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:
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.