"It's true. It's a problem," Ayah Bdeir admitted to me in front of her very crowded littleBits fair booth. "It's not really the price, it's the margins. There is not much profit for retailers."

Bdeir, an MIT grad who has presented about the inner workings of the maker movement at New York University, CERN, TED and many others, explained that she -- and most small, smart-product startups -- are caught in a brutal global supply chain bind where the economies demanded by our race-to-the-bottom retail infrastructure have little room for the custom, small-lot orders her company places.

"We produce basically at the one- to 10,000-product level, and retailers need us to be at the 100,000- or million-product level," she said. "I feel I can get littleBits to that point. But I wanted to make sure my product was dead-on perfect before we made that jump. It's something we are going to have to solve. But retail is going to have to wait for us."

Bdeir however, was adamant that both her company and companies such as Apple ( AAPL) have a solid track record for getting people to pay for quality. She estimates that roughly 65% of the kits she will sell this year will be littleBits' most expensive, at $199.

"That tells me there is more price elasticity in products than people want to admit," she said. "People don't want crap for their kids."

Retails still needed for scale
Before Web-intoxicated investors dismiss Frawley's and Bdeir's perspective as unique to toys, he warned that some of the smart-product industry's smartest people confirm that a deep and bitter battle looms between smart-product makers and the people who will sell them.

"I think all startups need to work out their details online," said Haytham Elhaway, executive director of the Zahn Center for Entrepreneurship, one of New York City's rapidly expanding hardware incubators, located at City College of New York in upper Manhattan. Elhaway explained that Web or no Web, retail is still critical for getting the large orders needed to create a truly low-cost product.

"If you want to scale you have to go through retail," he said. "And there are big challenges there" -- which, by the way, is exactly what Frawley has been saying all along.

"If you can only make a product for a wholesale price that is the same as your retail price," he said. "Who do you expect to do business with you?"
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

If you liked this article you might like

ReFactory Brings World-Class Electronics Manufacturing to Gowanus Brooklyn

#DigitalSkeptic: Media Stocks Are Nothing but Bad News

#DigitalSkeptic: Forget Web Video, 'Dear Abby' Kills the New-Media Star

#DigitalSkeptic: Human DJs Find Their Place Deep in Age of iTunes

#DigitalSkeptic: Collapsing Global Sales Drive Digital Music Confusion