Friday, November 18, 2005

Theoretically cheap

The Herald reports today on the MIT Media Lab's OLPC scheme to produce an USD100 (NZD150) laptop for schoolchildren in developing countries.

Reading the website in more detail, one thing I notice is that the $100 is a manufacturing cost (and they are actually finding quotes closer to $110). I worked on a consumer device project a while ago, and we reckoned on a sale price of four times the factory cost. You might think that excessive, but there are a lot of costs in getting a design into a factory and getting units to end users (R&D, purchasing, distribution, cost of capital, retailers margin, advertising, support, etc...)

Now the first thing you'd say is that OLPC aren't evil capitalists out to make a profit, so that will reduce the price substantially? Won't it? Well the largest maker of "cheap for a reason" PCs, Dell, made a 6% profit last year. Most mutuals (like Southern Cross or the Uk's Nationwide Building Society) don't sell their products much cheaper than profit making competitors - they usually reckon to aim to make a surplus and pass it back to customers in later years - aiming at break-even is just too risky. You'd probably expect OLPC to target a 10% surplus in the early stages just to cover contingencies - so their margins will need to be *more* than the commercial competition.

They also plan a rather different supply chain to the rest of the industry. They intend to sell in minimum quantities of a million units directly to developing country governments. For cash. Won't that cut out all the distribution costs? Well... The devices will still need to be boxed, shipped, distributed to the schools or whatever. The teachers (at least) will need to be trained. They will need a helpdesk, as well as some means of getting faulty units fixed. They'll need upgrades. The machines will need to be localised (unless part of the plan is to impose the English language on everyone). The governments themselves will need to fund the purchase of the machines - probably a good year ahead of any actual deliveries.

If the assumption is that the governments are going to receive bulk shipments of hardware and find everything else themselves, then the $100 price isn't real - they'd need to buy the laptops *and* set up a whole infrastructure to support them.

It's also not reasonable to assume that just because the sales are negotiated with governments, there won't be any sales costs. Even honest governments will take quite a lot of negotiating before they will fork out $100 million (plus possibly the same again in support costs, as we saw above). They might reasonably want OLPC to set up a back-to-back aid deal to finance the purchase. Also, many developing countries have rather corrupt governments and will probably want substantial bribes - all of which is going to send OLPC's overheads up.

So this $100 laptop is starting to look at having an effective retail price not far short of $400.
How does that compare with Evil Capitalism? Dell are offering a laptop for $499 with the usual 30G hard disk, 256 measly megabytes of RAM, Celeron, Windows XP, etc.

It does strike me that the OLPC could just go to tender for five million bog standard laptops loaded with Linux (or persuade MSFT to donate Windows licenses), drop-shipped to various third world airports. Add in a bit of subsidy from their public spirited backers (Google etc) and the total cost once the boxes reach the schoolroom will probably be a whole lot less than Negroponte's neat green and yellow boxes.

Final cynical point - this is a pretty major product development project - how many of the people on the OLPC board have experience in mass market product design and production. Answer: none of them!

The picture looks cool though!


Genius said...

And to think your supp[osed to be a leftie!
I was thinking a good idea would be to give them our old computers, you can buy one from computer retailers via a trade in deal and get them for almost nothing.

Rich said...

I'd say it wasn't a left/right thing - more a real world/academia thing.

A lot of old computers do get shipped to developing countries - and Microsoft have a program I linked to to give them a free legal OS (only fair given they would mostly have had a licensed copy originally). The trouble is they're all dissimilar and hard to support.

From talking to people in schools in these places, their main problem is not computers, it's the more basic issue that most people can't afford to send their kids to school. In many nations education is not free beyond eleven or so - and I think making sure everyone goes to school is much more beneficial than pretty green laptops.

Lulu said...

I come from a developing country, I see this is a wonderful initiative. I just hope that the actual price is 100$ and not more. And I also hope that low-income households dont sell the mahinces than use them!

Rich said...

For a $100 end-user price, they'd need to be able to build the laptops for $30.

I can't believe they won't get sold - the temptation is too great. And what's worse is that *because* they're not selling these commercially, the only way of getting one will be through a black market, which will make it even more attractive for kids to sell them.

If OLPC sold the boxes to wealthy westerners for $799, they could use the profits to subsidise at-cost sales into education.