Why Great Gadgets are So Hard (and expensive) to Build

As a self-professed gadget geek, I often think about why it is so hard to build a great gadget that really works for a meaningful number of people. I have talked to a number of people who both invested in and supported very successful gadget companies and I think that I have identified two of the main issues that make this such a difficult space to penetrate.

Not surprisingly, both of the issues that I feel are important touch on financing and fundraising issues, but not in the traditional way. Allow me to explain:

Issue 1: Building a Powerful Device Requires Inefficient End-to-End Ownership
I have studied a number of successful devices that have come to market and they all share one thing in common — a real ownership of the end-user experience, not just the ownership of a particular technology component. This basically means that gadget companies will need to own elements of the infrastructure (hardware, operating software, applications development, communications link, customer service, etc.) that they do not necessarily want to own or believe that they can operate profitably. Confused by what I mean? Here are some examples:

So, owning, developing, and controlling all of those components is very resource intensive. It requires a company to staff up in a variety of functional domains where they might not otherwise add significant headcount. Also, not very many companies are good at everything, so there is some inherent inefficiency in trying to do everything.

In the end, this means that it will cost a lot of money to get these projects done as the variety of people and resources that need to be cobbled together makes for quite a few challenges.

Issue 2: Riding the Cost Curve down to $200
Even though an increasing number of gadgets are being built using off-the-shelf components, many of the most desirable devices on the market today (TiVo, iPod, Treo, Nokia 3650, Danger, etc) have all started with very high price points and are gradually working their way toward the magical $200 price point. As a company, you know that your initial market will be limited to the so-called “early-adopters” who have the disposable income, patience, and savvy to deal with first-generation new devices. This is always a numerically small but vocal community of users. To reach broader appeal, the product often has to become cheaper and easier to use. However, getting to this point is expensive as the organization does not have the product revenues to offset its high cost of development and research. In simple terms, companies burn money aggressively as they try to get down the price curve to $200. So, once you have your product built, you need to have the war chest to endure the losses before you begin making money.