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The economics of open source hardware need a OSHW bank

photo of Michel Bauwens

Michel Bauwens
14th March 2009

Open Source HardWare requires a lot of time and it takes money too. It can’t work with only one, and not the other. If you throw a lot of time at making a project schematic, it doesn’t become a real thing unless you also throw money at it. Likewise, you can’t just throw money at building a project or paying someone to build it, without also taking the time to design it, architect it, and eventually code it and debug it.

The blog of Liquidware, an open source electronics shop that’s part of the Arduino ecology, examines the economics of open source hardware, in a manner that shows the rapid maturation of the field.

First, the article shows the similarities and differences between the traditional and the open source economy, summarized in a great graphic, and then delves into what differentiates making software from making open hardware.

open hardware economics

Essentially, if open source software is based on time, open source hardware needs both time, and money, the latter being necessary for actually making the physical products:

This “cluster”-based theory of Open Source Software and Hardware treats the Open Source Economy as a collection, or centralization of time and money. To have Open Source Software, you need clusters of time. To have Open Source Hardware, you need clusters of time and money.

Where can this money come from?

The author writes that:

“When money comes from individuals, it needs coordination mechanisms to make sure individuals are repaid, or get their money’s worth. When it comes from institutions, it often needs to support a cause or mission. And finally, when it comes from companies, it usually needs to make a profit. This last one is particularly nagging in the Open Source Hardware economy, because it suggests someone is making money off of Open Source. This tends to contradict the notion of the “free as in beer” ideas of Open Source. But is it necessary? Open Source Software can work without the presence of a profit-making corporate entity. Can the same be true for hardware?”

What matters is that, if a company needs to be involved, it has the right ethics compatible with a community of volunteers working for free, there are indeed, good and bad profits, or good and bad reasons to make profit, as summarized in a graphic.

The author explains:

“By this framework, profit-making is a good thing when it’s maximized and re-invested back to the community. On the other hand, profit-making is a “bad” thing (or “less good”) when it funds traditional business model reasons, like mitigating risk, distribution, portfolio, or scaling. Why? Because each of these business models involve taking advantage of the efforts of others to make profit. The profit doesn’t make its way back to the individuals who contributed, so it’s “less good” than a system that directly rewards and incents individuals and their time. This assumes that the end-state desired outcome is a system in which individuals are directly contributing to a shared community, and collecting as many of the benefits of their time as possible.”

The next point is that, if such an ecology of ethical OSHW businesses is to form, it needs a certain amount of financial backing, just as ordinary start-ups would. Such an institutional assistance can come through a, still to be created, Open Source Hardware Bank!

In a follow-up article, this idea is examined in greater detail:

As proposed by the Liquidware Antipasto blog:

“The Open Source Hardware Bank will work to eliminate the scaling and quantity pricing problem for OSHW projects by funding the build of 2x the quantity of any Open Source Hardware product. That means, if a project has found a way to find 10 potential buyers, the bank will put down the money needed to fund 10 more, for a total of 20 products. If a project has found 25 community members to buy in, the bank will fund another 25, to bring the total quantity down to 50. This should reduce the unit costs by around 10-30% of any hardware project, and in the case of the Illuminato, it’ll reduce costs by almost 40%!

In return, anyone who pitches in money to the bank will get a modest and sustainable return on their investment, somewhere between 5-10%. Normally, this wouldn’t be a huge amount, but given what I’ve learned about the “real” economy recently, 30-50% return on investment may never have really existed in the first place, let alone represented “sustainable growth.” This money gets paid back and cashed out when the rest of the inventory is bought as a check that Justin, Andrew, or I write and sign personally.

So Andrew, Justin, and I will see to it that the Open Source Hardware Bank does not default, and each of us will guarantee every investment. Maybe you could call it AJMIC (instead of FDIC insured)! No one is trying to become a millionaire (without lots of hard work), a high paid investment banker (ugh), or Alan Greenspan (was he ever right about anything?). We’re just trying to build a sustainable little financial institution to help Open Source Hardware DIY’ers. Consequently, we’re also human and realize the limits of spare time, so no one’s rushing out to build 50 projects, just 1 or 2 or 3 at a time will be perfectly fine, thank you!”


One Response to “The economics of open source hardware need a OSHW bank”

  1. P2P Foundation » Blog Archive » Regulatory hurdles for the open source hardware bank? Says:

    [...] There’s quite a bit of mainstream coverage on the creation of the Open Source Hardware Reserve Bank, which we covered before. [...]

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