Narrative: Hardware is Hard

Written: January 24, 2017

We live in a paradoxical time when it comes to hardware. On the one hand, it’s easier than it ever has been to create a new hardware product – the Shenzhen ecosystem in China makes every conceivable component available at low cost at volumes from tens to millions, and platforms like Kickstarter and Indiegogo make it possible for anyone with a great idea to raise money from would-be buyers to fund manufacturing. On the other hand, actually selling those products in larger numbers and building a sustainable business off the back of it is perhaps harder than it’s ever been, because hardware is increasingly part of an ecosystem, and those ecosystems have to compete with some of the biggest names on the planet – Apple, Facebook, Google, Microsoft, and Samsung.

Hardware is therefore both very easy and very hard – easy in the short term sense of getting a new product made, and hard in the sense of creating an ecosystem that can compete with the big players on an ongoing basis. Beyond that, smartphones are absorbing more and more functionality that was once provided by standalone devices – think of cameras, camcorders, fitness trackers, e-readers, PDAs, BlackBerries, and goodness knows how many other electronic devices. Being a one-trick hardware pony is particularly tough when you not only have to compete against other dedicated devices from big players but face the risk that the most widely adopted device in the world – smartphones – might eventually absorb the whole category.

Thirdly, competing with a quality product is increasingly tough when cheap alternatives from the very same Chinese manufacturers can easily undercut you on price with decent product quality. Again, the best brands build more than just hardware, but that means standalone hardware manufacturers need to get very good at software and services too, which is tough to do for a startup. Doing all this across multiple product categories at once to form an ecosystem is almost impossible without massive upfront funding, which again works against the new hardware company.

Even for large companies well established in other domains like software or services, getting into hardware can be hard. It may mean competing with erstwhile customers and partners, as both Google and Microsoft have begun to do in recent years, or it may mean learning entirely new skills, as Amazon has had to do, with mixed success (see the Kindle and Amazon Fire TV, but also the Fire Phone).

None of this is to say that it’s impossible to be successful in hardware from a standing start – several big Chinese companies have emerged in the smartphone space in recent years, with Oppo and Vivo becoming top 10 players seemingly out of nowhere. LeEco has become a hardware player from a services heritage with a decent amount of success, though it’s struggling to parlay that domestic success into a strong position in the US and elsewhere, and its rapid expansion is causing financial troubles. Successful non-Chinese hardware startups are harder to find – having a home base in both a massive and low-cost market helps enormously. GoPro and Fitbit have appeared to be success stories in recent years, but over the last few quarters it’s become clearer that both face significant challenges in taking their single-category model much further in the face of small total addressable markets and fierce competition from both cheaper alternatives and big ecosystem players. This is a tough market, and it’s going to take something really special to do well from a standing start in hardware over the next few years.