Recently a rumor that Aaton has (at least temporarily) closed its doors while looking for more funding has spread around the internet. This is a personal story for me, both because I have loved using Aaton cameras in my past, and because of my current venture with Digital Bolex.
This is Jean-Pierre Beauviala and his camera…
The following is an email that was sent to the CML (Cinematography Mailing List) by Martin Euredjian, founder of eCinema Systems, discussing the situation with Aaton and the plight of small imaging companies. I asked permission before I published it here. It’s long, but very important for everyone in our industry, or learning about our industry, to read.
Funding complex R&D without an existing product line
Well, I haven’t posted anything on CML for probably three years, if not longer. This is going to be long. Sorry.
I want to give the CML audience one point of view on what it takes to be a self-funded innovator in our industry and how you can help (or hurt) those who venture into entrepreneurship to, yes, serve you.
The last few years have certainly seen massive changes to our industry. The economic downturn caused untold damage across all industries and took down a myriad of players and, yes, innovators.
Our industry is small. Very small. Painfully small. And fickle. Very fickle. Innovators walking into this with the benefit of ignorance of the business realities involved learn –the hard way– very quickly. One of my all-time favorite quotes is by Mark Twain: “A man holding a cat by the tail learns something he can learn in no other way”.
Complex R&D in the context of a small industry with high cost of sales is a bad combination for a self-funded or underfunded entrepreneur. Well funded companies can afford to quite literally burn cash, make mistake after mistake, sell mediocre product below cost to kill competition and grab market share. And still survive. When you’ve put all of your savings into your business, mortgaged your home and topped off all of your credit cards and still don’t even have enough money to match the marketing budget of larger corporations, you ought to take pause. The problem is that an entrepreneur does not see this until having a firm grasp of the cat’s tail. At that point it’s too late. You are all in and have no choice but to grab on and hope to survive the ride. And, of course, sometimes we do what we do because we are passionate rather than rational.
There are so many factors conspiring against small companies in small high-tech markets. And example of this are large suppliers who can cause a lot of damage through their decisions. I don’t know if the alleged Dalsa sensor defect was the straw that broke the camel’s back (does anyone have verifiable data on this or is it just conjecture?) . I can tell you from first hand experience that these kinds of events can be severely crippling if you don’t have the deep pockets to absorb them. I had one memorable experience when buying high-grade LCD panels from Samsung. The LCD industry is known for the callousness of the OEM suppliers and the almost surreal difficulty in dealing with them. The kind of thing you just can’t believe (or know about) until you are knee-deep in the mud.
We were getting ready to do a major product-line expansion. eCinema was going to go from a one product company to a line of sixteen products spanning a range of applications and affordability levels. Having had really bad experiences with LG Philips I sought to switch to a different OEM supplier and initiated negotiations with Samsung. Does anyone remember Apple LCD monitors that went pink or magenta? Yup, LG defects. If they do that to Apple and get away with it, imagine what they are willing to do to small guys. Now multiply what you imagined by ten and you might have an idea of how these OEMs can treat small manufacturers.
The Samsung negotiations happened during NAB with no less than the top three VPs of Samsung LCD Americas. In other words, to get any higher you had to go to Korea. We agreed upon terms and they guaranteed availability of the OEM LCD modules that they helped us select. A huge problem in the LCD business is the constant threat of premature EOL (end of life). I had fallen pray to that one as well with LG. This time I brought it up with Samsung multiple times. They guaranteed seven years availability of the panels they helped us select. Now armed with this we could embark in this major new step for eCinema. I hired another engineer and we got to work. Eight months and well over a million dollars later we had in our hands the first eight of the sixteen planned designs.
Then it happened. We went to place orders with Samsung and got a chilling two line email from the distributor: “These panels have been discontinued. You have to redesign your product.”.
In the single-source OEM LCD business this is equivalent to having your entire product line evaporate –literally go “poof”– overnight. This is not unlike what can happen if you single-source a custom sensor for a camera from an OEM. Anything can take you down and you have absolutely no control. Sue Samsung? Right. Good luck. This event cost us well over a million dollars. That is “you are now dead” money for a small business. A lot of it is a blur now as the whole thing turned into a horrible nightmare that put me in the hospital no less than twice. Data was hard to come by, but conjecture at the time was that the main buyer for these panels had pulled the plug on the contract and Samsung pulled the plug on the entire line, affecting all small manufacturers. Through a distributor I learned of a manufacturer making monitors for government applications who was sued by the government to the tunes of tens of millions of dollars because
they could not deliver the product as specified. Carnage.
In the context of all of the above we also had to deal with mind blowing market realities. Competition can be ruthless when very well funded companies are threatened by what you are doing. And example of this is learning that a competitor actually bribed and paid-off some our dealers to keep our product from being shown at important events such as NAB as well as off their websites. Then there are other cases where product is almost literally given away in order to cause you damage by denying your company much-needed sales. Stuff from movies right? Well, no, that’s real life. And you don’t learn about some of these things until well after the damage is done.
And then there’s you, the user, the buyer, the one who talks about what these small companies work so hard to bring to market. You can help, a lot. You can also hurt, a lot.
The first issue is the constant chase of the new shinny thing on the shelf. I get it. I understand where this comes from and the need for it. The problem is that this is very damaging for small companies to deal with. It causes real economic damage and, in reality, slows down innovation. Forgive me if I can’t offer examples from other companies. One doesn’t often learn about these incidents because they are kept very private. So I can only talk about what I have experienced at eCinema. Please don’t think this is about me. It’s just that I don’t really have other examples I can share with you.
And so, we were about to close a very nice sale of potentially fifty to one hundred of our high-end monitors. I should say that this was a much-needed sale. As a small company you are almost always underfunded. It can be a painful existence. There are periods of time when you go from sale to sale walking the edge of a financial precipice. Large purchases inject oxygen into the business, let you breathe and actually execute on your plans rather than focusing on survival. This sale was massive for us. The bad news was that this was taking place about a month from NAB.
I’ve always dreaded trade shows. They are great opportunities to connect with your customers, share and learn. And, for some, tradeshows are great opportunities to cause damage to the competition. When a competitor learned of our large sale they moved quickly to make promises and representations about a product they were about to introduce at NAB. The sale was stopped cold on it’s tracks, pending NAB. In practical terms this means that, if you are lucky, you are looking at a three month delay before you resume the conversation. A typical tradeshow cost us between $100K and $200K to put on –not to mention opportunity costs. This is nothing for a larger business, but for a smaller company it’s a ton of money. I would venture to guess that if you asked most exhibitors at NAB they’d tell you that these shows are seldom worth the investment…but you have to do them because people think you are dead if you don’t show-up. And you always have to have something new for nearly the same reasons. Thankfully the internet has changed a lot of this. Just know that exhibitors are spending a lot of money to have a chance to talk to you face to face and almost always this is at a non-trivial financial loss for small companies.
The loss of this sale caused us to have to retreat and exhibit at the MGM instead –for about $10K– and make the best of it. As it turns out the product that was introduced –the one that stopped our sale– was shit. It didn’t matter. The shit product actually stopped a huge percentage of our sales for months and months. I don’t have precise data, but I would guess the effect of the shit product lasted at least a year. It took a while for people to realize that it was no good and then come back to us. Again, it takes a few cuts to damage a small entity beyond repair, whereas an elephant won’t even feel it.
Constantly chasing the new shinny thing on the shelf can really hurt both you and the small entities serving the industry. It hurts manufacturers because they are denied the much-needed steady revenue stream that supports R&D. It hurts you because you will ultimately not benefit from the results of such innovation. I think it is fair to say that certain kinds of innovation does not usually come from large players. Innovators are usually small “cowboys” who risk it all to bring ideas they are passionate about to market. They are driven by different metrics than those of the larger players and can execute difficult technology at a different pace. Still, it often is an “all in” business with huge personal risk.
Then there’s the matter of price “warfare”. Well, consumers at all levels tend to want to buy the lowest cost product that will meet their needs. And that’s OK. Greed? Nah, just reality. And, while I don’t have a problem with this concept or this reality in the context of a fair and even playing field it is quite a different matter when the playing field is tilted. We have now pretty much killed manufacturing in the US and Europe. Making nearly anything is significantly cheaper in China. Anything. And so, trying to compete by manufacturing in your backyard is almost delusional.
The problem is that small market (low volume) high-tech products can’t reasonably well be manufactured in China. For example, I am working on a small project right now with plans to manufacture in China. The minimum order quantity for one part alone is 5,000 pieces. You can make the same part in the US at minimum order quantities of a few hundred pieces at five to ten times the cost and twice the tooling costs. That’s just reality.
The other reason is that you really need detailed hands-on engagement with the manufacturing process in order to ensure quality (not to mention IP theft, etc.). When competitors come into the market who opt for overseas manufacturing they usually come in with a price advantage. The usual scenario is that of a lower quality and lesser specification product with less support, features, reliability, etc. offered at a deeply discounted price when compared to locally manufactured goods. The other scenario is that of well-funded companies explicitly coming into the market with below or near cost pricing in order to damage the competition and take the market. A large company can afford to lose money for a year or two in exchange for owning the market for ten.
Yes, in consumer-land there are great examples of very high quality products manufacture in China, the iPhone being on easy to site example. The reality here is that these are huge high volume products where a massive infrastructure is put into place in order to ensure quality and delivery value. If you are only making a few hundred of something a year you are SOL.
What does this look like from the vantage point of a small company? Your sales half –or worst– nearly overnight with the introduction of low price products. Your R&D efforts are stymied. You have to retreat into survival mode and engage in the impossible task of selling the same product for less –or go overseas and play the same game. You get to compete with a product that might be 70% of yours at half the money or less. Every sale you loose is another cut out of the one thousand that will kill you.
I can’t say much more about the chase for the lowest cost solution other than to suggest that, with every dollar you spend, you are supporting the present and future direction of a product category. If, in a small market, buyers flock to low cost solutions the net effect will be that all mid-range innovators will be damaged and possibly taken out. What will remain will be the uber-high-end and the low end, with few offerings in between. You are voting with your dollars for the future of what it is you are buying. Rather than look at it as scoring a great deal for a given widget you might want to consider every single one of your purchases as a vote towards the future direction of the industry or a category in the industry. I know, without a doubt, we had customers who bought our more expensive product instead of cheaper overseas alternatives because of precisely the idea of supporting the vision we were trying to execute and the idea of supporting your own backyard. I remain humbled and grateful for such support and loyalty.
Advanced R&D is expensive. As we navigated the years we continued working on what became our DPX technology for monitors. High-end R&D is incredibly expensive, be it cameras or anything else. We had things like custom thermal management heat sinks which cost $27,000 to prototype each and every design iteration. And, while we ultimately installed our own CNC machining equipment in getting ready to bring DPX to market, the costs were still staggering. I forget how many prototype iterations we went through. Each one cost us hundreds of thousands of dollars. When you are engaged in something like that and have to, at the same time, deal with some of the realities I discussed above, R&D happens at less-than-ideal pace. And, frankly, it is far too easy to give up. Without passion most do.
Finally there’s the economic downturn of 2008/2009. How can we not talk about that. This affected everyone. People lost jobs by the millions. Companies went out of business at industrial rates. Horrible. And, of course, our industry was in no way immune to this. If you survived the initial blast, the radiation –in the form or much reduced or non-existing sales– eventually got you. Unless you had the finances to survive. In our own case it was a combination of the two. A lot of our gear was purchased through leasing rather than outright cash transactions. When banks stopped lending, orders stopped virtually overnight. An unimaginable black swan event. Still, we navigated through the initial blast and emerged damaged but stubbornly clinging to life. Existence at that stage is very delicate. Then we had a major deal (millions) unravel, again, because of banks setting the breaks on lending. And that was that. No more.
Again, my apologies for what can seem like self-serving stories. As I said before, these are all the stories I have. I can’t rightfully talk about what other entrepreneurs experience or have experienced in our industry. And even where I do have some inside information from others I do not have the right to publicly discuss their internal stories and struggles.
I don’t know what the Aaton story might be. I have to say that in all these years I have not had the pleasure of personally meeting JP. I think we may have swapped emails a couple of times over the years, but never met in person –something I regret. Still, I have always felt a connection to any “go it alone despite the odds” entrepreneurs as I have been that guy more than once. It can be a hard and lonely ride that few are equipped to appreciate. I sincerely hope JP figures out a way to come out of the ashes to grace us with great innovative thinking.
JP, if you are reading this, count me in to help in any way I can, even if all you need is to simply talk to someone who has survived something that might resemble what you might be experiencing right now. I know that without my family, children and friends things would have been far different.
We here at Digital Bolex have gone through some of the hardship that Martin talks about. We have had parts we were planning on using discontinued, we have had issues because of products viewed as competitors, and of course many added R&D costs because of delays and changes. This email really touched home for me and I needed to share it.
In my monologues I often talk about how small business will one day replace large companies in many ways, and while this is true, it is not without great struggle. The truth is if we want smaller more personable, more responsive companies to be able to survive in this world we have to fight for that, and as Martin so elegantly said, we have to vote for it with our dollar.
Thank you for reading this, and thank you all for your support,
Joe Rubinstein, and the entire Digital Bolex team.