Sunday, January 31, 2010

Beware thin margins for smart devices

Before you and your partners launch a new company to compete with the iPad, iPhone, Nexus One, Droid, or similar smart  networked devices, be sure you understand the cost structure underlying this marketplace. Margins appear to be slim today and promise to be slimmer tomorrow.

Companies keep these figures secret, very secret, declining thereby to provide a road map for competitors. Thus a small industry has developed, teardowns, whereby specialized firms rip devices apart, analyze their design, identify their components, and calculate how much they cost to manufacture.

Last week The Economist published the parts cost for four well known phones.

Note that the iPhone 3GS with 16MB of memory has a parts cost of $170.07 and an assembly cost of $6.60. Neither ATT nor Apple quotes online a price for the phone without a wireless plan, but while I was writing this post a 3GS with 16MB sold on eBay for $550. ATT sells the same phone for $199, but requires a two-year service contract.

Like all chip-based devices, component prices, particularly memory, tend to fall in accordance with Moore’s Law. Components for the original iPhone cost $218, a full 28% higher than today. Absent competition, falling prices would mean larger margins, but smart phone competition this year should be fierce.

A better target might be the iPad. Until one of the teardown companies acquires and analyses a production model, we will just have to guess at cost. Based on the figures above, the parts cost of current iPhone is about 30 per cent of list price. Assuming the same for the iPad, a $499 model would have a parts cost of $150.

Still want to compete? Do what David Dell did for PCs and discover a dramatically more efficient sales and distribution channel.

Today’s Economist (9/30) calls the new device “The book of Jobs” and predicts great competition from many sources.”Different industries are already converging on this market: mobile-phone makers are launching small laptops, known as netbooks, and computer makers are moving into smart-phones. Newcomers such as Google, which is moving into mobile phones and laptops, and Amazon, with the Kindle, are also entering the fray: Amazon has just announced plans for an iPhone-style ‘app store’ for the Kindle, which will enable it to be more than just an e-reader.”

The soft spot for entrepreneurs: apps and content, where there are already multitudes of competitors, none yet dominant. And if you use a spell checker, add “iPad” to your dictionary.

Thursday, January 28, 2010

Rising "Clouds" Attract Venture Funding

Smart Phones and related devices are clearly a hit within the investment community, as evidenced by the dramatic interest in yesterday’s iPad announcement from Apple. And anything with “Virtual” in its name was a magnet for VC funding last year. That said, can “Cloud Computing” be far behind?

Blogging on the PEHub Forum today, Joanna Glasner discovers "Rising “Clouds” Within The VC Downturn."

“Venture investment may have nosedived last year. But not for startups with the word “cloud” prominently featured in their company description.

“That was one of the findings of a late-afternoon database search hastily orchestrated to come up with something for a blog post. The search unearthed that, in the past 12 months, 39 cloud computing-focused companies got funded, up from 22 in the same period a year ago.

“It’s unclear at this point whether the funding uptick was due to heightened venture interest in cloud computing companies, or due to more companies saying they do cloud computing in the expectation it could help raise more money. Another possibility is that some companies had something to do with actual clouds, although this is unlikely as little venture investment historically has gone to the meteorological sector.

“Other buzzwords that seemed hot in venture circles over the past year did not result in higher funding volumes for companies whose business descriptions included them. For example, 87 companies with “virtual” in their description got funded in the past year, compared to 105 a year ago. And 72 with “analytics” raised capital, down from 89 a year ago.

“However, it’s worth noting this occurred during period in which overall VC investment got hammered even more severely. In 2009, VCs invested a total of $17.68 billion in 2,795 deals, according to the PricewaterhouseCoopers/National Venture Capital Association MoneyTree Report, which uses data from Thomson Reuters. That was way down from 2008, when VCs invested $27.99 billion in 3,985 deals.

“Currently, I’m wondering what the up-and-coming buzzwords will be for 2010. Private shopping clubs seem to be closing a lot of rounds lately. I could also see a resurgence in businesses with “location-based” in their company description.”

Note: I often post excerpts from other blogs, but I very seldom reproduce the post in its entirety. Joanna was so concise and witty here, I couldn’t figure out what to leave behind.  And I agree with her that “location-based” may be among the hot keywords in 2010. Check her blog.

Wednesday, January 20, 2010

Mobile Cloud Computing As A Disruptive Force

“Mobile cloud computing is poised to become a disruptive force in the mobile world,” with the biggest changes occurring at the intersection of mobile computing and cloud computing, reads the invitation to “The First International Workshop on Mobile Cloud Computing & Services: Social Networks and Beyond.”

By coincidence, this notice arrived just after I completed yesterday’s post, IT's Perfect Storm: Where Smart Phones, The Cloud, and Virtualization Meet. Since our views, while not identical, are in harmony, I was most interested in their rationale and in their suggestions for research.

The rationale: “Mobile phone applications demand greater resources and improved interactivity for better user experience. Resources in cloud computing platforms such as Amazon EC2, Microsoft Azure, and Google AppEngine are a natural fit to remedy the lack of local resources in mobile devices. Mobile cloud computing refers to an infrastructure where data storage and data processing happen outside of the mobile device enabling a new class of applications previously not possible, e.g. context-aware mobile social networks.”

Suggested topics for research and paper submissions are:

• Mobile cloud computing programming model
• Mobile social networks: applications and experiences, system design and architecture
• Data services and architectures
• Cloud-assisted energy management of mobile devices
• Mobile device virtualization
• Fairness and isolation of mobile devices in the cloud
• Large scale mobile cloud applications
• Data privacy and security
• High availability and reliability
• Economic considerations in offering mobile cloud computing services
• Distribution of resources and computation between mobile devices and the cloud
• Data mining and machine learning in mobile cloud computing
• Context-aware services and computing

PROGRAM CO-CHAIRS are Richard Han, University of Colorado, and Li Erran Li, Bell Labs.

Tuesday, January 19, 2010

IT's Perfect Storm: Where Smart Phones, The Cloud, and Virtualization Meet

Last month I cited a Morgan Stanley Report on the prospects for "the mobile internet."  Upon reflection, I believe  the Morgan Stanley view misses some of the key forces remaking the IT industry today.   I am now preparing a lecture series on this topic and would appreciate your thoughts.

Proposed Lecture Series: Information Technology’s “Perfect Storm”

Accelerating information technology is having a disruptive influence on our economy, but the underlying forces causing this disruption are yet to be identified and understood by the vast majority of business leaders, government officials, and technologists themselves.

Like the Perfect Storm, three fundamental technologies: smart phones, cloud computing, and virtualization; are changing the face of our society and changing business as we understand it. The greatest effects are most visible at the points where the three intersect and merge. This combination threatens massive restructuring not only in computing and information technology, but in financial markets, entertainment, news, politics, education, societal values, and in the very ways we come to learn and understand things (epistemology).

In a March, 2009 blog post, the iPhone as a Murder Suspect, this author attributed many of the following deaths to the ever evolving smart phone: phone booths, pay phones, the phone on the kitchen wall, landline phones, the home phone number, paper address books, the “ month at a glance” calendar, wristwatches, PDAs. Also threatened are airline boarding passes, paper coupons, TV remote controls, garage door openers, point and shoot cameras, Walkman and MP3 players, and handheld gaming devices

A very recent and extremely visible disruptive effect of this Perfect Storm was its impact on the market for handheld and dashboard mounted GPS devices. Smart phones with location detecting chipsets and large color screens can do everything that dedicated GPS units from Garmin, Magellan, and Tom Tom can do. Smart phones are leading this attack, with the Cloud providing reserve troops. By using the smart phone for directions and display, while accessing continually updated maps and directions from the Cloud, supplemented by traffic reports, weather updates, parking advice, and shopping information, the phone becomes a far superior functional device and its multi-purpose nature provides an insurmountable cost advantage over dedicated GPS devices.

Moreover, the low cost and ease of writing and distributing applications for the smart phone and Cloud encourages vast numbers of entrepreneurs to extend the capabilities of these technologies in yet-undiscovered ways. Google’s Q4 2009 introduction of a free navigation application wiped 16 per cent off the valuation of Garmin and 23 per cent off Tom Tom.

And the story will grow more dramatic. Our three technologies have a long history, but recent advances have brought them to the fore. These pivotal events over the past couple of years have wrought fundamental changes:

Smart Phones: The July, 2008 introduction of the iPhone 3G with its application library made the smart phone a true general purpose computing device. Within 16 months, developers had created over 100,000 apps for the revolutionary App Store, making it the world’s largest applications store. App Store users have downloaded well over three billion apps, clearly making it the world’s most popular applications store. Google just introduced its own smart phone, the Nexus One, in Jan., 2010. A variety of smart-phone like devices of varying sizes and capabilities, sometimes called netbooks or tablets, are being delivered this year.

Cloud Computing: The 2008 publication of “The Big Switch” by Nicholas Carr brought Cloud computing to public attention, Amazon had launched its pioneering service, the Amazon Elastic Cloud, or EC2, in August 2006, primarily to monetize the extra capacity Amazon had purchased to handle peak loads for holidays. Microsoft will introduce a competing service in 1st Quarter 2010. Other major cloud providers include Google and IBM, as well as several smaller companies.

Virtualization: First a bit of history - IBM’s mainframe based VM (Virtual Machine) operating system was the most versatile, responsive, and secure system of its day. First prototyped in 1966, the VM System required both special hardware features and its own software. VM systems developed for microprocessors were far less robust until 2006, when both Intel and AMD delivered chips that support a full virtual machine implementation. Now processors can run unmodified guest operating systems with minimal performance degradation. VMware’s IPO in August, 2007, brought these developments to the attention of the investment and user communities. Virtualization, in the form of Virtual Machines and Virtual Operating Environments, provides the technological foundation for Cloud Computing. It has been successfully demonstrated on smart phones, and provides the likely basis on which future business, government, and social applications will be designed and developed.

Tuesday, January 5, 2010

3,000,000,000 Downloads, App Store Growth Boggles The Mind!

While preparing a proposal for a series of University lectures, over the weekend I looked up some figures for the growth of the Apple App Store. I wanted the numbers to be solid and verifiable; what I came up with was 100,000 Apps leading to 2 billion downloads. This morning, I sent off my proposal to several of my colleagues for review.

This afternoon Apple announced that it is now 3 billion downloads. I’m not hurt by the increase, other than to worry that the industry is changing faster than I can update my presentation.

Last time I talked to my former IBM colleague, Jim Maguire, he was still travelling the world teaching a course on IBM OS/360 Job Control Language that he had first prepared in the 1960s. His comment: “the best thing is it never changes.”

The essence of Apple’s press release is here:

CUPERTINO, California—January 5, 2010—Apple® today announced that more than three billion apps have been downloaded from its revolutionary App Store by iPhone® and iPod touch® users worldwide.

“Three billion applications downloaded in less than 18 months—this is like nothing we’ve ever seen before,” said Steve Jobs, Apple’s CEO. “The revolutionary App Store offers iPhone and iPod touch users an experience unlike anything else available on other mobile devices, and we see no signs of the competition catching up anytime soon.”

iPhone and iPod touch customers in 77 countries worldwide can choose from an incredible range of apps in 20 categories, including games, business, news, sports, health, reference and travel.

Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh. Today, Apple continues to lead the industry in innovation with its award-winning computers, OS X operating system and iLife and professional applications. Apple is also spearheading the digital media revolution with its iPod portable music and video players and iTunes online store, and has entered the mobile phone market with its revolutionary iPhone.

Note:  The first version of this post left out three zeros, claiming downloads in millions, rather than billions.  It is always dangerous to be both the writer and the editor.

Use The Cloud, Conserve Capital;

Many people are asserting that Cloud Computing dramatically reduces the cost of starting a company. On behalf of the many entrepreneurs reading this post, I sincerely hope this prediction is correct, because capital will be tight for at least the next couple of years.

Writing in Xconomy, Michael Greeley describes the depressed state of the venture capital environment here in New England. Michael is a General Partner at Flybridge Capital Partners and Chairman of the New England Venture Capital Association (which has lost 22 per cent of its members in the last two years).

I suspect that Angel investing has also declined. I’ll ask James Geshwiler and Marianne Hudson of the Angel Capital Association if they have any quantitative information for us. The lack of liquidity (see below) continues to be a barrier for Angels.

Here are some excerpts from Greeley’s posting:.

  • The venture industry weathered a swift-yet-painful contraction in 2009, which shows little sign of letting up. In 2008, the U.S. venture capital industry raised nearly $30 billion; although the 2009 data are yet to be compiled, it appears that last year the industry will have raised less than $15 billion—which may be the new annual reality. For entrepreneurs, this contraction will continue to make capital precious and hard to access.

  • New England-based companies raised nearly $3 billion in 2008; my guess is that this number will look closer to $2 billion in 2009. The New England Venture Capital Association, which I currently chair, had 138 dues-paying members two years ago; right now, we have 108 members. Fortunately for New England, more than 20 percent of all venture capital is managed by firms based in Massachusetts.

  • I continue to see great opportunities in the convergence of the IT and life sciences sectors, which New England is uniquely positioned to exploit. There are also wonderful opportunities in cloud computing and with new advertising technologies, but all of this is complicated by the absolute dearth of liquidity.

  • The real economic recovery is still a few years away. All of us are desperate for predictable, sustainable, and meaningful liquidity. Many of our portfolio companies are at a point of maturity, where in more normal times they would either go public or be sold at attractive M&A prices. Average holding periods have extended to more than eight years, which is unprecedented; normally VC’s expect this to be between four and six years. There will be around a dozen venture-backed IPOs in 2009; this would be closer to 100 in more normal years.


Saturday, January 2, 2010

Best New Claim for Google's Nexus One Phone

"This is not just a phone. It is a transporter. Google is being underestimated again. Basically, you use the Google mapping service, click the location you want to go to, face the phone toward you, and, in less than a second you are there."

Undoubtably inspired by Star Trek's Captain Kirk, this was posted as a comment on one of the NY Times blogs by Lyle Vos, NY, NY. I was most amused. Many bloggers think we'll see an Android phone announcement from Google next week, maybe Jan. 5.