July 22nd, 2005
Time To Hit A Driver
"I'm gonna raise a fuss,
I'm gonna raise a holler
About a workin' all summer
Just to try to earn a dollar" - Eddie Cochran, Summertime Blues
As we ease through summer, wishing our vacation could happen again or longing for it to start, I have been pondering areas in technology that will drive growth in the next few years. Where are the drivers, the demand-driven stimulators of growth, the "tipping-point" boosts to new technology markets, or new cycles in old markets? We can talk until the cows come home about new economic powerhouses in emerging markets like India and China and macroeconomic forces in mature markets. But what are these people buying? Or what are they doing that will make entrepreneurs supply enabling technologies?
Starting with the easier and more obvious drivers, let's look at the coming releases of technology that will spurn demand. First and most obvious, there is Vista, the newly re-named operating system upgrade from Microsoft, due in early 2006. No longer code named after a certain après-ski bar in Whistler, this first major upgrade since Windows XP will drive a lot of software innovation to upgrade or introduce features that Vista will enable. But will the adoption curve be as steep as Windows 95 or XP? Consider that there were no options in 2001 when XP hit the shelves. We all took our time upgrading even when there was no battle-tested desktop Linux alternative and Apple was a footnote. In fact, how many of you ran out and bought the XP upgrade or simply waited for a new PC/laptop which already had it installed? With OSX and Linux improving and gaining share on XP, will Vista be compelling enough? One thing is for sure: any of you running the old form of Windows (98, me) will be abandoned.
Vista will be an important driver as competition responds, hackers find problems and people buying new PCs get it installed. The biggest response will be from the Java community who are getting boxed in by Vista and all of the things crafty Microsoft learned from its legal battles around bundling Explorer etc. How will Oracle, IBM, BEA and Sun respond? They are not like Apple, running everything on their own little island. They need to interoperate and comply with the dominant desktop OS. Another interesting part of this technology driver is the web browser battle. Firefox came along and put a dent in Vista's plans to abandon the browser as a separate piece of software. Now they have to make Explorer 7.0 to help keep pace with innovations in Firefox, which now has nearly 10% of the browser market from zero a year ago.
A related driver to the Vista introduction is the adoption of PCs/laptops and connected devices. How will these things change in the next while? IDC just reported that PC growth jumped ahead of expectations in the second quarter worldwide. A 16.6% jump in sales YTY blasted through 12% estimates. Maybe Microsoft timed Vista right because the computer adoption is largely driven by upgrades, laptops in the enterprise and second and third computers (very cheap) for the home. The long awaited upgrade cycle, last noted in the Y2K run-up appears to be happening. This drives security software, application software, PC games and other upgrades in software. Just so you know, that was 45 million PCs/laptops sold in one quarter around the world.
The most dramatic driver of technology in the first half of our decade was the wireless device that transmitted data, not just voice. Games, ringtones, text messaging, picture messaging, e-mail and now applications connected to the enterprise have made the tiny cellphone the hottest consumer and business device (in the case of smartphones) ever. So now we expect to sell 750M cellphones in 2005, up from 713M in 2004 according to iSuppli. The growth is slowing as people now have more than one cellphone in many cases and the freedom to switch carriers with your existing phone slows the turnover of the devices. The driver for the next little while in wireless will be interconnectivity with the rest of your life and gadgets. So let me digress and confuse you by adding another big near term driver, VoIP, which largely turned around a moribund telecom equipment sector that had seen 5 straight years of declining sales before 2005 (worldwide service provider capex was $207B in 2004 and will be $215B in 2005 according to In-Stat). Next-generation voice equipment is the fastest growing sector of capex.
Back to the interconnectivity argument. We are seeing the effects of Skype, Vonage and other VoIP providers on long-distance calling. We have larger wireless bills (the industry term is ARPU (average revenue per user) thanks to all of the extra data features we consume. We have Wi-Fi and soon Wi-Max showering us with faster connectivity that the "3G" networks cannot provide, but are still useful for e-mail etc. While this trend is not a shocker, and many a start-up has fallen on the sword trying to be first to take advantage of all of this IP traffic on different networks and frequencies, the time has come for truly connected networks. It ain't here yet. Consider how I can be productive at an airport. I can find a Wi-fi hotspot and try to log in, assuming it is not congested, my card actually is compatible or the software is not having problems. My phone rings and it is someone that sent me an e-mail and wants my reaction. I am talking to them when my Blackberry buzzes with the message, but the screen is too small to make out the Word attachment with any clarity. I finally connect to the hotspot after 10 minutes of wasted time just in time to have my brother call me on my Skype phone. As I struggle to get my Bluetooth headset to recognize my laptop and not my cell phone to talk to my brother, the instant message from my wife pops up saying she hopes I have a nice flight, but could I send the picture from my cell phone of the antique we saw yesterday so she can shop for it on-line.
You getting the demand for interconnectivity yet? I am a tech guy and I am struggling with all of this. The "aware" devices and software that intelligently routes calls and messages will drive incredible utility in our world and should spur demand for more hardware devices and software that manages this new world. This goes for the office, the airport or at your home, where the consumer entertainment world is just catching on.
Which brings me to the entertainment world that our technology region here is so in tune with… The exploding driver here is the new Xbox and Playstation consoles coming to market in the next 12 months. The aforementioned increase in PCs, especially in the home, will also drive video game and related software sales sky high. While the latest generation of consoles does a great job on the gaming side, their internet connectivity was spotty and expensive and the idea of using them as a home gateway was a joke. The new consoles are powerful devices that can connect out to the Net and connect in on your wireless network. Combine that with set-top boxes bringing in your digital satellite or cable and having storage and interconnectivity capabilities and you can see the home entertainment world ripe for software and devices that co-operate easily. I have a great first generation device that wirelessly connects any stereo or boom box in my house to my iTunes via my Wi-fi connection.
I have talked before at length about this new age of consumer devices, spurned by the cellphone and the iPod. The market penetration of these, the video game consoles and the digitization of all of our entertainment means that growth can continue in these markets for the foreseeable future as smart entrepreneurs figure out how to leverage and… wait for it… interconnect these worlds.
Finally, I wanted to talk about drivers on the web. I could talk about the sea change that web services is enabling, the rise of the RSS feeds, blogs and instant messaging, which are all key drivers of gowth. But I just wanted to talk about Google. Google as a driver. Now, it is a mere $84B company compared to Microsoft at $268B (but bigger than Oracle at $77B). But these guys are smart. And they are not going to be "just a search engine" for much longer. Sure, they have the mapping, image, video and other neat related search stuff. Where they become a driver is through productization. Google is actively making software (gMail, for instance) that will encroach upon some of Microsoft and other application providers domain. They are not shackled by old technology and can only embrace and further the art of software via the Internet. They set up shop in Kirkland, WA and aimed their recruitment advertising at Redmond, WA only. They are in a legal fight with Microsoft over hiring away senior executives. As a corporation, they are not "evil" yet and can leverage that world-wide as an antidote to Microsoft hegemony.
Google's juggernaut will drive competitors and cooperators to follow their lead. Their brand will continue to strengthen as they extend it beyond search. They will, in a nutshell, help drive growth on the web in the next few years through their innovation.
As you relax on your vacation and contemplate what is coming and how to take advantage, concentrate on the drivers and latch on where you can. As you probably guessed, I am taking some time myself so Something Ventured will also be on vacation for a while.
From Last Time –
Thanks for the well written article which is helping me digest several conflicting problems.
What is your opinion on the path of Public Venture Capital taken by companies such as RailPower? It avoids the preference given to later stage funders (which might occur if the process was poorly managed) while allowing the first "angel" round a 10X on their investment. It also allowed a RailPower to raise about $75 million without significant commercial revenue and they now can choose between selling out such as a CREO or continuing to grow the opportunity.
The Golden Rule takes a back seat to the Market Rule.
I agree with your article and am working on a hypothesis that angel investing for companies such as Industrial technology is best done in a public venture capital model.
Keep up the thought provoking articles.
What Do You Think? Talk
Back To Brent Holliday
There is no panacea in fund-raising, but you raise another path that I failed to spend any time on. While it is very true that public trading offers higher valuations than private institutions or angels, the biggest issue with being public is… being public. If you stumble, everyone knows. If you fall out favour, your liquidity stinks. And you have to spend a lot of time doing the paperwork that, if anything, is getting more demanding in a SarbOx world.
For every RailPower that made their angels 10x, I would guess that there are 8-10 companies that made their angels zero or very little, about the same rate of success as private companies. It would be an interesting study to see whether this is true. At the end of the day, public or private, the company has to execute and find success to get its investors money.
Thanks for pointing out what I missed and good luck with the public model.
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