They say this is the Age of Design, with smart firms shaping new products that make millions for their corporate clients. Yet most design projects bring in less than $200,000, and one that generates $500,000 in revenues is rare. Even that price is under pressure from growing Asian competition.
Enter Robert Brunner, a design star with a new model for the business. Brunner has the credentials to be a revolutionary. He led Apple's (AAPL) design team in 1989-96 in bringing out the PowerBook. Then he jumped to Pentagram, an elite firm that has designed everything from the signage in the Bloomberg headquarters to a Nike (NKE) watch.
Now Brunner is creating his own firm, Ammunition Group, just blocks from Pentagram in San Francisco, and it doesn't just design new products, it wants to own many of them. Brunner figures that since big clients are going to hand off his design to contract manufacturers to oversee procurement, manufacturing, and logistics anyway, he can do it himself—with far less overhead than his clients. Ammunition will set up companies for products it designs and bring in partners to supply capital and expertise in manufacturing and marketing.
At least that's the business plan. Over time, Brunner hopes Ammunition will end up with a portfolio of projects. "With so much outsourcing, there's more opportunity for designers to create new business models," he says. He has raised $600,000 from angel investors and partners and is seeking $2 million to fund more projects. "The idea here is that we're treating design as IP [intellectual property], not a service."
In short, Brunner believes his tiny design firm can play the outsourcing game as well as any big corporation. That's a tall order for a 16-person firm. And if there's a hole in his strategy, it's in marketing and distribution. Making things in China is easy. Selling them to consumers in the U.S., Europe, and Asia is still hard. The one remaining edge of big consumer outfits is their expertise in building brands and getting shelf space—from e-commerce to warehouse clubs. Even if Ammunition can gin up world-class products, it will fail if Brunner can't tap into such expertise.
Brunner is off to a promising start. He just created a line of outdoor grills called Fuego. Next year, Ammunition will unveil an iPhone accessory, plus hi-fi headphones and a fancy hood for kitchen stoves. The aim is to raise the 20% of revenues Brunner's firm now gets from the new equity model to 50% in three years.
Brunner's progress is being watched closely by his peers. Top firms such as frog design and IDEO enjoyed gross margins of 60% or more in the 1990s, but under competitive pressures from contract manufacturers giving away design services free of charge, that has been trimmed to 25%, according to industry experts.
If it works, the ownership model will give Ammunition more ways to make more money. In some cases, the firm will license its products to bigger companies that take them to market. Since it will be licensing a full-blown product rather than just a sketch or concept, it may be able to command a higher royalty—say 10%, vs. the typical 3% to 5%. Or Ammunition will establish a company for a new product and take the product to market itself, keeping the bulk of the profits and revenues. Brunner's strategic game plan: to create successful product lines that big corporations will buy.
Brunner started down this path at Pentagram in 2004 when he oversaw development of the Fuego grill prototype. The concept was simple: By adding plenty of tabletop and getting rid of the tent-like lid, he made it possible for people to gather around the grill on all sides. When Pentagram didn't fund its development, Brunner pitched it to leading grill companies such as Viking Range. Again, no go. Finally, he got Alex Siow, who ran a maker of high-end range hoods called Zephyr, to partner with him and help fund a new company to launch the Fuego.
That gave Brunner someone with expertise in marketing—and valuable connections with kitchen-related retailers. Siow also landed a deal with Vittorino Lazzaro, an Italian-based manufacturer. Brunner, Siow, and Lazzaro all own a 33% stake in Fuego. So far, so good. This virtual company developed the first Fuego grills for less than $1 million and has been manufacturing them in China to hold down costs. The grills have garnered positive buzz, including a win at the 2007 International Design Excellence Awards. Brunner says they have sold 2,000 grills this year, at a starting price of $2,000 (there's a $3,000 version as well), reaching their sales target of $4.5 million. Brunner hopes to build Fuego into a $30 million-a-year business within three years.
Ammunition is developing other businesses, including an iPod accessory called the iPhone Station, which he had designed at Pentagram in partnership with Jibe Audio, a San Francisco audio-products company. The Swiss Army Knife-like device combines speakers, DVD playback, Internet radio, and a high-quality speakerphone. When Brunner left to form Ammunition, he took the project with him.
Once at Ammunition, Brunner and Jibe Audio brought in a new partner, audio engineering firm Menlo Scientific, and a Chinese manufacturer, Innovation Acoustic, to build it. The iPhone Station goes on sale in the first half of 2008. Hot new niche brands can often sell for two or more times revenues. So if the iPhone Station hits Brunner's goal of $10 million in first-year sales, then a consumer-electronics company might be willing to spend about $20 million to purchase it. Given his 50% stake, that would give Brunner a $10 million payday—"a lot more than if I'd taken the $150,000 [design fee] and moved on," he says.
A big hurdle for the iPhone Station will be distribution. Brunner has talked to one potential partner. And his old mates at Apple are considering selling the iPhone Station in company stores when it comes to market.
By Peter Burrows