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0 + 0 = 1 : the appliance model of selling software bundled with hardware

The business model of selling software bundled with hardware is called the appliance model. As hardware becomes less and less expensive and open source software is being offered for free, the traditional business model of selling packaged software is being threatened. This disruption in the software industry is forcing software vendors to consider other business models such as advertising-based, transaction-based, software-asa-service or appliance-based models in order to create additional value for customers. Most of these models have existed in variants for decades but are now gaining in popularity due to factors such as changing cost structures or the Internet as a delivery channel. This thesis analyzes the economic drivers and barriers for the appliance model for both the consumer and enterprise software industry segments. Important drivers of the appliance model for both of these sectors are hardware commoditization, open source software and vertical integration in order to capture margins. In the enterprise software segment the complexity of traditional software integration and operation including unpredictability of total cost of ownership, rising IT personnel cost and maintenance fees are driving the adoption of the appliance model. In the consumer software segment, ease of use, limited battery life, disintermediated distribution and prestige are important economic factors. The appliance model also has a number of economic disadvantages that hinder its adoption. Among these are the additional competencies that a company needs to build, supply chain and distribution costs, as well as inflexibility and inconvenience for the customer. Decision criteria for companies considering adopting the appliance model are also discussed. Industry examples in the consumer and enterprise software segment are examined and specific companies are used as case studies. Among these are the digital music player, digital video recorder, router and enterprise search markets. The possible implementation paths for software companies transitioning to the appliance model are proposed and the virtual appliance model as a next adoption step is discussed. Thesis Advisor: Michael A. Cusumano Title: Sloan Management Review Distinguished Professor of Management