Here's a good post by Mark Suster, a VC, on "The amazing power of deflationary economics for startups", which I think neatly explains the economic and innovation model behind 3D Robotics and most other open source hardware companies.
It starts by reminding us of the classic disruptive business model from the Innovator's Dilemma:
In the simplest form, new startups have a product that is INFERIOR to that offered by the competition but at a dramatically lower price with the seller opting for a very thin margin on their product.
Initially their only customers are people who can get by on the reduced functionality or perhaps don’t have the money to spend on the expensive product.
Often it turns out that the market is greatly expanded by having a lower price point new entrant. And over time the new entrant attracts enough business that, as depicted in the graph above, the quality of the product slowly increases over time.
The new entrant keeps margins low but suddenly has a lot of profits due to large volumes of business.
How does the incumbent respond? Not by dropping price & quality – they don’t have an advantage there. Instead they spend more money trying to innovate on product quality and call attention to the weaknesses of the new entrants product quality.
Often major customers defect en masse to the new entrant as they realize that the huge price premium is not justified by the product differentials.
It then provides some questions to ask to see if your product/service fits this bill:
- Does your product dramatically reduce costs in an industry with large incumbents and fat margins?
- Can you provide a narrowly focused product to a niche of that market who will be attracted to dramatically lower costs?
In the case of UAVs, both these seem true: most companies in this space price their products like military-industrial products, not consumer electronics. They typically have the margins of defense contractors. Meanwhile, the civilian/amateur market for UAVs is much more price sensitive and has been poorly served to date, both because of the high prices and also the regulatory restrictions on closed-source vendors.
The open source entrants in this space have the opportunity to be classic disruptors: faster, cheaper and, eventually, better. Starting with the original open source autopilot, Paparazzi, they were initially dismissed as being buggy, hard to use and poorly supported. But as more teams entered the fray, the open source autopilots got dramatically better, and prices continued to fall. Meanwhile the volumes rose: the ArduPilot project, for example, has shipped nearly 10,000 autopilot boards across all its varieties: that's more than all but a handful of the biggest aerospace companies.
Sure, there's still a lot of work left to do to make the open source autopilots as robust as a milspec one, but the gap is closing fast and the open source ones sell for $200 while the milspec ones go for 20 times that or more.
At 3D Robotics (the hardware company behind the DIY Drones store) we think about open source hardware as a "90/10" opportunity: 90% of the performance of commercial alternatives at 10% of the price.
Of course, we'd like to do even better over time--we think that the open source innovation model is not just cheaper than closed source, but can be better, too (think Linux, Firefox, Apache, etc). So maybe 110/10 is possible, or even more when you include things that open source projects are good at, such as introducing new feature quickly and creating open platforms for user innovation.
These are still early days, but I think the civilian UAV market will someday be even bigger than the military one. If the Innovator's Dilemma holds true, bet on the little guys moving fast and cheap to eventually dominate.
Comments
@Davey
I don't think there is much to debate any more. Open source is well established and here to say. Whatever the pro and cons are, its not going anywhere. I think it is very important for everyone to understand what the differences are and why on the surface open source appears so cheap. Its not that open source is better or cheaper in the long run (if you put a value on peoples donated time), its just a different model and it has an important role to play in a competitive market. From a consumers perspective, its a great thing!
@Chris
'the poster who made the "open source = communism" comment does have some direct experience with communism, so we've got to respect that ;-)'
I am fully aware of that and consider your comment not being ironic at all.
Toby: I agree, and you'll note that was my original point in the post above.
In fairness, the poster who made the "open source = communism" comment does have some direct experience with communism, so we've got to respect that ;-)
I merely sought to point out that when people say the apm is cheap and that commercial systems are expensive there are clear and fundamental reasons why that is the case due to the fact that open source companies are not on level playing field in terms of cost.
Chris there is no denying that 3dr is investing a lot of money into product dev which you then have to recover from selling hardware. The reality is that the 3dr investment is a drop in the ocean compared to what commercial companies have to spend. Hence commercial auto pilots will always be more expensive.
The only reason I raise thes is that people often complain on this site that commercial products are too expensive and for this reason I think it's a little unfair to compare the price of something developed with a major chunk of free labour with something commercial.
People tend to compare just the circuit boards and forget that the major cost of building an electronic product is not actually building it but developing, testing and certifying it.
Notwidthstanding, thank you everyone for your contributions, because without them the apm and related components would cost thousands of dollars more per unit.
I see this thread is descending into the usual debate over the pros and cons of open source. My views are already clear on this, so I just want to clear up a few factual assertions that have been made:
--3D Robotics has more than a dozen paid employees. We're hiring a Director of Software Engineering now.
--Dev team members are mostly volunteers (although they get free hardware), but we are implementing a merit-based compensation strategy this year, up to and including stock options for top contributors.
--Although 3D Robotics does not sell full autopilots (boards with code) or UAVs from the US, its partners outside the US (such as jDrones in Thailand and uDrones in Mexico) do.
--We have two full time professionals doing user support, to say nothing of the support offered by our distributors. The community helps a lot, but we take our customer support responsibilities very seriously.
--As Roberto points out, there are huge industries already built around commercial service and support of open source software, from IBM to Google/Android. To say nothing of all the startup companies that are enabled and accelerated by availability of free/cheap and good software. It is really difficult in 2011 to say that open source hasn't been a huge net economic benefit to the world--at least here in Silicon Valley that debate ended years ago. Certainly the "open source = communism" phrase hasn't been heard since Bill Gates left Microsoft ;-)
Mike: I was referring to the early days. Paparazzi, like the other open source autopilots, has matured tremendously since then, which was my point.
@Roberto, they don't even need to measure anything to write CE marking. They will only have to retract the product and pay fines if anybody proves the product is not compatible with regulations. CE is a DECLARATION of the manufacturer. In practice always backed by formal testing, but unfair vendors just put it and don't care.
Also note everythign on this site operates on the shady area:
-they dont sell UAV nor autopilots, they sell a kit (otherwise they would be jailed for exporting dual-use tech without permission)
-they sell no product, they need no certificates. in fact this is exact replication of what the capitalist were perceiving as unfair market a decade ago: nobody is liable for anything since this is not a product (nto UAV, nto autopilot), it is cheap, everybody says it's cool, the company is not making user support, rather the users do. The makers speak English, what is a progress compared to what China offered a decade ago but not any better what China offers today.
There is no denying it, if diydrones admit they sell an autopilot, they are out by the law.
If you put together US export laws lobbied by mil corporacies, relatively easy capital acces in the US and acceptance for unfinished product worldwide, you get exacty the world we live in.
Not sure the wording surrounding Paparazzi is quite fair...
@Toby,
I'm absolutely agree with your point of view. There are a lot of big company as IBM for example or google that contribute to opensource for share and growing their service . They don't make money sell licence of software but doing money selling Server or IT service that use Linux as OS.
So i think that main problem of OS when company as 3DRobotics develop only hardware and don't have inside competence for develop software and firmware is define the Bussiness Models .
Normally a company when sell a hardware is responsibility of it . So if there are some bugs inside the code or hardware they must solve it and could have problem with the customers if don't solve the problem.
What about opensource firmware ? No liability ? So the production of Opensource Hardware - Firmware is only good for some market as hobby not for commercial application.
Instead if you want to certify the firmware and hardware you need to invest a lot on firmware development test and debug . And ask to certification company to check the respect of specification of law.
In the future regolamentation of UAV will be need the certification of Drone. So i think that some company .. distribution company that develop RTF product need to doing a certification process and that is very expensive .
I think that could be very important to define when this kind of work is a hobby and when instead is for commercial application .
This two kind of market is totally different and also the rule of game is different.
For example Chris the Board producted by 3DRobotics have C.E. certification ? If they product only small number of prototype and know where they sell it don't need that certification but if they wants to export in Europe They need it .
Best
Roberto
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