Open Hardware Business – Part1

A discussion of the intersection where designers, open-sourcerers, business pros, and investors, and manufacturers meet and usually get mixed up.

A discussion of the intersection where designers, open-sourcerers, business pros, and investors, and manufacturers meet and usually get mixed up.

Did you know that patents and open source are nearly equal?

The only way to issue a patent is to provide in full detail the materials, methods, and machines used to produce your invention. These details must cover ONLY the part of your invention that is novel, useful, and nonobvious. That which is not novel, or obvious, is presumed to be public information. Part of the patent fee is the administrative cost of editing and publishing your work for distribution in the open public. When you do the equation, the patent process adds up to now-the-public-has-ability-to-make-your-invention – the only caveat is that the law protects the patent holder with the rights to profit from it. Or, the rights to distribute the rights to profit from it.

Let’s jump into the world of software, where patents got messy.

The cost to reproduce the work is near zero. The cost to profit involves paying for a legal team, paying for patents, paying for contractors who can turn a useful thing into a profit stream (like “how can we sell an application that lets drivers talk to riders and create tons of value”) This is Uber, by the way. Uber was founded in 2009 and made profit for the first time in 2023. 14 years before making a profit. Since 2020 they cut nearly 5,000 jobs details on crunchbase. Was profit only possible by cutting back costs? Perhaps in the world of software the cost of technology is small and the cost of human resources is high.

Now, transitioning to hardware.

There is a special (and modern) type of hardware that is more similar to software than ever before. Let’s call it digital hardware. Digital hardware has two features: The design is stored digitally, and the manufacturing is digital as well. That completes the chain of creation and production. When manufacturing is digital, manufacturing cost is still high but the cost of access is low. For example: A digital designer named Tara wants a printed photo, with professional quality. This is physical hardware. Her professional work of art takes little investment but professional printing systems cost tens of thousands. She can digitally manufacture a unit, in the sense that she can produce every pixel of data that makes it unique from another photo, and she can transfer that data to any manufacturer (print shop, Walgreens, etc) to have it produced while retaining ownership. She owns the pixels, and all the design elements. You can see here that Tara spent perhaps $100 on design software and Walgreens spent $50,000 on printing equipment. This situation has constraints and benefits:

Constraints: The designer must understand the limitations of the photo manufacturer. It must be sized at 4×6 inches, it must contain only CMYK colors (no shimmering gold, no flourescence, etc), and the format must be accepted by the manufacturer as well. n1

Benefits: The designer can retain ownership of her design in full, for the parts which are unique, useful, and nonobvious. Sound familiar? If you take a family photo and the digital work has a timestamp in yellow Arial font – then someone reproduces your photo for profit you can sue them based on copyright infringement but if they make a different photo with the same timestamp – that’s fair and legal. The text at the corner of the photo is obvious and not unique.
The next benefit is that you skip the investment in equipment and just add value directly within your expertise – designership.

Note1 In photos we barely notice constraints but in 3D printing, people complain constantly about what you “can’t make.” This is unfortunate.

To recap, digital manufacturing is that which

can execute the unique and nonobvious parts of a design while the designer retains ownership AND does not need to invest in expensive manufacturing equipment. Tara can buy a printer, but it’s not required to be successful. That means, if the invention is placed in the constraints of the typical manufacturer, the invention cost to produce is extremely low ► access is cheap.

When we enter the world of digital manufacturing, we can steer our business decisions by learning from software businesses.

I’ve heard two lines repeatedly in business circles this decade:

1) “It’s all about growth these days, not profit.”
2) “Patents are becoming less popular, and trade secrets are kept instead.”

This is simple evidence that the business world has noticed and responded to the environment that creates value in digital works.

After the world invented software, it changed the cost of creating value and that changed the way tech businesses advance.

When you open source a work, you own copyright

immediately at no cost, and the criteria is similar to a patent. You can’t copyright common literature like a red square or a common phrase (unique/nonobvious). And, authors automatically have copyrights to the content (in the USA, and in other legal systems) without filing anything.

If Tara, the digital designer has a market demand for her works, she has a range of business opportunities. She can be a contract designer, or she can become a whole photo production company. The former is a tiny investment and the latter is a large investment. To choose wisely, she should ask herself what her expertise is, and where she adds value. If Tara knows nothing about the photo production equipment, but she wants to build the whole system, she’s operating outside her expertise and the business, in order to compete, must invest in all the M’s of production in order to operate competitively. She will ask investors for funding and they will in turn ask why they should direct the funds to her business instead of the existing ones.

In truth, she offers no innovation in that space – all of her innovation lies in the design side. So, she turns to the first option: contract designer. Now, she produces digital works but she has a desire to scale up. If she invests in the knowledge of the constraints mentioned above, she can have a business that not only performs digital design but can advise others on turning a digital design into a physical one. The more she learns and develops best practices, the greater number she can serve – she can begin to scale incredibly large. Eventually she can become like Canva – worth billions, able to add so much value that it plugs in the regular consumer to the manufacturers and relieves the consumers from investing their time in the knowledge about the manufacturing system.

In my own words:

Canva invested in knowledge of the M’s-of-production, formed best practices to realize new value, and built an empire of digital production.

What would Tara do if she had a dream of a Canva-type of empire but she wanted to obtain more M’s than the investors could afford? She could open source the project. Instead of trying to own every detail in the first few years, she would forego early profits to achieve growth without investment. As we stated earlier, the difference between open source and patent is nothing but exclusivity on rights to profit. And, if there was so much profit to be made that you don’t even need exclusivity, you can begin to grow without trying to own everything in the digital production chain. Furthermore, you can open source an item and assign a fully valid license that asserts even more rights, at no cost to the author.

The next step for Tara the designer

is to formulate a structure that constrains creations within the digital manufacturing limitations. This is a big task but it’s not impossible, as seen with the digital photo production scenario. And, while technology expands at 2023 speeds, things are becoming possible faster than ever.

In a future post I will describe what I observed about open hardware, and what it means to “do it correctly.” Done correctly, open hardware becomes like open software – contributors can all benefit more greatly than they invest, and it’s a win-win for everyone.

Bullet summary:

  • Reproducing software has a low cost
  • Traditional hardware production cost is high but digital hardware is low, like software.
  • Obtaining patents has a high cost
  • So, digital works (soft & hardware) are unique from traditional hardware
  • There are special benefits to digital works
    • Everyday people have the tools to reproduce software
    • The number of people able to contribute to a project is high – talent pool is large
  • When choosing between patent or open source, you weigh the benefits
  • If the GROWTH featured by open-sourcing is larger than the PROFIT made from patenting, we choose the open-source IP pathway.
  • This formula only works if we open-source correctly. (next article to explain)

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