I just gave a lightning talk at the 2010 Open Hardware Summit. In it I tried to describe three situations where openness and business practice have intersected in our running of ThingM. Here's the transcript:
Hi. Thank you very much Alicia and Ayah for organizing this event. Since this is a lightning talk, let me cut to the chase.
I'm Mike, co-founder of ThingM with Tod E. Kurt. We design and manufacture ubiquitous computing products. Our current product line consists of BlinkM smart LEDs. These are ultrabright RGB LEDs that have an integrated driver that runs firmware that abstracts away the complexity of creating light effects. Someone with no experience with electronics, programming or color theory can use our stuff to make a smoothly fading, blinking light effect in a relatively short time without an additional microcontroller or any other hardware. Our smart LEDs even have their own input pins to change behavior on the fly and they're used in everything from car dashboard prototypes to (as we have been told) Lady Gaga's stage show.
The vast majority of our code and designs are open, but not everything, and I'll explain why in a minute.
First, let me preface by saying that ThingM is our day job. In the four years since we started it, we've always treated it as a profit-making business that needs to sustain itself and us. So, just as any small business, we're always thinking about money, and that frames my perspective on the value of Open Hardware as part of a larger business strategy.
I want to describe three situations where ideas of Open Hardware intersected with our business decisions. I haven't been watching the summit, so excuse me if this has been covered already.
We sell a product called the MaxM. It's a two-part smart LED. There's a controller and an LED cluster. When we first came out with it, one of our distributors asked if they could sell the LED cluster alone. With thought, "Why not?" and made some extras. They sold pretty well, but we made very little money on each one, maybe $1, because they were cheap. After the first run sold run, I ran the numbers and realized that for every cluster we sold instead of a MaxM, we lost somewhere around $5 in potential profits, and our customers got a product that wasn't nearly as interesting as a MaxM. Thus we would have to sell five clusters to make up for every potential lost MaxM sale. Was that actually happening? I don't know for sure, but the numbers didn't imply it, and there were indications that we were in fact hurting MaxM sales.
We decided to cancel the LED cluster, and we told the distributor. They said "OK, but if you don't mind, we'll just make our own. It won't look like yours, but it'll basically be the same thing." They didn't have our Gerber files or our LED supplier, but we share the schematic and it can be replicated very easily. Of course I said yes, since they're good friends of ours, but I felt like we had developed a product that cannibalized our primary market, while giving someone with better marketing and distribution resources than we had another opportunity to compete with us.
What did we learn? Well, we kind of screwed ourselves twice, and if our hardware wasn't as open, we may have only screwed ourselves once. Would we do things differently? Probably not.
A couple of months ago I was having a really good conversation with a big electronics catalog, trying to talk them into carrying our products. I thought things were going pretty well and they were going to pick up our product line, when their buyer casually said "Can you send over your UL certification? We can't carry your product unless it's been UL certified." I said, "uh, let me look into that." So I did. It costs between $10,000 and $20,000 for our type of lighting product. To do all of our products would cost us around $100K. If we want to get all of the other certifications that are applicable, it would probably cost us another $100K. First of all, we can't afford that. Moreover, conforming to the standards would require us to change our designs in specific ways, which would be great, because there's probably a reason those standards exist, but it's a pretty expensive design rev. If we make our revised designs open, we will be giving potential competitors the product of that standards conforming process, of that improved design that cost us $200K, putting us at an immediate financial disadvantage.
Can we afford to make that gift? I don't know. I'm still thinking about it.
Three years ago, about a week after we had started selling and shipping the BlinkM, we got an email. The email was a very nice. The author said that he and his company thought our products were very interesting, but wanted to point out that his company had just been granted a patent on the core functionality of our product, and that he would like to have a conversation with us about it. The patent had been granted that day, so it was clear that he had been quietly following our progress as we documented it on Flickr and our blogs. I immediately called our patent attorney. He asked me to come to his office. When I came in, he had the patent printed out and the key claims highlighted. He asked me whether our product did the highlighted claims. I said, "Well, it definitely does these two things, and if I understand this third claim correctly, then it does that, too." He said "Get out of that business immediately."
Fortunately, we were lucky. I'm stubborn and optimistic. Jeff, the guy who sent us the email was the CTO of an East Coast manufacturing company, and he said that rather than sending his lawyers, he wanted to talk first. He suggested we meet the following week, since he was going to be in the Bay Area. My patent lawyer's half-joking advice was not to go alone and to not meet him in a hotel room. Jeff suggested we meet in a hotel room in Santa Clara, alone. I said OK.
Since time is limited, I'll cut to the chase. It actually went very well. Jeff was generous and I didn't do anything that I regretted in the morning. We negotiated for about six hours and came up with a licensing agreement that allowed us to use his company's IP for free, but we could not make products outside of a specifically defined market, we could not share the technology with his competitors, and that the IP was not transferrable. If someone made something with our products that crossed into his company's market, he would treat it as a patent infringement, and we would be held at least partially responsible. Thus, we could not make the core part of our product, the firmware, open, since that would violate the agreement.
That's when I realized that IP, whether it's open or controlled by patents or trade secrets has a different quality when held by small companies than patents held by large companies. Large companies think of themselves as knights in armor and treat IP like a battle axe, but for small companies, if you're dealing with someone reasonable, a patent or an open hardware design is just a letter of introduction between two companies with a mutual interest in a technology. Their interest is, or should be, to do mutually beneficial business with each other. And that's how I've treating IP ever since. We have filed some patents and trade secrets, but most of our products are open. However, we have to decide which is which on a case by case basis.
The main thing I learned from these three experiences is that there are many shades of grey in Open Hardware. I try to keep ThingM as open as possible, but every decision has an effect on the financial health of the company, in the short term and the long term. Openness is a strategy for long-term technological influence, and perhaps profit, but it carries with it both short term and long term costs that have to calculated as part of a business model.