5 Steps to Cutting Costs Through Open Source: DIY Drones

I asked DIY Drones founder Chris Anderson to outline how a community can reduce the cost of product development by one or two orders of magnitude -- what are the advantages and pitfalls. Here's Anderson's list of five areas to keep in mind.
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In this blog, I'm continuing my exploration of what Chris Anderson's company DIY Drones has done in using open-source methods to create products that are exponentially less expensive to make.

After more than a decade as the editor of Wired magazine, Chris Anderson started the company of his dreams -- a robotics manufacturing company called 3D Robotics, to produce the autonomous flying vehicles coming out of DIY Drones. When it came time to choose a co-founder and the CEO for his company, Chris didn't go with an MIT Ph.D. or a Stanford professor. Instead, Anderson chose Jordi Muñoz, a 19-year-old high school student living in Tijuana, Mexico. How and why Anderson choose Muñoz is the opening theme of this blog. A subject I find fascinating and one that's important for you to understand.

"If I had used the traditional construct for hiring when looking for someone to be co-founder and CEO of 3D Robotics," Chris Anderson told me, "I probably would have gone to Stanford or MIT to look for people who had on their résumés the words 'drone' or maybe 'company' or possibly 'college degree,' maybe even 'graduate degree.' Instead, I ended up with a teenage high school student from Mexico. Now, it turns out that this teen, Jordi Muñoz, was the perfect person for the job. This job didn't require a Ph.D.-quality drone engineer. The job involved creating an open-source robotics company in an unexplored space using low-cost resources and built on community participation. The people who went to MIT and Stanford are probably genius, but they probably didn't know all those things."

Today Jordi is a 26-year-old high school graduate living in San Diego, serving as CEO of a multimillion-dollar company. How he was hired, and the success of his role as CEO, reinforces the notion that the community brings the right person to the company. The community also brings a network of people who want to work for the company during their spare time, evening and weekends. These individuals aren't motivated by the money; instead, they are doing it out of interest for the product being developed. These are people Chris could never afford to pay.

"Today, we have people who work for Apple, who are designing the iPhone by day and drones by night," Chris said. "We have people who work for Google. We have people who work for NASA by day. By night they put in often as many hours working on our projects. We could not afford to hire them. They told me they're unhireable. It's weird: 'You can't pay us to work for you. However, we'll work for you for free.' That is a great concept. So, why do they do it? Is it generosity? No. Is it altruism? No. It's enlightened self-interest -- because they have a passion that for whatever reason isn't tapped by their day job. And they've always wanted to do this."

When Anderson started 3D Robotics, he looked at the Raven, a small military UAV made by AeroVironment, and wondered how he could take out at least 90 percent of the cost of creating it (or something very like it).

"I'm not sure we were even smart enough to know that such economies were possible," Chris said. "We hadn't actually seen a Raven or known its capabilities until a bit later. But at the end of the day, we took two to three orders of magnitude out of the price in military technology. Undercutting military procurement economics turns out to be not so hard."

The military-grade UAV purchased by the Defense Department cost it between $300,000 to $400,000 for the full system. Chris' company ended up building what's known as a Quadcopter, similar to a Raven in overall capabilities, that costs about $300, or basically 1 percent of the cost of a similar UAV such as the Raven.

The secret was the community, and the use of open-sourcing.

During a recent trip to the EAA's (Experimental Aircraft Association) Oshkosh AirVenture air show in Oshkosh, Wisconsin, Anderson found a whole host of eager hobbyists and enthusiasts interested in working on fun and innovative aerospace-related projects. "The world's garages are full of people with lot of energy and passion, working on great ideas. What they need most is a better mechanism for collaboration," he said.

"The real magic happens when you combine the kind of collaboration we enable at DIY Drones with what's going on in electronics," Anderson said, "with super-powerful chips and processors available for the hobbyist at a fraction of the cost of only a few years ago. The recognition that we have infinite processing, infinite sensing, wireless imaging at consumer electronics economies of scale -- which is to say, cheap and available and easy to use -- that's the big breakthrough here. We've got a hammer that combines open-source innovation plus smartphone integration. So let's start hitting things with a hammer." Anderson plans to take on a number of other aerospace hardware projects where his approach can "demonetize" the cost, reducing it by 99 percent or more.

I asked Anderson to outline how a community can reduce the cost of product development by one or two orders of magnitude -- what are the advantages and pitfalls. Here's Anderson's list of five areas to keep in mind.
  • Don't charge for intellectual property. Making things open-source brings the cost down. Effectively the participants contribute their ideas and labor for free, and what you pay for is the hardware. "In electronics there's what is called the bill of materials, which is the fundamental cost of the components," Anderson explained. "Then there's the final cost of the product. For something like military electronics for military autopilot, the bill of materials might be $100 and the autopilot, essentially the software, might cost $10,000." Anderson continued, "There is a huge difference between the cost and the price. That difference is mostly labor in the form of R&D and intellectual property, plus the cost of doing business in the form of legal costs, sales cost and profit. The alternative, what we use with our open-source approach of DIY Drones and 3D Robotics, is to price the final products at 2.6 times the bill of materials. That 2.6 number is a 140 percent margin for the wholesaler -- that's the people who make it -- and another 40 percent margin for the retailer. That's the distributors who ultimately sell. That's fair. You can build a business on a 40 percent margin."
  • Be prepared to be ripped off. "The Chinese cloned us in seven days, Chris said. "We put in tens of thousands of dollars of our own R&D cost (R&D cost is not zero, but is still a lot lower than the military invests in it). We did all the work and then they just took our files and cloned us."
  • Despite theft from some quarters, the crowd will make your product better. "Along with cloning, though, what's going to happen is someone else is going to take your files and say, 'I could have done that better,'" Chris said. "And they're going to modify it and they're going to do a derivative design and then they're going to either sell that or send it back and say, 'You should do this instead.' That's what's great."
  • Open-source leads to regulatory breaks. Many people who try to do big bold things in the world find out it's not about the money or the technology: It's about the regulatory hurdles that will try and stop you. "If you are Lockheed Martin or Boeing or anybody else and you want to create an autopilot, first of all you have to get it certified, you have to go through this long approval process, through the military procurement chain," Chris said. "You're not allowed to test it in the air unless you have an approval from the FAA -- which governs unmanned vehicle use in the national aerospace. If, on the other hand, you're a kid, an amateur, there's an exemption for you and you can fly it in the park all day. Amateur use, i.e., non-commercial use, is a kind of safe zone. By and large, open-source qualifies as public domain, so the active technology being created free by the Internet and shared by the Internet means it's exempted." Chris Anderson went on to explain how this is also true for State Department ITAR regulations and even FCC regulations.
  • By giving it away for free, liability issues evaporate. "It turns out if you're shipping to end users, to consumers, you have to get FCC certification," Chris said. "If you're shipping to developers, you don't. It's the last person who touches the product before it ends up in a blister pack that has to get it certified. As long as you're shipping to other DIYers, you're exempt from that. Open-source is a get-out-of-jail-free card for the gnarly barriers to entry that have slowed innovation so far," Chris said. "By the way, big military industrial companies love regulation. The more rules, the better, because they've got an army of lawyers."
Basically, Chris said, open-source hardware is the "hammer" to break open innovation of all sorts. "Right now the technology is available. You can do it. With this hammer called open-source hardware, people are going to reverse engineer things. What's going to happen is that the first one is going to suck. But it was open and DIY, and that's cool enough. The next one's going to suck less. They're going to find a way to do something totally cool and cheap."

In my next blog, I'm going to introduce you to my friend Philip Rosedale, a brilliant entrepreneur and the creator of Second Life, who has come up with ways for entrepreneurs to change the way people think about barriers and to change the they think about work.

NOTE: Over the next year, I'm embarking on a BOLD mission -- to speak to top CEOs and entrepreneurs to find out their secrets to success. My last book Abundance, which hit No. 1 on Amazon, No. 2 on the New York Times and was at the top of Bill Gates' personal reading list, shows us the technologies that empower us to create a world of Abundance over the next 20 to 30 years. BOLD, my next book, will provide you with tools you can use to make your dreams come true and help you solve the world's grand challenges to create a world of Abundance. I'm going to write this book and share it with you every week through a series of blog posts. Each step of the way, I'll ask for your input and feedback. Top contributors will be credited within the book as a special "thank you," and all contributors will be recognized on the forthcoming BOLD book website. To ensure you never miss a message, sign up for my newsletter here.

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