4. 3. 3  Ancillary markets: hardware

One of the first business models described by Hecker, "Widget Frosting" is still as valid today as it was then. For hardware manufacturers, the development of software is a necessary expense if they are to sell their products, so any strategy that will lower the associated costs is desirable. In addition, following a model of free software development extends the possibilities of portability to other platforms, thereby increasing the market segment. We saw earlier how the major providers, which include hardware in their offer, are incorporating free operating systems as a way of reducing the final costs of the service, thus increasing their potential customer base.

On this point, it is interesting to note the role that Linux is playing in the new generation of embedded devices. We are witnessing a return to the combined sale of hardware and software in this type of device, which must come with its specific functionality built-in, often with simple operating systems with limited functionality. Nonetheless, the possibility of using embedded Linux has increased the business opportunities for this type of hardware.

The use of free software offers significant advantages in terms of cost savings, shorter development periods (essential in a market governed by short life cycles), ease of development subcontracting (due to a highly modular existing base) and the possibilities for innovation introduced by setting up a community around the product. Moreover, the use of free software gives manufacturers significant independence from the Windows Mobile and Symbian platforms, and hence, from the agendas of Microsoft and Nokia.

Currently, Linux-based operating systems are the most common in embedded systems and their adoption by consolidated companies of the sector, such as Wind River, points toward the continuation of this trend. In the smartphone market, Linux increased from 3.4% in 2004 to 14.3% in 2005, while embedded Windows only grew from 2.9% to 4.5% in the same period.

Recommended website

For more information:

Alejandro Lucero, "Seminario UAM: Linux en Sistemas Empotrados". www.os3sl.com/Documents/Seminario_UAM_I.pdf.

Furthermore, the existence of software at an affordable price for a large audience also generates an ecosystem of needs around it, which the hardware often forms part of. The Asterisk IP voice platform, for example, allows many businesses to use switchboards, with a significant reduction in costs. However, it requires users to purchase certain hardware elements, such as IP terminals, Asterisk cards, routers, recording systems, etc.

The manufacturers of these products can benefit from the spread of software like Asterisk, so they will have much to gain from participating in and contributing to its development. Likewise, software development companies can earn money by selling hardware and related services, as is the case of Digium, the company chiefly responsible for the development of Asterisk.

There are also other spaces and niches that can be exploited through this technology, such as those tapped by Avanzada7. This Málaga-based company sells the necessary hardware for the implementation of Asterisk, but acknowledges that it is neither a manufacturer nor a major distributor. Its differentiation stems from the provision of free support services following the sale of the devices. Avanzada7 has also established a partnership with Digium, the company responsible for the development of the software, creating a trusted network that extends to other companies wishing to implement Asterisk for end customers. Thus, it has set up a pyramidal network of the type described above based on the needs generated by free software, which it exploits through coopetition strategies.

Corporate data on Chumby Industries, Inc.

Company name

Chumby Industries, Inc.

Head office

San Diego, CA

(United States)

Website

www.chumby.com

Creation date

2005

No. of people employed in 2007

 

Turnover in 2006

 

Chumby Industries was set up with the aim of creating and marketing the "Chumby", launched in August 2006. This wireless (Wi-Fi) device was designed to replace the clock radio and can connect to the "Chumby Network", where it can download different types of information. It can play podcasts, Internet radio, and some videos. The device runs Linux and Flash Lite, an Adobe program with small interactive applications or "widgets". It does not have a browser and contents can only be downloaded through widgets, each of which has its own specific function: read the latest news from a blog, download the latest photos from a gallery, etc.

The Chumby hardware and software are free and both its schemas and printed circuit boards – and even its source code – can be downloaded. The company's marketing activity is based on its openness: the Chumby can be customised at any level by changing the outer casing and (literally) sewing on extensions to taste, creating new widgets or hacking the hardware. Thus, the device is not only sold as "user-friendly", it also opens the door to the expansion of its features beyond the control and financing of the company, leaving it to evolve into what every user wants it to be.

Nonetheless, Chumby's business model is not aimed at obtaining revenue from hardware, and the price of the device is relatively low. Steve Tomlin, founder and CEO of the company argues that several business models were possible with Chumby: they could have charged more and followed the model of a traditional hardware vendor, with the problems of recurring revenue that this would generate, or they could charge little for the device, but then charge for content subscriptions. However, the company preferred a third way: to obtain the revenue needed to just cover costs with sales and generate its profits through advertising.

To secure this new field of business, Chumby is not 100% open and there are constraints on its use, both in the hardware and on the "Chumby Network", thus guaranteeing the business model.

"Chumby network" access

After purchasing a Chumby, the user must register on the company website to access the widgets, accepting their terms of use. These terms allow anybody to add new widgets with any type of information they wish, giving their permission to distribute this information to any device connected to the network. However, restrictions are placed on permitted content, and inappropriate content (racist, violent, sexist, spam, etc.) is banned, as is commercial content:

"Prohibited Content includes Content that: (...) except as expressly approved by Chumby, involves commercial activities and/or promotions such as, without limitation, contests, sweepstakes, barter, advertising, or pyramid schemes." (http://www.chumby.com/pages/terms)

A payment must therefore be made to obtain authorisation for advertising content. The terms and conditions also warn that the user will receive advertising when he/she connects to the Chumby network.

Although widgets can technically be incorporated outside the Chumby network using USB devices, the company is confident that most of the contributions will remain within its network, thus attracting enough content to generate value from the number of people and contributions on it.

The device

Chumby allows access to the schemas and PCBs of its device. However, manufacturers seeking to use its designs and incorporate them into their own products have to pay the company to licence their new product. In addition, they have to accept that, besides any other networks to which they connect, they will also incorporate the Chumby Network.

To summarise, Chumby acknowledges that the value of its device lies in the content, in a manner similar way to O'Reilly in "Open Source Paradigm Shift" and others. Its strategy, besides characterising the product by its openness, is to attract as many people as possible to the network in an attempt to make it a benchmark network for small mobile devices of this nature. However, instead of selling content through subscriptions, it has decided to capitalise on this value through advertising.

For the company, the use of open hardware and software is a key strategy for the spread and adoption not just of its device but of the network that it has created to provide content. Moreover, its openness gives it a clear differentiation and commercial edge over similar products like Apple's iPod Touch and iPhone.