When I observe
what’s happening to consumer electronics I get a feeling of déjà vu. Is consumer hardware going through the same
transformation that consumer software did in the last decade? Change has been simmering
in the hardware space for years and now I wonder if we are about to witness a convergence
that will cause transformational shifts and disruptions to hardware like those
brought about in software with the advent of “the cloud”?
Ten years ago if you had a good idea and raised a million
dollars in seed funding to start an Internet software company, you’d spend
20-30 percent of your capital, sometimes more, on basic infrastructure. You had to rent your own hosting cage. You had to lease and
rack-and-stack your own servers, switches and firewalls. And you would likely have
to license and install costly software. Finally you had to hire someone to
manage it all.
There was no app store and no Facebook
“likes”. You had to manufacture physical discs and boxes and shrink-wrap the
software. You had to do "distribution deals" with retailers. And you
needed a co-marketing budget in order to buy ads and shelf space.
It was not uncommon for a company to raise a full $3-5
million before even launching their product or service.
Efficiency of capital in the software space was low ten years ago because so
much of it had to be spent on undifferentiated, commodity infrastructure and costly awareness building.
The consequence of having to raise a lot of capital in order
to build software was that barriers to entry were high and innovation stifled. Ten years ago it was almost impossible for a 22-year old college grad
to start a software company, regardless how smart they were or how good their
idea was, because in order to get going you needed to enter into
business relationships and secure multi-year server and software leasing
contracts. You had to hire a management team to demonstrate to both
investors and vendors that you had what it took to be successful.
All that has changed. What enabled this
change was the emergence of a utility model for computing and storage, an
operating system model that encourages a long-tail of innovation through apps,
plus a ubiquitous network that ties it all together with customers.
Today all you need to build a web service is a credit
card and an Amazon Web Services (AWS) account. Or with one or two engineers you can build
a mobile app for iOS, Android or Windows Phone and get instant distribution through an app store. You can hardly get your hands on $100k in seed funding without
having a working prototype of the thing you’re building.It's
not easy to stand out in a sea of online services and apps, but the cost to
take a shot at it has dropped like a rock in a pond. Anyone can run the
experiment. Access to capital is no longer the primary gating factor when
trying out a software and services idea.
The way we develop and distribute software has radically
changed as a primary function of five pervasive and loosely coupled developments:
open source software, open services and APIs, “the cloud”akahosted computing and storage, primarily Amazon Web Services, mobile platforms with app stores and finally access to the social graph for awareness building and distribution.
While a small amount of effort is still required to set up
and configure the servers and software to run a new service, the vast amount of
work now goes into the development – coding – of the core idea, failing early
and iterating or moving on if the experiment fails.
The blossoming and explosion of web and mobile apps in the
last ten years are a direct consequence of major barriers to innovation disappearing.
The reduced need for capital has had a profound democratizing effect. DropBox,
Angry Birds, Instagram, even Facebook are a few high profile examples where a
few people have created hugely successful applications and services with
minimal amounts of start-up capital. These examples are only a few exceptionally
bright beacons in a vast, seething ocean of creativity and innovation, all
fueled by ubiquitous access to “the cloud” and to simple distribution through
Are we going through a similar transformation in hardware?
A couple of weeks ago Wired ran a story called In the KickstarterFuture, Hardware is the New Software.
They featured two guys who used Kickstarter to raise only $32,000
to manufacture their first batch of an air guitar pick that plugs into the
iPhone. They had raised a little bit of money from angel investors first in order
to design the product, but altogether were able to build and ship their first
product for just over $100,000. This would have been unheard of just a few years
On May 18th a small start-up called Allerta became
the talk of the tech community by setting a new record on the crowd-funding site
KickStarter. They raised an astonishing $10.2 million from individuals who
pre-ordered, and hence funded manufacturing of the $150 Pebble smart-watch. Pebble
is a cool looking Android based smart watch that wirelessly connects to your
smartphone and shows alerts from your phone, including caller ID, email
messages and Facebook notifications. It even has APIs that lets developers
write their own apps that run on your watch.
The Pebble Smart-Watch pitch
Yet the most interesting part of the Pebble story, a part
that most people seem to have missed, was not that they raised more than $10
million. The astonishing thing was they were only trying to raise $250,000!
With only a quarter of a million dollars a small company
with a few young guys – five if I’m not mistaken – were planning to build and ship their
first fully functioning, nicely designed, Android based smart-watches. In fact,
when they posted their pitch to Kickstarter they already had a working
prototype that they had built based on learning from a prior, similar product
called InPulse that they had built for BlackBerry phones.
How is it that a few talented guys – used gender neutrally
of course – with very little capital can now build and sell functioning
hardware products? Is there a “cloud equivalent” that is changing the rules of
the game in hardware too?
While the cloud is an apt metaphor for the “bits of
software”, it is not the right model to describe the “atoms of hardware”. So
perhaps we should be calling what’s happening to hardware an “earth
infrastructure” as opposed to the software “cloud infrastructure”. Something big
is going on with this earth
infrastructure and here are the drivers:
3D printing and
modeling tools – a remarkable revolution is underway in 3D printing.
Physical objects can literally be designed on a laptop and printed as full physical
models that we can touch, feel, and see in the real world. 3D printing
technology is on a roll and it is having an effect on both perception and
reality of how “easy” it has become to produce a physical object. “Just hit
print” and at rapidly falling cost you can pick up a model and see if it
resembles what you had in your mind. This is having a big effect on the speed
and cost of iterating on designs and form-factors.
Maker movements and open
source – The Maker movement today looks a lot like the early open source
software movements. The Maker movement still has a decidedly “hobbyist” flavor, yet growing rapidly in
breadth and depth. Hardware incubators such as Lemon Labs based in SF is
bringing the incubator model that's blossomed in the software space to hardware. And
the open source model is emerging as well. Adruino and Bug Labs are both open source
electronics platforms. Thingiverse is emerging as an interesting repository of digital designs. While a full-on GitHub equivalent in the hardware space has not emerged yet, it’s
likely that this will happen.
Android – while
the lower layers of the operating system has been commoditized for a while,
Android is rapidly making the whole OS stack a commodity. Equally important is
the fact that the success of Android as a mobile phone OS has made it much,
much easier than it was before to get set up and running on virtually any chip
set. All chip vendors have an Android implementation and apps will (more or
less) run on all of them. Just like people used to put a lot of effort into the
hosting infrastructure pre-cloud, only a few companies had access to an OS.
Others would license it. Owning the OS was a significant barrier to entry. Not
so much any more. With Pebble a couple of guys were able to take Android and
get it up and running on their smart watch. The equivalent would have been very
expensive or even impossible even two or three years ago. Today someone wanting
to build a “smart gadget” can focus most of their effort on the user experience
and apps, as opposed to investing heavily in developing or significantly customizing the OS.
Chipsets – from
sensors to CPUs with micro controllers in the middle, it is now possible to get
powerful, fully functional computing devices up and running in record time.
Reference designs that run Android are readily available by all the chip
manufacturers leading to a significant reduction in cost and complexity. Much
like what happened with internet software development, a much larger part of
the development effort can now be focused on creating end-user value, rather
than developing a low level software stack and designing chip sets.
Shenzhen – a
powerful hardware manufacturing eco-system has emerged in Shenzhen, China. And as pointed out in the Wired article, the Chinese manufacturers are now
increasingly willing to take on small start-ups. The competitiveness of the eco-system leads
to constant improvements in quality and pricing. And this also leads to
efficiencies where it is no longer necessary to start with large orders. It has
become possible to start a production run with only a few thousand devices,
again significantly reducing the need for start-up capital to get a consumer
electronics product off the ground.
Two other trends supporting hardware innovation are
access to capital through crowd sourcing services such as Kickstarter and the pervasiveness of ecommerce options, reducing dependencies on traditional
retailers and distribution channels. Even if a product still needs to make it
into traditional retail channels in order to make it big, it is possible to get
going, get market validation and get your first customers by selling direct,
asking your first customers to help promote your products on Facebook and
Twitter, circumventing traditional dependencies on big marketing budgets and distribution
agreements at the beginning of a new product’s life.
The “earth” – as opposed to “cloud”, remember – manufacturing
and distribution infrastructure necessary to support design and manufacturing
of atoms – aka hardware – is becoming very efficient resulting in the barriers
to entry in hardware coming down fast.
What is happening in consumer electronics looks a lot like
what has happened in software in the last ten years. A small team can now make
hyper efficient use of capital and voila, out comes a cool little physical
object, manufactured with earth
infrastructure, running a state of the art operating system with apps, and
obviously connected to a hyper efficient cloudinfrastructure.
If I were a venture capitalist today I’d be investing in next generation earth