The consumer electronics business, once the playground of large companies, has seen scrappy entrepreneurs charge in. But while the bar to becoming a hardware entrepreneur is lower than ever, it’s still not a gimme.
Indeed, there have been some big blowups along the way. The CrunchPad project, a stab at creating a $200 touchscreen tablet, ended abruptly this week, before the product could make its debut. Led by the opinionated Web 2.0 publisher Michael Arrington, CrunchPad was mired in delays and partner wrangling. Ultimately, after a year and a half of development efforts, Arrington declared that the idea was stillborn, blaming the company that helped him design the device, Fusion Garage. Despite that, Fusion Garage plans to go ahead with the launch next week, setting the stage for a potentially nasty legal battle.
Other projects have faced smaller but still significant difficulties. Fitbit, a $100 fitness tracker, created by first-time hardware entrepreneurs Eric Friedman and James Park, is shipping now, but its launch was delayed by months.
That’s not to say that hardware entrepreneurs are all doomed. Indeed, thanks to cheap and readily available overseas manufacturing, the bar to entering the hardware business is lower than ever. And there have been some standout successes: First-time hardware entrepreneurs have created such products as the Flip, a popular and inexpensive video recorder; the LiveScribe Pulse pen, a digital note-taking pen; the Chumby, a squeezable internet-connected display; and even new styles of notebook PCs.
So what does it really take to create a gadget? A smart product design, a realistic expectation of time and costs, and the ability to put together the right team, say entrepreneurs. Wired.com interviewed several hardware entrepreneurs to find out what works and what doesn’t.
It’s got to be more than just atoms
About three years ago, John Chuang, a former CEO of a staffing company Aquent, decided he wanted to create a new kind of PC. The device, called litl Webbook, would be a compact notebook that could be used for browsing the internet, displaying digital photos and watching TV shows. A nifty hardware trick using a pivoted hinge would allow the device to morph from the traditional notebook into a picture frame.
As Chuang drew up the plans for the machine, he became increasingly convinced he would have to think like an Apple rather than a Dell.
“Any hardware company who thinks they are just doing hardware is going to realize pretty soon that there is a software component that will become very important in their ability to differentiate,” says Chuang.
It’s the secret to the consumer electronics business in the post-iPhone world: Software and services matter as much as hardware.
“Hardware and software are inseparable,” agrees Steve Tomlin, CEO and founder of Chumby. “The wrong model is in a lot of people’s brains because of what happened with PCs,” where different companies provided hardware and software.
To deliver a high-quality consumer experience, a gadget designer has to plan the whole package: hardware, software and interface.
Having a software and services component also allows the company to be flexible, says Tomlin. Earlier this year, Chumby said it would start licensing its software to be embedded into other devices such as Blu-ray players and digital photo frames. The move, if successful, would let Chumby go beyond early adopters to a larger, more general audience.
Accept the fact that knockoffs will be easy
Hardware products are created by contract manufacturers in Asia. These are a relatively small group of companies that are willing to do business with anyone who has an idea, original or not.
The notion that you can create a mass-market consumer electronics product that can remain exclusively yours is a fallacy, say entrepreneurs. Accepting the hardware risk also makes it easier to focus on what the true value of the product is.
“If you are selling just a hardware product, the potential to be knocked off is very high,” says Jim Margraff, CEO of LiveScribe. “There’s always the risk of being copied and marginalized and in any competitive world, a standalone device means high price pressure.”
Instead, he says, raise the stakes by building a platform that can support a larger ecosystem.
Take the iPhone, for instance. If it was just about the device’s slim profile, responsive touchscreen and 3.5-inch display, creating an iPhone clone would be easy — indeed, look at dozens of cheap, unusable Chinese iPhone knockoffs. But instead, Apple’s elegant user interface and third-party app support have helped keep the iPhone ahead of its peers.
“Hardware is fast to [create] and is the easiest to copy. You can get a lot of competition very quickly,” says Chuang. “But software takes a lot of time. You can’t just replicate a great UI.”
Another option is to go open source from the beginning, says Chumby’s Tomlin. Community involvement can help refine the product and offer ideas on features you want to focus on.
“Anything we create, we are happy to open source,” says Tomlin. “Anyone can reverse engineer it anyway.”
Focus, focus, focus
Being an entrepreneur isn’t a part-time job. For gadget inventors, it can be especially grueling as they rack up the miles visiting contract manufacturers in Asia. And that’s important. Though most Asian manufacturers are used to working with international clients, the process still requires constant and close supervision.
“You want to make sure you have enough money and time,” says Chuang. “And invest in full prototypes often. A lot of entrepreneurs don’t want to do that and they end up with buggy products that take longer to fix.”
There are also administrative tasks such as legal contracts that require close attention. “Doing the blocking and tackling on the legal side consumes a lot of time,” says Tomlin.
“There has to be trust among partners, but remember, great walls make for trusted neighbors,” he says. “Good contracts can do the same.”
It will always take longer than you think
“When you work with big companies, you are on their schedule,” says Tomlin. “You are driven by their agendas.”
That can mean weeks of delay that entrepreneurs have little control over.
LiveScribe’s Pulse Pen product is no debutante. The product was already a hit in Target stores and has been available online through Amazon since 2008. Yet getting a wider retail distribution this year took longer than expected, says Margraff. Cautious retailers, skittish about the economy, pushed back on new product rollouts.
“Everything is later than expected,” says Margraff. “We were hoping to be in stores in time for the back-to-school seasons but we will now be there for the holidays.”
And that’s despite the “enormous interest” in the product, says Margraff. Layoffs in stores, changes in management, and fear about stocking and inventory levels pushed back product introductions.
LiveScribe now has inked deals with Best Buy, Staples and Apple to display its product in stores.
It will always cost more than you think
Gadget prototypes are always too good to be true. They promise an amazing set of features, almost always for the low, low price of $99.99. But when it’s time to ship the product, that price tag has either ballooned to $300 or some of the most exciting features have been quietly dropped.
“I have made that mistake,” says Margraff. “Most new entrepreneurs that haven’t gone through the the process are highly likely to fall on the sword.”
That’s why modeling the costs accurately is important, he says. “People make the mistake of just looking at the bill of materials without scrap, labor, overhead and profit, or [forget to] add the cost of marketing,” he says.
Creating a product out of a standard reference design is easy. Differentiation is what costs money, says Chuang.
“It is hard to deviate from the norm,” he says. “The supply chains and ODMs (original design manufacturers) are all used to building what exists and that’s where everything is cost effective.”
Even seemingly small things can add up. Take the pivoting hinge in the litl Webbook. “If you say you want to use a normal hinge but just want it to rotate a little more, it changes everything,” says Chuang.
Most gadgets also will bump up against heightened consumer expectations. Raised on a diet of subsidized $200 smartphones, consumers expect to see polished, sophisticated gadgets for a similar price.
“Smartphones, which have multiple hundreds of dollars in committed subscription standing behind them, have set expectations for that kind of value,” says Tomlin. “And that’s not easy for everyone else to deliver.”
Distribution will be difficult
Getting a product into hands of consumers also costs money. “The biggest naivete is how much money gets consumed in the channel,” says Tomlin. “Most of these companies can’t just call up Wal-mart and sell to them. They have to go through a distributor who takes a cut.”
Gadget entrepreneurs warn that it is difficult to get rapid mass-market adoption for a physical device that’s only offered online. If a few hundred early adopters is what you are gunning for, friends and family will always step in. But if you want to sell a product to millions, retail is the way to go, they say.
“The efficiency of the retail distribution channel in the U.S. is unparalleled in the world,” says Margraff.
And to become a part of that channel means throwing some money into the bucket.
“If you have to go through retail distribution, all the middlemen have to be compensated,” says Tomlin. “You have to make sure that cost of product does not balloon.”
A tip: Find a contract manufacturer who is willing to carry the financial burden of inventory, says Tomlin.
Choose your friends wisely
Using an independent design firm to create the product, as Arrington did, is standard operating procedure. Even big firms like Dell often work with independent design shops such as New Deal Design to create new products.
But it’s best to work with a firm that lets you retain the rights to your intellectual property, says Chuang. He created the litl Webbook with help from product-design and consulting firm Moto Development Group.
It’s also important to have some hardware competency on your own staff, say entrepreneurs. “That way you don’t end up wrangling over the IP,” says Tomlin.
Just owning the IP isn’t enough to stay ahead in the game, warns Chuang.
“At the end of the day, it is a very fluid market and the IP is a race against time,” he says. “The IP probably won’t protect you in the market for a long period of time, which is why it is necessary to keep a steady stream of innovations coming.”
See Also:
Photo: litl Webbook/litl
We know it can be tough scraping by with a measly 2.93GHz Xeon processor and 1TB hard drives in your Mac Pro, so you’ll no doubt be pleased to know that Apple has finally seen fit to add a bit of extra horsepower to its humble little desktop. That includes a new option for a speedy 3.33GHz Xeon processor, which will add a hefty $1,200 to the base price, and a new a 2TB SATA 3Gb/s 7,200rpm hard drive option (also now available on Apple’s Xserve server), which is a comparative bargain at just $350 — though you can, of course, add four of them. Unfortunately, anyone that’s thinking about doubling up on those 3.33GHz Xeon processors is still out of luck, as the 8-core rigs still top out at just 2.93Ghz. 
