Wednesday, June 3, 2009

5 Ways Open Source Hardware is Like Big Pharma

Ok, first things first. There is one big, obnoxious, clear way that Open Source hardware is NOT like big pharma: it’s not a large profit-seeking institution in a market that tries to make money through complex ethical decisions about life or death. Now that that’s out of the way, I can move on :)

This past weekend at Maker Faire, Phil was nice enough to extend the invitation to me to sit on the OSHW panel, next to some other very active OSHW advocates. He threw questions about licensing, collaboration and asked for examples from the panel. I participated, but I also took notes in order to write up all the things I wanted to say but couldn’t… for this blog. I’m very biased I think. In preparation for the panel, I spent some time researching major industries for examples and analogies to Open Source Hardware, because I’ve come to disagree that Open Source Hardware’s nearest and dearest cousin is Open Source Software – I think it’s something else, maybe even more like patents? In the meantime, I think there are strong arguments that OSHW has very little to do with OSS. So, I’m going to try to make my case that OSHW is a lot like Big Pharma... based on the notes I took on an index card during the panel…

1) Innovation Costs Big Money
I hate the word "innovation" because it doesn't seem to mean anything anymore. Anyway, there’s some statistic that floats around the pharma industry that to develop a single drug, it costs billions of dollars. It's one of those rites-of-passage that people in the pharma industry seem to say a lot, because of course it doesn't cost that much; most of the expense goes towards throw-away costs of failed drugs that never see the light of day. Just replace failed drugs with solder, expendables, broken revisions, website infrastructure, hosting costs, coding time, oscilloscopes, microscopes, compiler and JTAG debugger costs. There’s a strong incentive in the pharma industry to distribute, re-allocate, or spread out all those funds. That’s fancy-speak for “try not to pay it all yourself, and instead find a way to make someone else pay.” Open Source Hardware is the same way, at least for me. Where at all possible, guys I know (and I) try to use equipment and borrow software and materials from school, work, institutions, and labs willing and able to lend. Otherwise, setting up a lab to do OSHW (at least to my degree of happiness) would have cost more than $30,000! So OSHW wouldn't happen without shared infrastructure.

2) The Generic "Replicant" Dilemma
Call it hindsight obviousness... Apparently, it costs large amounts of money to find the chemical or substance that has a direct and measurable impact on a specific disease. But once you have that formulation, it costs relatively nothing to reproduce. Big Pharma has this problem in a very big way, with generic drug manufacturers. In 25 words or less, the problem is that Indian production companies churn out unbranded, but nearly identical versions of the branded drugs, and sell them at fractions of the cost. Some people argue that the branded version of a drug means quality, service, or even placebo effect that results in a better "health outcome" (ugh - more business words), but at the end of the day, from a strictly functional point of view, there’s no difference. Same with Open Source Hardware. Right now, there’s a big difference between the “individual” and “institutional” Open Source Hardware. Individuals like OSHW because they (I, me) can hack and alter what I buy. But institutions don't really like Open Source Hardware, because if a company builds 50 of something that is “Open Source” there’s a big risk that another company will improve the design and make 50 better versions of the electronics, and then some of the original 50 never sell, and that means the first company to build something risks losing money.

That's weird. It boils down to: Consumers and Producers have very different incentives when it comes to Open Source Hardware. That brings me to…

3) Damn Gestalt! The System Works Better Than Any One Part of It
There’s some meme in press that floats around that the biopharma and biotech industries seem to produce drugs, those drugs seem to help people, and in general progress is made. But for every 1 company that does well, dozens of others smaller companies fail to push a single drug past FDA approval, and go bankrupt or get bought out for pennies. It's like drug pipeline portfolio theory: in general, designing and selling drugs is profitable, but betting all your money on any single IND probably isn't going to work out. It’s also like a “gambler’s dilemma” – every once in a while someone wins, and that makes everyone happy, but on average everyone loses money. Open Source Hardware works the same way. For every project that takes off, there are dozens that don’t quite work, and each project usually costs a few thousand dollars in PCB revisions and soldered parts. So as an individual, it can cost money to participate in the R&D part of Open Source Hardware, but as a customer or consumer of Open Source Hardware, it’s great because I get all the benefits! The Community as a whole does better and gains more than the average Contributor. I think I'm going to call this the "Open Source Hardware Gestalt Curse."

The solution, I think, is to try to remove the split between consumers and producers. If OSHW is always done by DIY'ers, the system balances because the individual who bears the cost to build something immediately sees their own reward.

4) Little Orphan Annie^D^D^D^D^DDrug^D^D^D^DCircuit
For the most part, OSHW – by necessity and opportunity, not necessarily demand – has focused initially on what some might call “Long Tail” products. That’s fancy-speak for “stuff only I or about ~10 other people want” (or if you’re far enough towards the end of the long tail, it means “stuff no one wants” – hmmm does the long tail go to zero, or just hover at 1 for a really long time?). In other words, it doesn’t make any sense for a company to make. In Big Pharma, there’s a similar problem – some drugs cost so much to make, that no company really wants to make them, so they don’t get made at all. Or, a drug can’t be marketed or sold at a high enough price, so there’s no profit. That’s a lot like what the Open Source Hardware Bank was introduced to do for the Illuminato. The Illuminato is sold at cost, so no company would ever say, “that makes sense to build!” But it doesn’t mean it shouldn’t exist. It just shouldn’t exist as produced by a company trying to make profit. Maybe Big Pharma should set up an Open Source Healthcare Bank?

5) Surplus Allocation: Who Deserves It More vs. Who Wants It?
What is the relationship between open invention and capitalistic profit? Who deserves to make money? In Big Pharma, who has earned the right to keep the profit made off of drugs? Should the pharma company keep all the profit, as a reward for trying to fund so many other drugs that didn’t work out, or should the insurance companies make profit by reimbursing less for the price of drugs, or should the individual inventors make all the money since they discovered it all? It seems that the big pharma business model has a build-in assumption that the institutions that take risk of managing drug portfolios (and over-pay executives) should deserve the profit. Open Source Hardware has a similar question to face: should OSHW be sold at a profit at all? If so, who really earns it? Should the people who provide the money earn the profit, should the guys who design the board get the profit, should no one get the profit? This is a very real problem to be answered: should OSHW project brand names be licensed to derivative boards (and if so, for how much?), is it right to make money from students when they buy OSHW stuff (probably not?), and what are the appropriate considerations for an OSHW license that differ from OSS licensing (e.g. replication, recompilation, and enablement means very different things to hardware than software).

It's easy to ask lots of questions... it's harder to design PCB's ... so back to building the ButtonShield!


merlin13 said...

Excellent points you brought up, Matt, really great ideas to think about! And while I don't have the expertise or experience in OSHW, I'd like to make a couple points.
First of all, I think that whoever comes up with the OSHW device or PCB or whatever it is, should make some money no matter what. Finances left aside, the designer/maker/inventor should make some money. Even when the money for the project comes from somewhere/somebody else. So, in the case of OSHW bank, it is awesome that you sell the boards at cost but you should make something; at least say 5% - at least! (which is not much, I understand some kit makers - not assembled, mind you, just kits - are making over 100%!! in OSHW bank's case the assembling works is way bigger than just putting kits together).

Second, whoever invests in OSHW projects should be at least a little bit interested in the work that's being done. This in my opinion would make everyone interested in a way in the final product and not just some in the product and some in making money. I know this would dramatically reduce the number of potential investors but still, it would not create situations like in other investment opportunities where investors are interested only in profit. To bring this again in the context of OSHW bank, the ideas of
Buy 1/Build1/2/3 are great but I would also change the things for Fund5 something like this: you make 5% on a device no matter what. Somebody invests money in Fund5 for example, they could get back the current 15% you give (or less); but if they are willing to take a board instead of the profit, you could give up your 5% and basically for a Fund5 investment the investor could get a board (there is the shipping cost in top of that but this could be arranged somehow).
This way you could still attract potential investors interested only in money but you could also attract people interested in financing something that they want to have in the end.

Just my 2 cents.
Thanks a lot for posting your ideas!

Matt said...

That's a really interesting idea... I didn't really think about it that way. Firstly, you made me think that the better measure in Open Source Hardware is probably not Return on Interest ROI, it's probably Return on Participation ROP. And maybe there are two types of return on participation: there's one where you participate by building stuff, and then another where you participate by pitching in money. It might be possible in that case to redirect some of the ROI for the early funded boards to anyone how did the Fund-5 option, in order to make the 5% minimum guaranteed (or whatever it would be called at a bank). In either case, it puts the emphasis on participation, because that's what individuals (like me) like to do! I think I'm going to try this out with the handful of projects that I was going to post to the OSHW bank in a couple weeks... Thanks a lot :)

merlin13 said...

Glad to be of help :-)
BTW, if you think about posting more projects, please think about some smaller/cheaper projects that while already available somewhere else (like an SD card shield for example, or an I2C memory shield) would probably be a good addition and would attract more people that are willing to pay something like $20-30 but for which $50 is too much.
Just a thought.

merlin13 said...

Do you have by any chance and updates regarding the OSHW projects? Like EqualizerShield or Illuminato 3?