By Denis Martin

It seems that with every passing day it becomes more evident that "hardware is being replaced by software." There are those who see academic innovations at universities like Stanford on the fronts of OpenFlow and the Software Defined Network or even early shifts in enterprise thinking on this front for support for the argument. It is true that there is really no question at this point that we are in the midst of a massive cycle of innovation on how IT systems work and are connected. Arguably when mainstream publications like Forbes are making these very pronouncements one could argue it is pretty much a sign that the game is over. (See, for example, Anthony Kosner, Forbes, January 1, 2014 in "Prediction 2014: Hardware Is the New Software.")

But things aren't always how they appear.

In fact these tectonic changes are more importantly viewed as a shift toward high value IT services oriented automation. The interesting thing about this direction of IT innovation is that it is fundamentally rooted in a world of ever constant change, ever shorter release cycles, increasingly iterative development, more dynamic processes, and ever increasing interaction points between hardware and software elements. Those facts are incontrovertible. It isn't really about the degradation of the intrinsic value of hardware. It is about the increasingly complex interaction between these elements. The complexity exists because of the highly complex interaction between hardware and software elements and the great additional value that is extracted through automated interaction.

A recent case in point is Nest. How could a company called Nest, which at ground zero is a company which manufactures a thermostat with mouse-like elegance, be sold to Google for $3.2 Billion? As a data point, that price is roughly 30 times the current total world wide market for smart thermostats. The fact is Next is worth this because of the incredibly sophisticated interaction between the hardware and software elements and importantly the services oriented information abstracted and home automation capabilities derived from that interaction --- be it remote thermostat management from a smart phone, or smart home awareness, for example, learning and predicting when to heat or cool the home. These are all highly valuable propositions for one of the world's most dominant information company. Nest was able to capture all of this in an elegant but iconic "Honeywell" round package. It's not about the degradation of the legacy thermostat, but it is about the incredibly robust automation and interaction potential.