An Innovator’s Dilemma: License or Manufacture?

Dash Express, the GPS with GPRS communication for automatic pooling of real-time traffic reports and a truly open application API, is one of the coolest products I've ever owned; it clearly points the way to not only the future of not getting lost but also the next stage of mobile communication and crowd-sourced data. Dash Navigation, the company behind it, recently laid off 65% of its workforce, according to Eric Shonfeld on TechCrunch, and has had to make radical and perhaps fatal alterations to its business plan.

Dash Navigation invented a radical mating of wireless and GPS technology. Existing GPS systems like those from Garmin (GRMN) are closed systems, so Dash built and distributed its own hardware to provider consumers a way to buy its clever technology. The company made its platform open so that outside developers could add value to this cool device. It raised a significant amount of venture capital from first tier VC firms Kleiner Perkins and Sequoia, and got excellent product reviews.

But now, the company's in trouble. It has announced that it will no longer be a manufacturer (although you can still buy the device as I did). Instead, the company will concentrate on licensing to GPS manufacturers, mobile phone providers, PDA makers etc. in order to get wider distribution. It hasn't announced any licensing deals since the press release with its change of approach – although that was only a month ago. According to its website, it is not hiring, which given the recent layoffs, is not surprising. Despite this, it is still supporting its product as I can testify from being a user POV.

Unfortunately, licensing is NOT a good strategy for innovation. The licensees usually won't budget enough for the consumer education needed to sell innovation; they don't live or die by your success; they may just be covering a bet. They don't change their hardware to fit your software. You as the licensor don't have retail margins to support retail advertising since those margins go the builders and distributors of the retail product.

On the other hand, manufacturing and getting good distribution for a manufactured product is incredibly expensive, and is either a hit or a miss. You run the risk of just doing enough to show fast followers how to add your features to their hardware. They don't even have to be as good as you are if they have better distribution.

This is the innovator's dilemma and there's no good answer except lots of luck or lots and lots of capital. In a great economy, there's a flood of innovation and it's easy to get money but hard to get attention. In a poor economy, money is hard to come by; your VCs suddenly remember the old adage about throwing good money after bad and say they hear their mothers calling if you happen to corner them in a corridor.

The Apple Macintosh wouldn't have worked as licensed software for the PCs of its day. It needed hardware designed for its strengths; it needed large margins to support a large ad budget and initially short production runs (compared to DOS machines). Steve Jobs decided to tightly bundle the hardware and software and they've never been teased apart since. When things are going well for Apple (AAPL), this is considered a brilliant strategy. However, when things weren't going well, everyone knew this was a mistake and said he should've licensed it. Now, Apple has its own capital and can continue with integrated hardware and software innovation like the iPod and the iPhone. The model works when you're rich and brilliant.

TiVo (TIVO) was an incredibly innovative product. Eight years later, and I still haven't seen a competitor that is even as good as the first TiVo device. TiVo has gone back and forth at least once between a manufacturing and a licensing model. It can't compete with the distribution advantage of the networks. Somehow, it survives but doesn't really prosper (Disclosure: I own a small amount of TiVo stock even though I don't currently own the device because the features I want don't work with DirecTV).

The Israeli company VocalTec was THE early innovator in VoIP (when VoIP was still in the carrier network and not in the home or office). Its engineering skill was in VoIP software development, and the company felt, probably correctly, that it had to sell VoIP devices to the carrier market to get the margins the company needed and to deliver a "turnkey" solution. However, once Cisco (CSCO) and other became interested in delivering their own boxes, there was no longer a way for VocalTec to compete. Should the company have licensed from the beginning? It’s easy to say with hindsight, but it might not gotten traction or sufficient margins nor been able to raise capital by going public if it had.

Back in the distant past, my company, Solutions, Inc. developed fax software for the Macintosh. We licensed it to fax modem manufacturers, and made a modest living but squandered most of it trying to promote our software (which was only available bundled) at trade shows. "You're selling what?" people would ask. At best, we made a dollar or so, on each modem our licensees sold. Should we have had our own modem? We didn't have the capital, so eventually; we licensed the software to Apple who used it as an upgrade to its own inferior software. That’s not a bad outcome, but it was not what we were dreaming of.

I hope Dash Navigation finds a way through this innovator's dilemma. Its device IS going to shape the future, and it’d be nice if the company could benefit from it.