March 21st, 2005
Looking Back On This Decade
"You been tellin' me you're a genius,
Since you were seventeen,
In all the time I've known you,
I still don't know what you mean.
Are you reelin' in the years,
Stowin' away the time..." - Steely Dan, Reelin' In The Years
Reading the tea leaves in technology markets is a difficult proposition right now. There are many mixed signals and unsettled debates about technology direction. The public markets are flat and for every bullish company, there is another reducing expectations. Where are we headed through 2005 and 2006? It is an important question for us because, like the BC Liberal party, I believe we are headed for a "golden decade" in technology, or at least a somewhat frothy market in the last half of this decade. In 2015 it will be easy to use hindsight and say "Look at the trends in 2005. Any fool could have predicted the rise of the _______ industry and made a fortune." Kind of like in 1995, when we all should have made hay on the Internet.
If you believe that we are headed for better times then you, like me, think that this decade's technology stock chart will look like a giant U, with the bottom of the U around early 2003. Exactly five years ago, I sat in Florida banging out this column 5 days after the peak of the NASDAQ arguing that we were at the top of the market because Book4Golf.com was being touted as a billion dollar company. Well, goody for me, I was right. Nothing like accurately predicting the beginning of a nuclear winter. From the top to the bottom and now heading back up again. Where do we go from here?
I have argued in this space recently about the consumer markets. It seems that consumer electronics is going through a renaissance with the iPod, the multi-function wireless handsets, digital photography and videography and next generation video gaming platforms. In the enterprise, after many boom and bust hype cycles, mobile applications are everywhere, security for IP networks is a real money maker, open source software is making huge inroads and VoIP is finally here. Money is being made by those creating the technologies underlying these booming markets but confusion still abounds about which technologies come next. Where there is confusion, there is opportunity. As soon as everyone sees clearly where technology is headed, it's too late to make money… unless you are Microsoft.
An entrepreneur looking for a really huge opportunity needs to look at enabling technologies and extrapolate their application to markets with the biggest changes. In other words, map the innovation to the market with the greatest need. Timing is everything in this game because developing technology applications takes time and markets move. Worse, competitors can beat you to the prize. Sometimes you guess wrong about the market timing and can be way too early.
Let's look back to recent successes for an example. What was the iPod's real innovation? The technology enabler was the mini hard drive technology allowing massive storage on a small device. Yes, the wheel and the overall design elements were important, but the step function was from flash memory measured in megabytes to storage measured in gigabytes. The ability to cost effectively apply that storage technology to a receptive market was the key to success. What was it about the market that made the timing perfect? The post Kazaa/Napster world of digital download and music sharing was ripe for a combination of PC software for arranging music and a device to take it on the road. A device that could take it ALL on the road. It was too much hassle to continually swap songs on your 128Mb MP3 player. The re-birth of Apple was built on this successful mapping of innovation to market dynamics.
Seems easy in hindsight right?
Let's look at some markets that seem to be headed for growth and/or structural change in the next few years. I'll try and stick to those that have yet to peak because technology development takes time. For example, would you invest in technology for oil and gas exploration today if your technology would be ready in 18 months? Is that a market that will go up in the next two years? Or are we near or at the peak for oil prices and demand for this decade?
Healthcare is one that I'd like to shine a light on. Structurally, this is one of the toughest markets to play in. Applying technology to this market has been difficult due to government regulation and slow adoption by healthcare workers. With increasing pressure to manage costs, to become more efficient at delivering healthcare and to become much better at preventing disease in the first place, this market is ready for its own IT renaissance. A new generation of IT friendly healthcare workers is emerging at the higher levels of decision making. Increased costs of making mistakes and requiring audit trails are driving digital record keeping.
The issue here is that healthcare has been "ready" for IT for a long time and it hasn't broken out. Inroads have been made (look no further than the success of ALI Technologies here in our own backyard), but the real penetration of healthcare is yet to come. Advances in technology and innovation need to be applied here. Perhaps the software world's focus on interoperability and standards (Web services, XML) will be the catalyst for applications that healthcare can adopt cost-effectively (lower integration costs are a must for this industry). Maybe secure mobile/wireless data applications are another innovation that healthcare will adopt rapidly.
In the next decade, the healthcare market will be one that we all look back at and say it should have been obvious that there was money to be made there.
Let's flip the mapping thing around and look at emerging innovations and see what markets might be ripe for applications. Bluetooth has had its day in the hype machine as a data cable replacement technology. It has spawned only one serious application, the wireless cellular headset that makes folks look like they are on the set of Star Trek. Its cousin, Zigbee, is full of promise. Using far less power but with similar range, Zigbee looks like it can start to deliver where Bluetooth couldn't… less obvious market opportunities. Where does the low power, wireless data networking protocol fit? It has been designed more for signalling and control or in sensor networks. Perhaps the industrial market has application or construction markets for new homes or developing countries. What about wireless meter reading? A local company, Tantalus, has a solution for that market already… should they adopt Zigbee? Will it give them an iPod like advantage in the market?
RFID (radio frequency identification) has been around the hype cycle already. It, with Zigbee, might be an enabling technology for a variety of markets. Asset tracking is the obvious one, but where else? Is the retail goods sector ready for RFID enabling better inventory control and faster checkout for consumers? Can it be tied to digital handset technologies for truly enabling m-commerce? The retail market has begun to embrace RFID in the back office (warehousing and shipping) but will Wal-Mart move it to the consumer? I believe the retail market will see huge IT changes in the next few years and it may be driven by the innovations described here. Convenience for the consumer and loyalty to the retailer are the drivers for adoption of these types of technologies.
Getting back to markets for a minute, how about the telecom market, biggest buyers of technology of any market on the planet? Breaking it down into wireless and wireline spending, the carriers are clearly favouring the wireless space right now. Who wouldn't? US$160B in revenue in the US alone up 10% from 2003, growing to US$212B by 2008. The carriers are busy upgrading their networks for new services like photo sharing, TV out and other data applications. Like oil & gas, is this a market that is peaking? What new innovations are out there to change the economics or demand in the wireless space two years from now? If you were really contrarian and looking ahead, perhaps you would look at wireline.
In a recent conversation with a very prominent Silicon Valley VC, backer of companies like Juniper and Netscreen, I was told that he would rather "stick a fork in his eye" than invest in the carrier wireline market right now. Hmmmm. Perhaps we are a little early there as this very sick value chain gets off its feet. Currently, makers of semiconductor related components are averaging 50% gross margins while makers of wireline optical components are averaging 18% gross margins. Those are the companies actually selling stuff in this market. Many aren't and have headed for the hills of military or industrial markets.
Yet, telecom wireline gear (and software) is still a massive annual market. The same size as wireless in the US. If we stand at 2015 and look back, will we see the right time to start applying innovation to this market was now? Here's why I think so: All of the wireless data being generated, the increasing VoIP traffic, the increasing broadband access penetration, the interactive gaming market… it all has to traverse wires in the long haul and metro area markets. As cable and telco companies start to duke it out in the vaunted "triple play" of voice, video and data, the need for groomed, secure, reliable bandwidth will increase over today. And don't talk to me about the early decade overbuild and dark fiber… it still costs money and needs gear to light it. Colour me a contrarian because this market is screaming for intelligently applied innovation over the next few years.
The truth is that many of us are not smart enough to dream up the right innovation for the right market and then have the wherewithal to assemble a team and get financing. Often the opportunities for either innovation or market opportunity fall in our lap somehow and we have to assess whether the intersection of market and innovation makes sense and is big enough. As VCs we do that every day.
I strongly believe that the next few years will be the ones in which we make hay on this technology business cycle. Not as big as the late 90's, but big enough for me.
What Do You Think? Talk
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