Is it hard to get into the hardware business?

In my head, I see the entry to the hardware business very difficult due to all the patents. Is this true or is it just me?

Say I want to create a simple mobile phone with touch capabilities. What are obstacles in terms of the laws and patents that I would run into?

No, it's not just you. The barriers to entry in hardware are much higher than in software. Over the last year or so I've been watching the struggles of WakeMate, a Y-Combinator company, trying to build a fairly simple hardware product from scratch. It took a year longer than they expected, and when they finally started shipping the software, they discovered that their power supply vendor had provided them with inferior power supplies that tended to burst into flames. Given that their product was something you take to bed with you, this was a pretty bad start.

That's before you even get to patent issues. The world of mobile phones is positively encrusted in patents. Only the biggest companies can afford to buy access to all the patent portfolios you need to make a mobile phone. That's why you hardly see any new entrants.

You should think about what the differentiating features of your phone would be, and then your best approach would probably be to find an existing handset manufacturer to take it on. Still, as a startup, you'll have some incredible competition and have a very, very steep hill to climb, which is why there are so many web startups and so few hardware startups.

Patents are not really the main issue.

The problem with hardware products is that they require a lot of upfront investment (money) to make, they take time to design and manufacture (so you can't iterate quickly). Combined, these two mean that it's easy to fail big in hardware. Web 2.0 startups don't have that problem.

That being said, the upside of hardware startups is that you stand a good chance of having much less competition, and you can sometimes build amazing products with a mix of hardware and software, that none of your 100% software-only competitors can match.

At the Founder Showcase last Tuesday, one of the investors said very casually that for hardware companies, a seed round means $2M minimum. Now you know.

In addition to the other answers another problem is volume. e.g. You'll forecast ordering 10,000 units but only actually order 1,000. So your suppliers will charge you a lot more per unit.

Say I want to create a simple mobile
phone with touch capabilities. What
are obstacles in terms of the laws and
patents that I would run into?

For a specific answer, I worked in the mobile phone world until a little over a year ago, and still have friends working on phones for Motorola, Nokia, and Google. Yes, there are a lot of patent issues you can trip over, both on the hardware and software side. The smartphone players in particular all have large patent portfolios and regularly like to duke it out in court; it usually winds up with some sort of cross-licensing truce that falls apart after a few years and then they're back at it again.

So it's not something you want to just waltz into without being prepared. You really need to have some experienced industry people who know where the problem areas are, and also retain a really good intellectual property law firm.

But as others have said, the bigger problem with consumer electronic hardware is the design and manufacturing. It's very expensive and difficult to come up with a design that will meet customer needs and can also be manufactured with good quality at a reasonable cost. For something of the general complexity of a cell phone, you can figure on something in the dollar range of tens-of-millions to get the first one out the door. That's one of the reasons you'll see many cell phone hardware manufacturers like HTC and Samsung shipping nearly-identical phones with, say, Android and Windows Mobile 7.