The Truth About Open Source Hardware Business Models

By on September 20, 2013

After some time now, the Open Hardware Ecosystem and Business sector gained some significant traction. An excellent presentation by Mathilde Berchon was recently release at the open hardware summit, trying to summarize the increasingly interesting diversity and numbers of the OSHW business. Here’s some interesting passage in the talk:

The number of open hardware startups is increasing, mostly since 2007. Before this date, about only one company per year was launched […] Since 2007, the number of new open hardware startups is growing pretty fast.

It takes an average of two years to go from a project to a product. With the rapid increase of open hardware projects – reaching now the thousands – we might expect the birth of many new open hardware startups in the coming years. […]

Electronics for hobbyists and education is by far the number one market addressed by open hardware companies. 63% of them are developing products for hobbyists’ electronics, education and prototyping. Many of them are inspired by Arduino or Rasperry Pi success, developing compatible boards, shields and kits. The second position goes to fabrication tools (15%), and more specifically to 3D printing (11%). Market is then fragmented between many niches that reflects open hardware entrepreneurs passions: drones (3%), lights (3%), synthesizers (2%), construction kits…

All the data is available in the Open Hardware Startups Database here: http://wiki.makingsociety.com/index.php5?title=Makingsociety_wiki:Community_portal

Mathilde’s talks and other sources of information shows that, despite the sector is still of negligible size respect the traditional hardware and manufacturing business, OSHW is anticipating some interesting trends such as hardware componentization and on-demand manufacturing but we’ll be be back on this later.

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Within time we are seeing a substantial diversity of business models coming up for businesses growing around open hardware. A partial but interesting recap has been made by Robert Viseur in July (you can find his presentation here) and I would like to integrate it and extend it with some more information to give a complete overview.

The most obvious monetization strategy: Manufacturing

The most obvious monetization strategy for open source hardware is that of manufacturing. Indeed as is it for closed source hardware – but differently from software that has basically zero infrastructures needed to build – open hardware still requires a factory to be built, at least when we talk about electronics (you could self build open design furniture sometimes).

Interestingly enough, the advantage to having access to manufacturing facilities is, on the other hand, less and less decisive in places like China’s Shenzhen, where at now the knowledge, processes and tools needed to build hardware are radically accessible and shared across hundreds if not thousands of companies. Manufacturing ability is no more a differentiator in itself.

With this in mind, the point here is only one: a successful hardware design – being it closed or open doesn’t matter – will be copied once successful and – as Nathan Seidle often pointed out in interviews – market advantage resides in company elasticity and in the capability to innovate rapidly a product portfolio.

Despite the correctness of this consideration, to be honest, the most successful open source hardware company in the world, Arduino, demonstrated that, even if you’re painfully slow to innovate your products – every Arduino lover knows that the board have some limitations and the new models often take a hell of time to arrive – you can win the market.

Arduino experimentation (or, better, lack of experimentation) in business model, eventually became it’s true advantage. As the platform debuted on the market the founders decided that only the brand would have characterized their production. It should be noted that this simple model it’s particularly difficult to achieve and, also, may only work for that kind of projects that have a strong prosumer/consumer oriented market segment and, at the end of the day, a Business to Customer model.

B2C markets are those where brands count: the B2C tends to be inefficient for the professional context where components may be embedded in final products therefore hiding the brand. As you may know, for example, Arduino boards complexity is negligible and one can copy the board, manufacture it and rebrand it (maybe inside a more complex product) with relative ease.

Obviously, while this situation could be seen as a problem for the original brand manufacturers, this opens an opportunity for third parties to manufacture the product designs of several third parties (when open source). These players could, in this way, explore and exploit new niche markets for customized and/or upgraded niche products or even take care of geographical distribution with local production facilities that can eliminate shipping costs.

Another existing approach that many players are considering is the so called dual licensing. Dual Licensing is very famous and widely adopted in Open Source software and simply put, it’s about having the same piece of software distributed under two different software licenses, where one is usually Free Software or OSI-approved and the other is a proprietary license.

In hardware we could have pretty the same situation: that’s indeed the case of Gaisler Research’s LEON is a 32-bit CPU microprocessor core, based on the SPARC-V, A LGPL/GPL FLOSS licensed product that also offers a proprietary license for integration in proprietary products.

Another approach to dual licensing could be based on extending the core open product with additional proprietary extensions or versions. Thanks to dual licensing, providers can create a product that is more resilient in the market since other companies or professionals may decide to base their product on the technology and contribute to a common development. That being said, it’s still very early and it’s hard to find a dual licensing hardware product that really fueled a lot of community innovation in parallel with a closed edition.

In many cases the open-hardware approach just stands as a declaration of intents and openness to the community: something that you can’t really avoid this days. On a different level by the way, one must note that having an open source core offering  may help lower the customer lock in concerns (especially in the professional segment).

The lock in problem instead could be considered a friction point for companies trying to complement open source hardware with closed source Software as a Service offering (especially in the Internet of Things and connected hardware realm). On the other hand we still see a relatively limited market penetration also for Open Source powered cloud integration services (such as Thingspeak): this could be interpreted as an indication of a market segment that’s still not mature: that of intelligent, connected object.

Professional Services make the bulk of the rest of the monetization strategies and business models around open source hardware. In fact a bunch of interesting and very focused small companies are bootstrapping businesses around visionary customers exploring IoT, Machine to Machine and hardware innovation.

That of logistics and automation, by the way, still seems a market dominated by few closed industry giants (eg: Siemens), playing in the field of large and middle scale projects in traditional industry contexts.

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A lot of debate but in the meantime a de-facto standard: Crowdfunding for preorders

In the meanwhile the open source hardware movement was questioning about the business models sustainability, Kickstarter, Indiegogo and even self hosted crowdfunding campaigns gained more and more importance in supporting creative hardware projects. Tens of hardware related projects appear every month and a significant percentage gets enough traction to be funded, often more than expected.

Projects range from creative niche products (Nixie), to tools (see Open Pitaya), to advanced vertical equipment developed for specific niche needs (such as Piksi and Flutter).

Common traits of these hardware projects funded via crowdfunding are:

  • Componentized (common protocols, standardized interfaces)

  • Prosumer oriented (targeting a market of early adopters and creators)

  • Super niche products (specific features)

  • Non R&D intensive

  • Strongly focused on solving existing gaps

This part of the open-hardware industry, is definitely growing around its main customer segment, that of creative prosumers, that appears to be an evolution of the good old DIY market, joined with the a massive exposure and cooperation that the internet has been able to offer to cool inventions and great projects.

The evolution towards hardware componentization could be strictly related to the very nature of the transformation of the funding strategies: in fact final consumer-hardware may not be strictly interesting to hardware innovators since still too capital intensive.

Why a lagging adoption in the industrial realm: is it a business model problem?

The fact that, differently from the creative industry, the corporate hardware industry is still not embracing open hardware could therefore be not much related to business sustainability and business model issues. Instead the closed approach, could be much more related to promoting ill (from a sustainability point of view) behaviors like planned obsolescence to ensure profit maximization.

Despite the leaders of open hardware are still not really significant in terms of market share, respect for example to a mainstream – closed source – home appliance vendor or electronics manufacturer like General Electrics or Samsung, the rampant level of success that those players are having among early adopters should be at least considered by the hardware giants.

In fact, entirely emerging industries – like that of drones and UAV for example – are being develop around the concept of open and componentized hardware and new projects, targeting new and challenging industry branches (some new, some just there to be disrupted) are emerging every day.

We can really foresee a huge disruption potential in these industries: if you just look at the role that the Arduino platform is playing we can really see two different aspects. On one hand, Arduino is a brand and a community: the platform itself has a negligible technology advantage (if any) but still is largely used as a core for many truly innovative products ranging in many industries and having real impact in the life of those that are open to experimentation.

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The UAV industry is strongly based on Opensource

But behind this “social” role, the Arduino platform succeeded to be the first global componentized hardware platform that is universally recognized and used as an interchangeable component. Think to our 3Drag 3Dprinter: as many of you know the printer now sports an advanced control board that allows things like autonomous printing, but is still based on Arduino.

Thanks to Arduino componentization and to the standardization of its I/O interfaces our enhanced board may be used in several other contexts and products, and not only those based on RepRap: virtually everything that is based on Arduino, using the same firmware, can use our board in some ways.

The work done by iFixit during these years, and the preliminary appreciation that the initiative is gaining among some industry players demonstrates that a different approach is, somehow, possible.

Said that’s, it’s way more likely I think, that (in the very same way it happened for the incumbent software industry), a new breed of hardware manufacturers will come up and disrupt the existing ones, instead of seeing the incumbents change their approach.

This incapability to change their approach may be due to the organizational rigidities that might actually prevent incumbents to adapt. Some interesting examples in the software industry might be that of Oracle and Microsoft: both the software giants of the early 2000 are increasingly losing market shares and struggling to face the competition of a new breed of (once) startup players such as Salesforce, or even Google.

Despite Google is a giant today, it was nearly a startup when those incumbents were dominating the market, and actually debuted in the Software as a Service, browsers and Operating Systems market very lately. All these markets are now being almost totally disrupted by the guys from mountain view.

What we could expect in the hardware and manufacturing industry could be a something really similar: the birth and affirmation of new hardware and manufacturing players that, despite not ideologically linked to open-hardware, will enjoy of the growing componentization that open-hardware itself drove into the hardware industry. As Google did with open source software.

These players will be likely based on totally new and innovative approaches to production: a similar paramount change is the one that we saw in the software industry: it switched it’s dominant model from on premise installations to Software as a Service.

Hardware Componentization and Manufacturing as a Service

To support a new kind of demand – agile, interested in user centric customization, community driven, strongly based on prosumers instead of consumers and, in general, targeting smarter, picky users – the whole manufacturing industry will likely transform its sourcing and fabrication habits. We may eventually see a radical transformation in the “factory” concept itself: it will become more distributed and potentially unlinked from the brands and manufacturers but more likely to be independent: do you see the parallels with Amazon Web Services and Elastic Computer Cloud?

The role of Amazon ECC and similar on demand infrastructures has been that of facilitating the emergence of a incredibly thriving software ecosystem that is – bite after bite – literally eating the world as Marc Andreessen said

Indubitably such a huge and decisive role could be that of great visionaries that will eventually show up in the manufacturing industry with elastic fabrication infrastructure, scattered around the globe: this actually copes with a rising demand for ultra customization. Just recently, Motorola switched some of its production facilities in Texas just to be able to offer user customization to Moto X customers:

“to offer four-day shipping for customized phones, it is moving part of its phone manufacturing process to the United States for the first time to assemble phones as they’re ordered.”

As it was for Amazon, the first players to provide such kind of distributed, on-demand manufacturing facilities – could really be the ones now owning the most advanced production infrastructure. In fact, they live a similar situation that Amazon lived years ago: their need to optimize their production potential to be smarter and more agile, finally could enable them to offer their services to the other brands and creators.

It’s just the first step towards a sustainable manufacturing process

At the end open source might finally become embedded in hardware manufacturing as it’s now the software industry. It may be a factor empowering the transition towards a more efficient and sustainable manufacturing process.

Sustainability tough it’s not a matter of innovation dynamics but it’s a political choice. Until resource extraction and externality generation will be allowed at the current level and no incentives whatsoever will be placed in developing new materials and new sustainable supply chains, nothing will really change or, if yes, this change may be definitely too slow for the need of global ecosystem.

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About Simone Cicero

Simone Cicero is a blogger (at meedabyte.com), strategist & speaker. Simone is also a long time Open Source advocate and Open Source Electronics editor. Follow him on twitter at @meedabyte