The erosion of hardware margins is outstripping the ability of manufacturers to make it up on volume, even as the Internet of Things (IoT) continues to expand at an accelerating pace, concludes a new report penned by Laurie F. Wurster, Research Director at Gartner. The report, entitled “Emerging Technology Analysis: Software Licensing and Entitlement Management Is the Key to Monetizing the Internet of Things” was published on Monday and points to embedded applications as a potentially paradigm-shifting source of differentiation—and sustainable revenues—in the connected era.

Gartner argues that OEMs can become much more than just commodity suppliers by applying software licensing models to physical hardware through built-in entitlement management capabilities. That could, theoretically, lower barriers to entry for customers across a wide variety of segments. For instance, a small community hospital that can’t afford to purchase a million-dollar MRI machine would be able use one on a pay-per-scan basis. In another example, a telco would be able to temporarily increase signal capacity during activity spikes without committing to a large infrastructure investment or charging a premium from subscribers.

In addition to making technology more accessible, hardware licensing would also allow manufacturers to enable different features without making any product modifications, which is similar to how modem and router vendors utilize software configurations today to let users unlock more bandwidth.

Device makers in other markets could leverage this model to deliver functionality and capacity in different combinations, without producing separate versions of the sale solutions, an approach that can significantly reduce manufacturing costs. “Once you build software licensing into your business model, the opportunities to flexibly configure your products and offer value added services is virtually infinite,” explained Mathieu Baissac, Vice President of Product Management at Flexera Software. “And it doesn’t result in an increase in manufacturing costs because you control this all through software licensing and entitlement management.”

Tiered offerings have another benefit: self-service upgrades. That means a customer can quickly access new features by logging into their product’s Web portal and paying a fee, as opposed to traveling to a brick-and-mortar store and purchasing a new device. Aside from improving the overall shopping experience, this has the added benefit of producing data that manufacturers can analyze to gain a deeper understanding of who their clients are, what they own, and whether or not their clients are complying with the manufacturers’ licensing terms.

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Suzanne Kattau contributed to this article.