Bug Labs takes on the gadget giants

The BugBase lets users build their own consumer gadgets.

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LAS VEGAS (FORTUNE Small Business) -- Leave it to a small business to reinvent consumer electronics. Tiny New York City-based Bug Labs is about to come to market with a do-it-yourself modular hardware gadget that lets customers custom create their own electronics.

That's right: Just get yourself a black turtleneck and you can be your own Steve Jobs.

Called Bug, the system is based on a single computer about the size of a double set of playing cards. The BugBase ($299) can support snap-on modules including screens, global positioning units, motion activation systems and more. Prices start at $49 and run to $99 for the first-generation add-on units, which go on sale later this month. These early modules let users create anything from a portable music player to a GPS device to a motion-activated camera. As more modules come online, the number of possible configurations increases.

The Bug platform, which I saw here at the 2008 International Consumer Electronics Show (CES), has a definite Lego-toys vibe. Simply snap the modules together however you like and you can go from camera to media player to nav system and back. As if that's not wild enough, the entire Linux-based platform - design, chipsets, engineering, the works - is open to the public. There are no Qualcomm (QCOM, Fortune 500)-like licenses or fees.

And that's not even the best part. The entire package is wrapped in an online blogging community called BugBlogger.com, where enthusiasts can share hardware tips, talk gadgets and generally revel in Bug bliss.

"We put the diagrams for what we do up on our website where anybody can see them, and then open it up for everybody to do what they want," says Peter Semmelhack, 42, founder of Bug Labs. "Just because I want a motion detector tied to a camera doesn't mean you do. It's the classic open-source model, but for electronics."

Others seem to be catching the Bug bug. The company has solid mid-level backing and decent street cred. Funding is led by Union Square Ventures and Spark Capital. While I was interviewing Semmelhack here, representatives from the music content industry - who requested anonymity - stopped by looking for information. Semmelhack says the company has gotten interest from wireless providers, manufacturers, peripherals makers and several other players in the gadget-o-sphere.

"Anything that gives them a hope they won't get nailed on license fees for hardware attracts their interest," he says.

How Semmelhack - who has no formal training as a hardware engineer - got Bug Labs going is the classic "can't help myself" start-up story. Back in 2006, he was running Antenna Software, a company he also founded. He wanted a GPS he could use with his young family, but none on the market suited him.

Semmelhack enjoyed playing with build-it-yourself electronics kits as a child, and wondered how hard would it be to just build the unit he wanted. Then he read Eric Von Hippel's seminal work, Democratizing Innovation. That sparked the idea of creating an open-source, community-based, snap-together platform that would let everybody create just the gadget they want.

He put up $30,000 of his own money, hired some engineers, and finished a prototype a year ago. That unit was enough to prove the concept, drive the current round of funding and attract the attention of mainstream press like me. (I found Bug Labs the old-fashioned way, by sifting through the mountain of press releases ahead of this year's CES.)

Now, obviously I love this idea - and I admit I am pulling for this digital David to take on the often-Neolithic Goliath that is the consumer electronics industry. But there are major issues to overcome if this Bug is going crawl.

The early unit I with played with briefly here is a semi-translucent plastic that, let's be honest, will not win any design awards. The BugBase is no Apple (AAPL, Fortune 500) iPod. Actually, it's no Lego toy, either. It's that ugly. Of course, it may evolve under the alchemic effects of the open source phenomenon - just look at Firefox for an example of what people can accomplish if they're willing to cooperate on technology.

There are major business issues as well. The sad fact is that the electronics industry is based almost entirely on design knock-offs. Yes, Bug will have a powerful first-mover brand in the marketplace. But really, how can this small player compete when 89-cent gadget modules show up at Wal-Mart (WMT, Fortune 500) from, say, Vietnam?

Finally, there is the issue of performance: It's still unknown whether the modular approach will actually work. Ask yourself: Would you trust the navigation of your family vacation to a snapped-together GPS unit with no sales or support or service?

Obviously, what Semmelhack has done with Bug Labs is one of the major stories to come out of this otherwise slow CES. And I love the fact that a small business caused all the fuss.

But does the DIY, YouTube vibe really have a role in hardware? It will be fascinating to find out.