By ABI Research Analyst, Michela MentingThe biometrics market has grown dramatically over the last few years, boosting a plethora of new technologies and applications. The technology migration from the government and security markets to consumer and enterprise coincides with an avid surge of device and sensor shipments, with fingerprint, iris, face, and vein being among the most prevalent modalities.Driven primarily by consumer electronics (CE), mobile payments, digital security, and identity management, global biometrics sensor shipments are expected to reach 1.9 billion by 2022, at a CAGR of 12.4% since 2015.However, increased penetration rates have also been observed across the government, civil, banking, healthcare, and enterprise markets, bringing the total organic non-consumer biometrics device shipments to 31 million worldwide for 2022.ABI Research expects that biometrics market revenue will grow from US$26.6 billion in 2016 to US$44.5 billion in 2022. At the heart of this growth is technology innovation, which originates from the lowest layers of the supply chain, notably biometrics sensors, and then moves all the way to product integration and service creation at the top of the value chain. However, the revenue share of biometrics sensors from the total biometrics market will remain very tinny, and will not exceed 7% in 2022.The decreasing cost of biometrics sensors and related devices has resulted in a value shift from hardware to software and services, weakening the value of selling biometrics sensors as standalone products. In order to survive these new market conditions and remain competitive, biometrics chipset suppliers will have to transform their business models in line with technology innovation they often champion. They will have to move away from selling biometrics sensors as products and investigate new ways of improving the value proposition of their offerings.This article discusses building biometrics solutions around sensors and how offering these solutions “as-a-service” could be a viable alternative to the traditional model based on one-time hardware sales.Limitations of the Hardware-Centric ModelHardware technologies are currently monetized through one-time product sales. Referred to here as a hardware-centric approach, this business model is well accepted in environments involving commoditized and low-cost technologies addressing large-scale markets. However, the hardware-centric model, when applied to nascent technologies, could put considerable stress on the supply chain, mainly at the bottom layers where the technology landscape is fragmented, alignment with the supply chain is complex and time consuming, and competition is high.This means that these technologies are shipped at low margins and their profitability often depends on the scale of deployment. This is particularly true for technologies like biometrics, which do not operate on a plug-and-play basis. In addition to the multitude of biometrics sensors offered (e.g., fingerprint, iris, face recognition, location history, tamper analytics), a host of certification authorities, algorithm standards, standardization mandates, data policies, and governance issues need to be accounted for prior to implementing any biometrics solution.As a result, it becomes increasingly difficult for biometrics sensor makers to build a sustainable business and cope with the increasingly challenging market conditions. These players face competition from two ends:1- Vertical integrators who use their own chipsets to support their own biometrics system solutions and offer highly integrated solutions to their customers.2- Low-cost manufacturers who often cut the cost by offering off-the-shelf biometrics sensors not necessarily optimized for any specific application or use case, leaving system suppliers to assume the burden of system integration and use case alignment.In order to overcome these challenges and better address new areas of growth, biometrics sensor vendors will have to consolidate their offerings by supporting multi-factor biometrics technologies capable of generating scale through addressing the needs of a variety of potential use cases and applications. They will have to work tightly with technology integrators and implementers to be able to craft solutions that are tailored to address end-market needs. They will also have to change their business model from one where they act just as a hardware supplier to one where they are considered an integral part of any solution or service enabled by their products.Implementing Silicon-as-a-Service: Opportunities and ChallengesAn alternative model to the hardware-centric business model would be providing solutions tailored to solve the customer problems and charging for usage or performance of the underlying hardware. This new model is referred to as silicon-as-a-service (SaaS) in this paper. SaaS has been already adopted by a number of vendors addressing different verticals. Prime examples include:- Philips, GE, and Xicato, which are offering lighting management services over their lighting systems- GE and Zebra offering asset tracking services to hospitals using Zebra's sensor infrastructure- Aruba offering Beacon proximity services to public venuesThis business model is also considered by a number of location technology suppliers, including Comtech, Fathom, and Quuppa.SaaS provides many benefits to both hardware suppliers and end customers. Chipset suppliers and their business partners can capitalize on SaaS in a number of ways that could translate to higher revenue opportunities in the long term, including:- Better Profitability from Hardware: Profitability during the product life cycle is much higher with SaaS than with using a one-time sales model. In addition, SaaS enables recurring revenue generation, which could protect the vendor from unpredictable waves of product life cycles.- Cost Saving: SaaS helps vendors build a direct relationship with their customers, which could help them gain visibility on demand, cutting costs associated with distributors and inventory management.- Improved Value Proposition: Targeting customers' needs, SaaS offers suppliers the possibility to track how their hardware is used and quickly react to customers' needs for new features and hardware improvement.- Value-Added Service Offering: Biometrics sensors can be used for authenticating users in buildings, and when combined with location information, it can also be used for ID management or creating analytics from data generated by the chip.- Customer Loyalty and Retention: SaaS enables chipset suppliers and their business partners to create and develop long-term relationships with clients.- Attracting New Customers: Cut the up-front cost and lower the barriers to market entry for them.- Business Model Innovation: The SaaS business model enables vendors to tailor their prices in line with customers' budgets, needs, and strategies. Depending on the client, a number of pricing models are available to them based on either usage, transaction, number of users supported, shared revenue, or the offer of professional or value-added services.Customers and partners have a lot to gain by embracing SaaS, including:- Lower upfront investments, hence, lowering the risk related to market entry. This risk is shared with the technology supplier, as implementers do not have to bear the upfront investment for using the service on their own.- Deploy solutions tailored to their own need.- Lower the cost related to technology maintenance and upgrade.- Service Assurance: Technology maintenance comes as a part of the service offering.Adopting SaaS, as opposed to the hardware-centric model is not without challenges, including:- Choosing the right partners and working with them to define solutions that are relevant to customers.- Complementing hardware with comprehensive application libraries, APIs, and software development tools to differentiate from low-cost hardware suppliers.- Influencing the ecosystem and elevating the hardware position within the supply chain.- Evaluating the revenue share associated with the solution you are building with other partners.- Redefining the value proposition around offering services, not selling products.- Assessing the viability of the business case and adapting to the conditions of the markets targeted.- Anticipate supporting customers post sales; for example, offering after sales maintenance and updates, handling security and privacy issues, and managing the ownership of data transiting through the hardware.Case-Study, Biometrics-as-a-ServiceIn the biometrics market, the proliferation of biometrics applications and a steady increase of biometrics users worldwide could essentially call for suppliers of biometrics sensors to shift their strategy from the hardware-centric model to adopt novel pricing approaches. The biometrics-as-a-service (BaaS) model can be aligned with the needs of the changing landscape of the biometrics industry.By offering chipsets for free or at cost, biometrics sensor vendors can experiment with a much wider spectrum of pricing options, thus generating a much greater ROI over time. These pricing options fall primarily under two main categories of offerings: transactions and services.The transactional part is based on charging the customer for the number of transactions enabled by the biometrics chips, such as people identification, presence, or authentication to access a particular service or device.Higher transaction numbers will generate greater revenue. To illustrate the revenue stream of a biometrics sensor deployed under the BaaS model versus the one-time sale of a chip, let us assume a hypothetical and theoretical scenario in which the customer is charged a fee each time a transaction is made over the sensor. The cost of this sensor is US$1.5 to US$2 on average and traditionally sells at 28% gross margin.If one assumes the sensor enables approximately 75 transactions per week on average, then the chipset supplier could achieve ROI after 1 year if it charges US$.0005 per transaction, or in 2 years if it charges US$.000025 per transaction. If one considers the typical product life time service of biometrics chips to be in the range of 4 years, then the profit margin of the chipset supplier could be as high as 75%, without even counting revenue from value-added services created from data generated over the biometrics sensor.The second part of the revenue stream involves software services, which can be applied through developing a cloud service or partnering with a cloud service provider. The chipset will still act as the very core of the model, but will enhance its potential as a powerful enabler of cloud solutions for biometrics and location-based services.These solutions, for example, may include encryption, key and certificate management, APIs to access value-added features and applications, data analytics, and platform and interoperability options (e.g., connecting existing infrastructure to other third-party services or devices). Most importantly, these goals will be achieved in a much more secure, convenient, and scalable fashion than the traditional model.The creation of value-added services around biometrics not only introduces new revenue streams, but enables the supplier to expand in new value-added applications and create a solid ecosystem around its hardware offering.Although the BaaS business model can be applied in almost every biometrics application, the most crucial market opportunities can be predominately found in three major use case clusters: 1) identity and access management (IAM), 2) e-commerce and payments, and 3) security and multifactor authentication (MFA).IAM stands at a critical juncture, faced with the task of streamlining security across numerous business environments and technologies with an ever-increasing number of users. Managing these heterogeneous devices, encryption keys, certificates, and connections is not an easy task under current hardware-based models. This usually involves making use of SDKs, proprietary tools, further infrastructure expenditures, or requesting additional support from third-party vendors, which, ultimately, lays additional costs on top of a solution that initially seemed cheaper. Instead, placing the chipset at the very core allows for a streamlined integration of new devices and identities under one unified, cloud-enabled platform.When it comes to e-commerce and payments, this service is considered to be the holy grail of biometrics applications in the banking sector. An exponential increase of mobile payments worldwide (particularly driven by developing economies in Asia), as well as high penetration rates of biometrics technologies in CE have created an ideal environment for chipset vendors to enter new markets with software-added services. This leads to two major positive outcomes.Supplying biometrically-enabled chipsets and a related platform at a lower initial cost will lower the barrier to adoption and will allow vendors to take full advantage of the increased payment transactions enabled by biometrics chips. Further, it will also allow biometrics players to seed the market with brand new technologies and applications, which can be further monetized later, thus building the foundation for a much faster adaptation to future market needs compared to the competition.BaaS is also ideal for user security and MFA. The unceasing influx of IoT devices, along with the expansion of digital identities, the proliferation of user accounts, and the rampant increase of cyberthreats are mounting pressure for additional and robust security frameworks built around the silicon-layer.Combining these developments provides an excellent monetization source for biometrics chips using the SaaS model. MFA could be achieved by multiple authentication sources, such as by using biometrics authentication the user location. MFA cannot be achieved unless all authentication sources are well integrated under the same framework and only if the solution does not create any hindrance to the end user. Again, this presents the biometrics sensor supplier with an ideal opportunity to transform its business from offering products to offering solutions that are meaningful to the enterprise customers.ConclusionsIn summary, SaaS allows biometrics suppliers to improve their profitability from the hardware, strengthen their value proposition by offering a number of value-added services over their biometrics solutions, differentiate their offering against low-cost biometrics suppliers, and strengthen loyalty with existing customers. However, SaaS is not without challenges for hardware vendors.Vendors need to develop solutions around its biometrics sensors that are meaningful to the vertical being targeted. They need to transform their value proposition from product offering to service offering. Building such solutions means the biometrics sensor vendor will need to create an all-inclusive framework with all of the must-have elements, including cloud resources, encryption policy and governance, public key infrastructure (PKI) management, alignment with certification authorities, frameworks for data privacy and security, service fulfillment and assurance policy platforms, and security.Only a handful of biometrics suppliers can check off all of these elements and the majority still needs to partner with other players within the supply chain to build such solutions. Such partnerships are not obvious to build and may require sharing revenue across several stakeholders, which is often not easy to establish.