Steve Crowe of The Robot Report has been following Teradyne’s adventures in IP protection this year, most recently noting their second foray into court against the Chinese cobot manufacturer JAKA. Our bickering over parking and their absolute domination of my colleagues in the neighborhood basketball tournament aside, I’ve got mad respect for them. Teradyne has been a force in the automation industry: they make some of the best automated electronics test products in the world, and their Universal Robots line appears regularly in our own workcells. So naturally, when I see Steve covering Teradyne, I lean over the fence for the neighborhood gossip. But when he asks, “is this simply what happens when an industry matures?” it finally knocked loose some observations that have been rolling around in my own head for some time.

In a word: yes. This is a sign of industry maturity but for a more dreadful reason: it’s a warning sign of commoditization.

Let me step us back for a moment and talk about some finance bro stuff. You may have heard finance bros and VCs talking almost fetishistically about “alpha”, without ever mentioning “beta”. Here’s some quick definitions:

• Beta: Your commodity baseline, what any competent manufacturer can produce. A 6-axis cobot is as a 6-axis cobot does. Baseball terms would put this as your replacement-level player: one who can be called up that performs at the minimum standard for minimum cost.
• Alpha: Your excess value above baseline, the stuff that makes your product stand out and seem more attractive than that Beta baseline. Could be the integration, the ecosystem, the system design, the deployment experience, the support quality… anything that justifies your charging a premium for your product over the functionally equivalent alternative. This is a baseball player with a positive WAR[1].

Alpha constantly erodes due to technology and manufacturing advances, greater knowledge in the market about how to solve problems, rising customer expectations, and other pressures. Last year’s alpha becomes this year’s beta. Bluetooth was once a premium feature, high alpha; now it’s table stakes, strongly beta. This natural erosion is called “alpha compression”, and it’s a race to zero as the alpha continually dissolves away towards nothing.

To bring it back, commoditization occurs when your alpha evaporates. That unique thing that you brought to the market isn’t so special any more.

Now, commoditization is not a universal evil. We need commodities, both virtual and physical. The entire Open Source Software movement is a response to the need for commoditized software. If I needed to find a “special” machine screw for every application I would lose my mind.

But commoditization requires a radical shift in your operating model: driving towards massive scale, absolutely relentless cost efficiency, and volume is your only lever. You can do that in high tech: Kingston’s our reigning champion of massive scale and reliability in the memory module market. However, when you lose your alpha before you can transition to your commoditized operating model you’ll get ground under by competitors who can race to the bottom faster than you, just like the photovoltaic industry did[2].

So how do we diagnose commoditization, and how do we grade it?

First off, we need to recognize that companies all use market barriers to protect themselves. Some barriers, such as intellectual property instruments like patents and copyrights, can be virtuous: governments recognize that reasonably-sized paths towards extended alpha stimulate investments in creativity that benefit society as a whole. The problems happen when companies use these barriers to the exclusion of other alpha-creating activities such as R&D investment[3].

Commoditization has three major stages.

• Early stage: Ecosystem lock-ins as substitutes for genuine product improvement. John Deere’s war against Right-To-Repair provides a perfect example of weaponizing the pain of switching to a new vendor to guarantee market exclusivity. John Deere still has plenty of alpha to exploit but they’ve instead chosen the lazy path that doesn’t require creativity or risk.
• Mid stage: Regulatory capture, standards manipulation, all that devious stuff that effectively writes out anyone else from being allowed to compete in the first place. AT&T has committed many sins, but the best example of mid-stage commoditization was AT&T’s history of abusing their monopoly position to prevent third party devices from being attached to their phone lines. That meant no answering machines, fax machines, dial-up modems, or assistive devices not produced and sold by AT&T themselves. Once the FCC finally lifted this restriction in 1968, telecommunications devices exploded and AT&T sold more phone lines than ever per capita, going from 414 lines per 1,000 people in 1960 to 796 lines per 1,000 people in 1980[4]. AT&T played themselves by trying to control alpha when they should have focused on their beta.
• Late stage: The final argument of every petty asshole with nothing else left to offer: “I’ll sue you!” It’s ugly, it’s expensive, it’s messily public. Sometimes you have to go there; for example, trademarks require aggressive protective measures in order to maintain them, such as Patagonia’s uncomfortable infringement lawsuit against Pattie Gonia[5]. On the other end of the spectrum you find patent trolls like SCO, who never had alpha and honestly have no beta left either. Perhaps they only have rho. Most IP protection lawsuits land somewhere in between, like Teradyne’s, where there’s legitimate beef on patent infringement but that’s the only thing they’ve got left in the competition space.

So using that guide, let’s track the progression of the disease for Teradyne’s Universal Robots. In The Beginning, UR created the Cobot, and saw that it was good. PolyScope kicks ass, arms are stupid easy to replace in the field, real safety co-existence. As time goes on, switching to other companies’ products generates its own kind of lock-in and collaborative safety standards continue to provide a considerable buffer. Then, Chinese manufacturers manage to close the hardware gap, not only collapsing UR’s alpha but compressing their beta as well. Teradyne’s now suddenly in a fight for their lives because the hardware should never have been their wooden walls safeguarding their city[6].

Commoditization comes for all markets, and one that’s probably most tactile on an everyday basis is the personal computing market. Most PC makers are optimizing their beta: Dell, HP, Lenovo. They assemble laptops and desktops from roughly interchangeable components that fade into the background compared to the price and spec sheet and whether you can remove the stupid “register your Windows license” watermark. My personal spite for modern HP products aside[7], you won’t generally find a user who ride-or-dies their Dell Latitude. The Fruit Company on the other hand, can only survive by maintaining their alpha. Sure, Apple maintains a hefty IP portfolio but they earn their market loyalty through tight component integration and great software-hardware co-design, even in the Intel Mac days when they were running the same processors as their beta compatriots. When they rolled out Apple Silicon, they then added hardware differentiation back on top of that already fat alpha.

Coulda, woulda, shoulda. Teradyne’s now in a bind. They might still be able to dig it out and find alpha in PolyScope’s UX, in creating an App Store equivalent for robots with the UR+ ecosystem, or in building an authorized reseller army from their integrator network. Can they turn it around like Apple did in the 2000s, or do they fight for pennies like a Dell or Lenovo?

It’s entirely possible, and even feasible. Teradyne in general and Universal Robots specifically have great people (even though they slow to 3mph for 15mph speed bumps, wtf). It’ll take creativity, a little bit of risk taking, and a willingness to experiment. No need for a moonshot here, just some cleverness and the space to implement it. But IP protection, including their lawsuit, doesn’t buy you alpha, it just buys you time. The race to zero won’t stop for a court date.

[1] – Wins Above Replacement. Basically, how much more the player contributed to winning a game than your baseline player would. The Sabermetrics people get way too nerdy about this way too quickly, but Wikipedia’s got a decent explainer for us mere mortals.
[2] – No one’s pockets are as deep as companies backed by state-sponsored capitalism.
[3] – Pharmaceuticals are an entire problem with this unto themselves.
[4] – Munged together from US Census data and the FCC’s Statistics of Communications Common Carriers.
[5] – Suing her for $1, because that’s the minimum to demonstrate they’re protecting their trademark.
[6] – Oh I’m sorry, we’re going to use Greek letters and I’m not going to slip some classical history in? Pulled a fast one on you.
[7] – The last great HP product was the LaserJet 4 with the Jetdirect Print Server card and I will not be accepting questions. That absolute unit lasted for two decades after I tactically acquired it.