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Hardware Wants to Be Free

Technology is getting cheap--so cheap, in fact, that gadgets alone may cease to be the moneymakers. Tech start-ups, take note.
Amazon loses money on each Kindle Fire it makes. The real moneymaker is the content business behind the device.

Everyone loves something for nothing. In fact, the word "free" continually tests as one of the most powerful words you can add to an advertising or direct mail headline.

For years, people in the media business have been bedeviled by the oft-cited idea that "information wants to be free." But now, hardware companies are quickly coming to a point where the same will be said about their products. Electronics, particularly computers, have become so cheap that in the near future you'll be able to give away inexpensive PCs, tablets, and smartphones as premiums. But that means a major shift in strategy for not just hardware companies, but everyone in the tech and media industries.

An Industry Shift

The information-wants-to-be free mantra has been around for decades longer than the usual attribution: it's something Stewart Brand, founder of the Whole Earth Catalog, said in the mid-1980s at a conference. However, his full quote is more complex and nuanced:

In fall 1984, at the first Hackers' Conference, I said in one discussion session: "On the one hand information wants to be expensive, because it's so valuable. The right information in the right place just changes your life. On the other hand, information wants to be free, because the cost of getting it out is getting lower and lower all the time. So you have these two fighting against each other.

The tension between the two directions--ease of distribution and redistribution and the expense of producing something worth reading or viewing--is permanent. Creation is expensive. Reproduction is cheap. That has caused enormous perturbations in the media industry, because people often mistakenly assume that the cost of distribution includes the cost of creation. This explains why people think that an e-book version of a title should be much less than, say, a traditionally produced paperback, even though the cost of manufacturing lies in the $1 to $3 range, depending on whether you include such things as warehousing, shipping, and handling.

Why Hardware Is Next

The creation/distribution tension has been a problem for media companies because they partake in one of the purest forms of intellectual property trafficking. But the hardware industry is about to face its own version of this profit conundrum. In the past, manufacturing a PC, for example, has required companies that made processors, memory, power supplies, circuit boards, and so on. The real cost of intellectual property--including developing the base components, designing the mechanics of cases and physical assemblies, and engineering everything required to assemble a fully functioning device--was spread over hundreds of millions of devices. The costs of distribution, which in this case means actually manufacturing the devices and then distributing them, masked the content costs.

All that is coming to an end. It has now become possible to build incredibly inexpensive and yet fully functioning computers. For example, you can literally build your own PC for under $300, including a monitor. It might not boost your nerd cred, but it will work.

Too much? The Raspberry Pi project has created $35 single-board computers that connect to a television set and a keyboard, have two USB posts as well as an Ethernet port, come with 512 megabytes of RAM, and run Linux. A more stripped down model with half the RAM is $25.

It also comes from a nonprofit that isn't trying to maximize revenue. This isn't a device for the average consumer. You'd have to sport a tinkering predisposition to get something like this to work. However, that was the state of the personal computer in the mid-1970s, when hobbyists, engineers, and others assembled their own machines. With prices this low, someone will eventually make them run Android and build incredibly cheap tablets.

That last statement was a bit of misdirection, as there is already a $40 tablet from India. It's not the fastest or most powerful, but it has a touch screen and enough hardware to move beyond the toy category.

Time to Adapt

Some will dismiss such developments as too underpowered to take seriously, but they would be wrong. Prices will continue to plummet so far as to make Amazon's lowest end Kindle Fire tablet seem exorbitant. No one, particularly entrepreneurs, can assume that hardware will continue to be a moneymaker. There has been too much integration on chips over the years and too many free options for software to preserve the hardware industry in its traditional structure. Just look at the financial results of Hewlett-Packard to see how bad things have become.

If you're in the hardware business, you need to consider how you will adapt over the long run to accommodate the coming competition from ultra-low cost products. Even a premium positioning such as the one Apple takes could crack under enough pressure. (Notice that Android smartphones in total far outsell the iPhone globally.) Perhaps you need to develop services, content, or some other offering that can underwrite figuratively (or even literally) giving away hardware.

At the same time, if you're in another type of business that makes use of a consumer's access to a computer, hardware may become inexpensive enough to give away as a premium to help draw customers.

There are no answers for dealing with this future. No one could even know for sure the exact form it will take. But asking the questions has become a must.

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IMAGE: Getty
Last updated: Dec 26, 2012

ERIK SHERMAN | Columnist

Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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