware image. The other option is to switch to a different image that contains the requested feature. Obviously, this other image comes with a new price tag.
In contrast, with a pricing model based on individual feature licensing, customers see a relatively small incremental price difference and often aren't required to obtain new firmware images. A new license file turns on the desired feature. While this may seem trivial at first, consider that a feature can be something small, such as a new set of tone detectors, or something much more significant, such as video support. Today's advanced media gateway products can support features as complex as video services with a simple license file update using the same firmware image.
The next level of customization comes in the form of customer participation. Media gateway DSPs must be easy to modify because media gateway designers often encounter situations where they need to make small additions or changes to the firmware. Some companies that use proprietary codecs or protocols do not want to divulge this intellectual property, not even to their software vendors, so they must be able to port their software themselves. A media gateway that allows customer-written modules to be added helps alleviate this problem. Designers can start with a complete media gateway and add only the bits of code that help differentiate the system.
Vendor commitment required
While mass customization appears elegant, the mechanics behind it can be quite complex. Some vendors have tried to offer this level of customization but fell short, primarily because they did not supply both the hardware and software. To lock their software to the capacity or feature set that was purchased, some vendors use external hardware devices to store the licensing information. The problem with this approach is that it prevents easy upgrades in the field because the license key cannot be updated securely.
To achieve true flexibility in the licensing scheme, the DSP itself must contain the necessary hardware to validate the licensing information. This is a very similar technique to the methods FPGA vendors use to protect their customers' IP. Some FPGAs now contain the necessary nonvolatile security keys to decode encrypted bit streams. In the case of media gateways, it's important that this mechanism be as seamless as possible for the user.
Vendors must be committed to the media gateway market in order for these mass customization methods to be effective and easy for customers to implement. Hardware and software must be designed in such a way that the licensing mechanism is an integral part of the media gateway software developer's kit. Furthermore, vendors must establish the necessary logistics to manage the feature and capacity licensing in the firmware. Because this business model already exists in the software industry, its pitfalls and solutions are well-known.
Optimal pricing, profit margins
The mass customization of media gateways will help usher in the next wave of cost savings for equipment manufacturers. Not only will this allow for optimal price points through software licensing, but it will also enable users to add new features such as video services, which will ultimately help OEMs maintain higher margins in the face of fierce competition.