Author: JT Smith
Open Source Business –
Garrison Keillor once said, “The urge to perform is not necessarily an
indication of talent.” Just because you’d like to get up on stage doesn’t mean
that it’s necessarily a good idea. That’s good advice for young performers.
It’s especially good advice for would-be CEOs of brand new consumer
products companies. From the safety of your living room, starting your own company may sound like a lot of fun, but unless you have a really good idea (that
someone might want to buy), a lot of money, a rolodex full of well
-financed business partners, and the stomach for a business environment that
would make the Mafia squeamish, you might consider going out and getting a
real job.Unfortunately for John Gildred, he decided to found a consumer
electronics start-up. Gildred was (and probably still is) a fan of Open Source
software. Apparently he thought it would be way cool if people could
design and improve their own video games, and maybe download them off
the Web. So about 16 months back Gildred, backed by a few friends and
“angel” investors, plus the credit line of his charge cards and the content of
his savings account, went out to perform in the marketplace. He founded
a firm he called founded Indrema. It was going to be great. It was
going to be an “Open Source” version of a gaming system, Internet box and
video recording system all wrapped up into one. And the only
competition he was going to have was from little firms like Nintendo, Sony, and Microsoft.
After a year of press releases and rather little else, Indrema was
earning little notice except for occasional scornful remarks from Slashdot
posters.
He had a shiny box, a
little bit of software code, and next to nothing in the way of
product, and he still had no funding. By last week, the Indrema CEO admitted to Red Herring that things were looking pretty grim. Gildred said, “We’ll know in the next 30 days” if the company would survive. They
knew sooner than that. A week later, they were out of business.
From the beginning, the idea was absolute madness. Developing an
electronics platform is extremely capital intensive. It’s one of the many reasons
that Sega is getting out of the business. Even Microsoft is finding the
costs of developing its X-Box console to be a real strain on the bottom line.
Further it’s a business that functions with tight margins. Gross
profits can run as low as 10%. The only way to survive in such a market is to
generate vast economies of scale, and to sell millions of units.
For another thing, the box, whether it is a computer or a hand-held
game machine has to have something to run to be viable. Indrema’s
developers apparently hoped that Open Source developers “who couldn’t afford to
make games for Nintendo or Sega” might be persuaded to build something for
them. But what kind of developer “couldn’t afford” to build to those
platforms? Today’s game software is incredibly expensive to make. The development
costs of leading titles frequently rival that of some lower-end movies.
A better question would be, what kind of developer would ever risk
hundreds of thousands (if not millions) of dollars on anything other than a
solid commercial platform? Sony, Sega and Nintendo, especially, broke into
the market with a set of programs, and heavily subsidized their early
developers. They had to. Without sufficient games, the average mass marketer
wouldn’t have considered them. Many retailers have sold game hardware as a loss
leader. The profit has been in the games themselves. No games, no
profit. no interest.
Even if games were available, profit margins on the retail side of
the consumer electronics space are razor thin — worse than they are for
hardware developers. That means that retailers can’t afford to take risks on any
product that might be left on the shelf. The winnowing process can be
pretty brutal, as Sega recently discovered. Whatever the merits of PlayStation
2, Nintendo’s GameCube, or the upcoming Microsoft X-Box, each of these
developers can promise retailers a hefty advertising budget. Further,
they can use their other product lines to cross promote, lessening the risk
that a retailer will get stuck with unwanted inventory.
Also, because companies like Sony and Nintendo already have a
substantial presence inside virtually every major electronics retailer, they have
plenty of influence. They can — and do — use their other products as leverage
to “stuff the channel,” effectively forcing retailers to take on a
new console if they want to sell other, more established products. The console companies
can even “persuade” retailers not to carry a given product (made by
their competition) or to stick it on a back shelf somewhere if the retailer
ever expects to get the latest video games or software. It’s blackmail, to
be sure, but it’s done all the time. Cut throat? You bet. This is a market
that Microsoft could lose because it’s too nice. Tactics that
got Microsoft its first court date with Judge Thomas Penfield Jackson are
just standard operating procedure in consumer electronics.
But that’s how the grownups in this business do marketing.
That blood-soaked retail environment is the one reason I continue to
have so many doubts about Linux-based handheld devices or Linux based
MP3 players, even now. Consumer electronics is a damn tough market to break
into, and it’s even tougher to survive. The quality of the product is
almost beside the point, compared to raw marketing muscle and a willingness to
use it.
It was that environment which made the Indrema fantasy just that,
from the very beginning. The most fortunate thing about this entire gambit
was that this particular show closed before other investors could be
found who might have been willing to throw even more money at a
hopeless project.
Ever the entrepreneur, Gildred promises he’ll be back. He recently
told Video Business, “I will develop a similar product and
re-invent it under another umbrella,” a pledge which probably did little for his
current investors. Gildred suggested that next time, he’d try “working
for a company, rather than creating it from the ground up.”
Unfortunately for Gildred, unless that company turns out to be someone like Sony or
Microsoft, he’s likely to have just as hard a time the second time around.
He might want to skip the encore performance.
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