by Joseph Crowley
Coke or Pepsi? D.C. or Marvel? It’s safe to say you probably prefer one of each category or dislike both options. But why? After all, Coke and Pepsi are both Colas. D.C. and Marvel both make comic books. The answer is obvious. You prefer Coke or Pepsi because of the flavor recipe and pick D.C. or Marvel because of the specific characters and stories.
In the Cola example, each company’s recipe is not public information. In the comic book example, each company holds intellectual property rights over its characters and settings. These companies’ business models necessitate the protection of their intellectual property from use by other companies. This business model is the norm in most industries. If you create or invent something, you should copyright, patent, or trademark it to control the sales of that product. But what if your company ignored this standard? What if your company deliberately avoided intellectual property rights by putting the recipe on the internet for everyone to see?
In the 2010s, a technology manufacturer headquartered in Loveland, Colorado, tested this idea. Aleph Objects produced a 3D printer line called the “Lulzbot.” What made this product interesting was the “open ethos” behind its production. Not only was the product developed using open-source technology – technology produced and published without securing intellectual property rights – but the device itself was “open.” The recipe of the hardware components used to build the physical printer was available online through Aleph’s website. The software used by the printer was fully open-source as well. Nothing in the device’s makeup was proprietary. Individuals were free to build their own Lulzbot without paying the company anything.
Can this business model be effective? If the company doesn’t protect its product from being replicated by other manufacturers, can it still make a profit? Let’s explore the pros and cons of this model.
Pros
Cheaper Startup Expenses
If you’re starting a company to sell a product you designed/invented, any decent lawyer will encourage you to get a patent on your design. You produced something unique, making it competitive in the marketplace. However, the expenses necessary to secure a patent can be intimidating for a company that is just starting out. Costs vary depending on the industry, but securing a patent will likely cost a business thousands of dollars. This price tag includes fees assessed by the USPTO and expenses on patent attorneys. You may spend even more money if your first application gets rejected and you need to try again. If you choose not to patent your product, you obviously save this money.
Harness Customers to Improve the Product
Employing an open model can reduce research and development expenses. If you produce open-source software and hardware, your customer base can contribute to the development of your company. As customers tweak the product with minor improvements and revisions, you can implement these changes in your production model. Under this scheme, you aren’t solely dependent on your R&D engineers (which, as a startup, may just be yourself) for good ideas. A limitless team of people can make suggestions, all for free.
No Need to Defend Your Intellectual Property
Even if you secure intellectual property rights to your product, you still need to defend these rights from would-be duplicators. Failing to do so will hurt your business, causing your market share to decrease and possibly losing your patent altogether. If you never secured the patent in the first place, this problem doesn’t exist. You don’t need to spend money on lawyers to protect your intellectual property.
Cons
Idea Theft
If you are not securing intellectual property rights over your product, your competitors can replicate it. If you place your cards on the table, your opponents will know what they’re up against. They can take advantage of your good ideas, but you will not see any improvements they make. It’s easy to see how your business can fall behind the competition in this situation.
Industry Dependent
Let’s face it, in most industries, this model can’t work. You won’t beat Coke by making your own Cola and publishing the recipe online. If you’re trying to beat D.C. and Marvel, letting them use your characters in their stories will not help. This business model may be effective in the technology industry, but perhaps nowhere else. Open-source software is already an industry standard, and open hardware has been done before, as seen with the Aleph Objects example.
Making Money
If you publish the schematics for your product online, how can you expect to sell any units? Why would consumers buy from your company when they can make your product themselves? For this business model to be successful, you must take advantage of economies of scale. Your production costs must be low so you can still price-compete with individuals who would buy the parts and build your product themselves. These margins are going to be tight. You can’t markup your product’s price when building one is easy and cheap. This model may require higher startup costs to make production efficient enough for prices to stay low.
The Takeaway
It is impossible to recommend an “open ethos” model to all business owners. The model is too industry and circumstance specific. Lawyers usually recommend that business owners secure intellectual property for a reason. However, for some entrepreneurs (particularly those with very progressive views regarding the philosophy of ownership), the “open ethos” model may work. Playing while showing your hand is a bold strategy in any card game, but you can still win if your cards are good enough.
This post has been reproduced and updated with the author’s permission. It was originally authored on January 31, 2023 and can be found here.
Joe Crowley, at the time of this post, is a third-year law student at Penn State Dickinson Law. He is originally from Fort Collins, Colorado. He received his undergraduate degree from Colorado State University. He is interested in all aspects of business and tax law. In his free time, he likes to watch movies, read, and play chess.
Sources:
https://opensource.com/business/15/11/open-ethos-powers-lulzbots-success
https://www.uspto.gov/trademarks/basics/trademark-patent-copyright
https://uslawpros.com/how-much-does-a-patent-cost/
