1.4 Open Source Hardware

Despite its relevance to business, the study of OSH has not become the subject of significant research yet. There are mainly websites, specialized magazines, online communities and blogs who constantly focus their attention on OSH. However, the term OSH is not as diffused as OSS, and the academic panorama has not presented its official definition yet. The first OH Summit hosted in New York City by OSH players in September 2010 laid the foundation to a common definition of the term. After several rounds of feedback which lasted about six months and which involved the most relevant OSH experts, on 10 February 2011 the final 1.0 OSHW Definition[1] was announced:

“Open source hardware is hardware whose design is made publicly available so that anyone can study, modify, distribute, make and sell the design or hardware based on that design. The hardware’s source, the design from which it is made, is available in the preferred format for making modifications to it. Ideally, open source hardware uses readily-available components and materials, standard processes, open infrastructure, unrestricted content, and open-source design tools to maximize the ability of individuals to make and use hardware. Open source hardware gives people the freedom to control their technology while sharing knowledge and encouraging commerce through the open exchange of designs”. Given the novelty of the definition, and the leaders in the field who have endorsed it, in this research the term OSH will refer to the OSHW 1.0 Definition.

1.1.1.              Peculiarity

The tangibility of the product in the OSH is straightforward.  Nonetheless, OSH is not only about physical hardware, but also about intangible assets related to the hardware design information. This makes the existing OSS business model not directly applicable to companies involved in OSH projects (Ferreira 2009). Little additional research was made on the types of business models that might be specifically related to OSH. Salem and Khatib (2004) suggested four different business models:

  1. Design distribution: enabling companies to sell distributions containing a set of designs;
  2. Design technical support: enabling companies to offer technical support related to open designs;
  3. Design implementation: enabling companies to implement and sell the designs by paying royalties to the original developers;
  4. Releasing: enabling companies to release their designs under a GPL-compatible license, whenever the implementation is considered commercially available.

Clive Thompson (2008), instead, identified two main economic models for OSH-based market offers. The first is to concentrate not on selling hardware but instead on selling expertise as the inventor. The second is to sell OSH devices while trying to keep ahead of the competition basing the strategy on complementary assets.  Furthermore, Anderson (2009)[2], starting from his experience of OSH entrepreneur proposes three different business models.

The Forty Percent Model based on transparency regarding of costs and a choice between paying the OSH company to make the product or Do it Yourself (DIY). Entrepreneurs list all the components and other costs of the products and the reference where they can buy them yourself along with instructions on how to put them together. Consequently, users can decide if they can make the gadget by themselves or whether they believe it is easier, safer and quicker to buy a ready to use one. In the latter case, the OSH company charges a 66% markup, which gives the entrepreneur a 40% profit. However, it should be considered that the low barriers to entry and investments required may lead to a cut in the price as a result to increasing of competition into the market. The user entrepreneur is still better off anyway. The consumers surplus increase due to the lower price of the goods, and the market will grows, thus more people will have access to the products. The only requirement of the licensee is to give credit for the design and link back to the user innovator.

The Third-Party Catch is employed whenever user entrepreneurs want the product to be sold via third-party retailers, who can collectively have far greater reach than a single organization, which in turn needs another piece of the cake. In order to avoid the “channel conflict” (Tsay and  Agrawal 2009), entrepreneurs need to charge pretty much the same price everywhere, including in their own site. Given the double marginalization (Tirole 1988), the price the final customers has to pay will be higher, which is not the goal of the user entrepreneur, who instead wants to expose the idea to everyone. Limiting pricing transparency without disclosing all cost (those are lower than single unit cost given the economies of scale) to the customers can partially remove the problem.

Semi-Transparent Pricing: the user entrepreneur can disclose the prices for components in single unit quantities and link them to the sources where people can buy from, without listing the volume discount prices. Then, they can set the direct sales price as the sum of the single-unit prices (call that “apparent cost”) plus 66%. However, given the volume discounts, the actual costs are lower, consequently the real margin is higher, but they will charge 66% more than it would cost to DIY. The wholesale price is the apparent cost, allowing retailers to grab a 66% markup for themselves. The company profit comes from the difference between the apparent cost and whatever the real cost is with the volume discounts. The harder they push on those discounts, the more money they make.

However, these theories on hypothetical business models just suggested the possibility of application; in fact they lack of research to look for evidence.

Moreover, also the research into motivations linked to OSH is limited. David Rowe (2009) states that among the others, social connectedness, fascination with technology, material gain but also psychological well being and gratification are some possible explanations. Regarding this, it seems that OSH has similar motivation in performing innovation activities to OSS.

Looking at IPR, it has been shown by Pomeranz (2000) that whenever markets are regulated by IPR, there are traditional inefficiencies given the lack of investment is a certain niche of the market. OSH design could solve these problems. Open source is known to promote uniform, high quality standards, while competitive designs can often fragmented standards as companies vie for control. They further reduce transparency in a market that already suffers from a lack of transparency. An open source strategy eliminates many legal issues that create transaction costs, eliminates the need for cumbersome access control measures, and achieves the highest level of transparency that is possible in an intellectual property market.

In this sense, in case of absence of IPR, the cost of goods are reflected only in the cost for making the good, which leads to a drop in the selling price, and the possibility to enter in new unexplored markets by climbing the “long tail” (Anderson 2004).

[1] Source: http://freedomdefined.org/OSHW First accessed 11 February 2011

[2] He is also one of the informant of the analysis later described.

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