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January 10, 2009

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Ken

You model seems like a viable one, but only if your R&D costs are close to zero. How do you expect recoup the sunk costs incurred to develop this product? Let’s say a hypothetical product has a marginal cost of $1, but you spent $1 million developing it (wages, test PCBs, lab equipment, electricity, etc.). Let us further say you hope to amortize this cost over the first 1 million units sold. This would price the item at $3.33 ($1 marginal cost + $1 share of sunk cost + 40% profit margin).

However, you have chosen to make the hardware open source. Someone else can (almost) immediately enter the market and price the item at $1.67, since they don’t have to recoup the sunk costs. In a perfectly competitive market, you will loose out to this entrant who is producing an identical product and charging less, or you will be force to re-price downward toward $1.67. Either way, you have a $1 million bill that will be tough to pay off.

Adam

@Ken

The whole idea of open source is that a lot of the innovation is outsourced, right? Most of the costs involve maintaining ties with a community of people outside of the firm, and figuring out which contributions have the potential to bear fruit.

So it may be that open source hardware would result in less direct investment in R&D, but that doesn't necessarily mean that there will be less innovation as a result.

Chris Anderson

Yes, what Adam said. Open Source hardware (and software, for that matter) only works when people are willing to donate the R&D. Possibly not the best way to invent a cancer drug, but it works great for the kind of stuff we're doing, where the total R&D required is measured in a couple person-months spread out over many people and months.

Adam

@Chris,

At the risk of being a contrarian, I'd say that there's even an argument to be made for making cancer drugs this way. We've seen examples where open collaboration made the difference in the medical world, such as with SARS. It doesn't seem implausible to me that a pharmaceutical company could actually come up with new medicine if they attempted to draw on the medical community and left the rights for the resulting product in the public domain.

But that's a whole other discussion :)

Johnny

Regarding the medical field. The entire economic dynamic of the medical field relates entirely to government control of the approval process, and the fact that all medical treatments and care are entirely controlled by governments in major countries.

Thus, you can't just make some drug for rheumatism and start selling it. The entire economic model of pharmaceuticals relates to gaining FDA (in the Usa) approvals, the now-formalised "testing" milieu, and so on.

Casual thinking about "open source medicine" is valueless unless it relates to the central reality of pharma, which is simply that there is a "government-pharmaceutical complex" and all costs and economic aspects relate to that.

(If you posit a completely libertarian system where medicine and pharmaceuticals are completely not-controlled by government, then sure you can ask questions like "what business model blah blah research blah blah." But all of that is utterly irrelevant in the current world mileu of a "government-pharmaceutical complex" .. all pharma and medical pricing and economics is entirely and totally about working within the government-controlled situation.)

Regarding the open source blimps:

Chris, you seem to be trying to get a the "real" ("supply side", if you will) "price" of something, what it "actually costs" or is "really" "worth."

Is that right?

For instance you talk about the costs of parts (say $4), the cost of paying a worker to assemble (say $6), the cost of packaging (say $5), the cost of delivery (say $5) for a total of $20 and then a "markup" of $5 for a price point of $25.

But does this have any reality?

There is nothing, whatsoever, at all, in the world that is based on the "real" "what it costs" cost. Nothing, ever, not once, has been sold, there has never been a Sale of any one particular thing made, based on "supply side", "actual" "value".

For instance .. what's the most expensive thing you own and/ot have ever bought? I'm guessing it's a piece of real estate, say a house.

The "actual" cost of a piece of land (presumably, the cost of building a wire fence and some paperwork) is trivial (say $2000), but an acre of land can be worth $100000s, even millions. The price purely depends on one and one thing only, of course: the demand. (The demand divided by supply, if you like.)

If you tried to apply your type of calculation above to a "piece of land", nothing would make any sense, there is no starting point.

And this applies to Every Thing ever sold form a carrot in 1300 to a antigravity boot in 2300. New GM and Ford station wagons sitting at the docks are now very cheap and getting cheaper by the day. To make them cost a certain amount in a pension fund (a few thousand bucks), a certain amount to meet government compliance (a few more thousand bucks), purchase of some steel (few hundred bucks) and so on, leading to some total "$x".

But that total, "$x," has zero, absolutely no, nothing, none whatsosver influence over the price the Suburbans are sold (or not sold) for today in shops. That "$x" figure is of no more importance than astrology. It's just an "interesting figure" that you happened to arrive at through some (completely irrelevant) process, the details of which mean nothing.

If you offer the product at $200, and ... nobody buys it, one and only one thing can happen, the price will come down, let's say to $100, and then people will buy it.

If the product sells incredibly well at $200, someone will just buy them all from you and sell them at $400.

The price can only be, what it is ... the natural price set by the market.

(Nothing is more "open source" than price setting! the biggest corporation in the world has utterly no, zero, none whatsoever, power over setting prices.) (Putting aside situations in which government is involved, of course.)

Could it be that you have been completely wrong-minded in your "supply side" calculations? ie, issues like the "actual" cost, markups, etc, mean utterly nothing in determining the price of a sale: price is and can only be determined by the market, with absolutely zero reference to any 'supply side" facts (or indeed to anythign else).

Johnny

Mike J

Wow Chirs, love the idea.
And Adam - yep I buy the Cancer idea. Johnny - Man that is hard core, and yes I agree.
But back to the cancer idea.

Let's talk more about open source cancer solutions, and let's call them solutions at this stage. The Closed innovation system is run by the Pharma/biotech model which is astronomically expensive, massively risky and rarely produces long term sustainable positive health outcomes.

An open sourced model would include natural western methods and Indigenous (Chinese Indian,African) medicines.

These medicines are in effect already open sourced!

The only cost is the cost of the ingredient, which is usually a natural or semi manufactured ingredient. Interestingly, these 'solutions' are often as effective if not more so than Western oncology solutions and are mostly safer - with over thousands of years of 'clinical' evidence. Albeit not in a form that we may be prepared to accept.

So the real issue comes back to the challenge all open innovation models come up against. How can they survive and flourish when the incumbent (Pharma/Govt regulators) has so much to lose?

zhuqian

We are dedicated to your comfort. Down with traditional furniture, andffxi gil up with alternative furniture.

Penny

Interesting read but the idea still has a long way to go.

Rick Netten

It is amazing how quick margins get out of hand as they get doubled. I made the comment on a item manufactured in China (a bicycle) A $300 retail bicycle costs the retailer $180 and he nets 5% =$15. The Wholesaler pays $108 and nets 3% 180 = 5.40 . The retailer nets 5% and the wholesaler nets 3% = and the manufacturer nets 5% of 108 $5.40

Wholesaler and retailer both in the US make 4 times as much profit as the manufacturer...

On the Money

On a slightly different but not unrelated tack ... Asus offer a sub-notebook at about £290. If you choose Linux, you get 20gb solid state memory but if you choose Windows XP you only get 12gb. Now, Linux takes up less space than XP ... so the reason for the difference can only really be the Microsoft licence cost ... VIVA OPEN SOURCE!

On the Money

On a slightly different but not unrelated tack ... Asus offer a sub-notebook at about £290. If you choose Linux, you get 20gb solid state memory but if you choose Windows XP you only get 12gb. Now, Linux takes up less space than XP ... so the reason for the difference can only really be the Microsoft licence cost ... VIVA OPEN SOURCE!

On the Money

On a slightly different but not unrelated tack ... Asus offer a sub-notebook at about £290. If you choose Linux, you get 20gb solid state memory but if you choose Windows XP you only get 12gb. Now, Linux takes up less space than XP ... so the reason for the difference can only really be the Microsoft licence cost ... VIVA OPEN SOURCE!

Antti K

Johnny wrote:

>Could it be that you have been completely wrong-minded in
>your "supply side" calculations? ie, issues like the
>"actual" cost, markups, etc, mean utterly nothing in
>determining the price of a sale: price is and can
>only be determined by the market, with absolutely
>zero reference to any 'supply side" facts
>(or indeed to anything else).

Well, just a minor note: usually the sellers want
that selling price > supply side price, otherwise
they cannot run that line of business for very long.
And that was one of the points of the original blog post
as well.

Website Design by A2zdesignwork

This model is based on a simple rule:
transparency about costs and a choice between paying us to make the product or doing it yourself.

Joannah

I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.


Joannah

http://2gbmemory.net

anderS

Chris,

Perhaps you picked it up already (or even know them directly). But you should check out this initiative, and the guys behind it:
http://antipastohw.blogspot.com/2009/03/introducing-open-source-hardware.html

Seems like you guys are on the same road to viable open source hardware business models.

Good luck, and thanks for your insights in general.

منتديات


An open sourced model would include natural western methods and Indigenous (Chinese Indian,African) medicines.

href="http://www.alqaly.com/vb">منتديات


منتدي

Closed innovation system is run by the Pharma/biotech model which is astronomically expensive, massively risky and rarely produces long term sustainable positive health outcomes

منتدي


David

From my experience the only cost is the cost of the ingredient, which is usually a natural or semi manufactured ingredient.

David From the Deeper Voice Blog

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Most of the costs involve maintaining ties with a community of people outside of the firm, and figuring out which contributions have the potential to bear fruit.

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منتديات

Thank you and the subject site's outstanding

دليل مواقع

good blogs

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Account Deleted

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2im

Recognizes your hand dear brother

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Tidbits

The Long Tail by Chris Anderson

Notes and sources for the book

FREE was available in all digital forms--ebook, web book, and audiobook--for free shortly after the hardcover was published on July 7th. The ebook and web book were free for a limited time and limited to certain geographic regions as determined by each national publisher; the unabridged MP3 audiobook (get zip file here) will remain free forever, available in all regions.

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