Is 2009 the year of mobile computing?

 As I look around post-holiday season, I am seeing more and more regular, non-technical friends and family get connected on their mobile devices.  What does that mean? A great example is that of my father-in-law who got rid of his old Motorola Startac and exchanged it for an iPhone.  Yes, he got an iPhone, and then days later I got a message to get connected to him on Facebook.  Ever since, he has been using the phone to take pictures nonstop, send emails and SMS messages, stay connected to Facebook, and surf the web looking for the latest news or directions. I last wrote about the iPhone in November 2007 when my wife and her friends started getting iPhones.  Clearly that was just the beginning of a longer term trend for mobile devices to get more powerful, easier to use, and more widely deployed into the market.  Since then, we have the new Google phone, a better Palm device, Blackberrys for consumers, and numerous other devices from Samsung and HTC.

So is this the year that mobile computing becomes mainstream and that mobile software/service companies become a household name?  More importantly, will there be any grand slam venture capital opportunities in wireless?  Through various forms I have been involved from an investment perspective in wireless-related companies since 1996 when I made an investment in a company called AirMedia.  It was way ahead of its time in the sense that it had a hardware device that connected to a paging network to deliver email alerts, stock quotes, and breaking news.  From a business model perspective we had it nailed…or so we thought…buy the hardware device at cost and we would make money back by selling a monthly subscription service.  It raised an additional $30mm of venture capital after we invested and subsequently was long on buzz but short on customer adoption.  I learned a lot from that investment.  The first lesson I learned is that "pioneers get arrows in their backs."  In other words, we were way ahead of the market and were bleeding edge.  Wireless was thought of as the next big thing, but we were way too early and also had to get people to adopt a new device-virtually impossible!  Secondly, I learned that you can't invest in a technology in search of a problem to solve.  It was surely cool stuff but no one really cared and in order to get people to care you had to spend lots of money to define not only a new product but also a new category – the wireless Internet connected device.

Here we are 13 years later and I have seen very few successful wireless pure play software/service related companies.  I wonder if 2009 is the year that some wireless startups breakthrough.  Trust me, I am a big believer in being connected anywhere and anytime but at the same time I am skeptical of how these startups plan to make money.  What is different in 2009 versus 1996 is that we do have a user base, we have some awesome devices that are cheap, powerful, and easy to use, and we have all you can eat service plans with unlimited data.  However the same fundamental challenges still remain as it is still difficult for wireless startups to get their products to the market.  You can either go on-deck through the carrier channel and their walled gardens or off-deck through the web where you will need to have an incredibly viral product or spend lots of money on marketing.  You can also reach users through handset manufacturers like the iPhone marketplace or through Nokia (one of my portfolio companies Gizmo5 is also distributed through Nokia) but in these cases you are either still under one company's complete contrl (Apple) or have to spend incredible amounts of time negotiating with a large company like Nokia.

So even with a huge user base of wireless devices and users, the odds are still stacked against pure-play wireless startups.  If anything, I see wireless as just a natural extension of any web-based product or service.  Take Cisco's Webex as an example.  Even though their users have wanted a mobile app for awhile, they just launched an iPhone app that let's users schedule and join Webex conferences from their device.  Why do we need a pure-play wireless conferencing play if the big guys can easily extend their functionality? So while we read about increased wireless usage it is clear to me that either many folks are still using the lowest common denominator on their devices (taking pictures, sending SMS messages, doing a simple web search) or mostly using the large incumbents' technology like Google Maps or GMail or Yahoo on the Go or Microsoft Search or Facebook.  This is a tough market for startups to break into and while we may see some products get strong adoption out of the gate like a flatulance app on the iPhone, this doesn't mean that these are real businesses.The bottom line is that as more apps become delivered over the cloud, the delineation between a desktop play and wireless one diminishes rapidly unless you are a mobile only location-based service.  Wireless is just a technology and 2009 will be a year where wireless and desktop continue to blur as people only care about what web service they use and always expect to get it from any device over any network.

Nokia-an Internet company???

As I have mentioned before, Nokia is one of the few handset manufacturers to get it (See my post from 2/07 on this).  Nokia understands that hardware margins are eroding and like in many technology businesses the value is in the software and monthly service revenue.  In addition, as time goes by, more and more people will be using their phones and data services to get information and communicate with friends.  Therefore it is no surprise that Nokia announced yesterday that it wants to be more like an Internet company and less like a manufacturing company. 

Our new structure is helping  Nokia to be more integrated as we focus more attention on developing new businesses around Internet services. Over time, it will allow us to be faster and more agile in bringing out new products and services, in serving our operator customers better, and in meeting our customers’ needs in different parts of the world.

Our goal is to act less like a traditional manufacturer, and more like an Internet company.

The other piece that Nokia gets is that if they don’t start offering services on their devices, Google, Microsoft, and Yahoo will.  The delicate dance that Nokia is playing is how to fend off the traditional Internet guys while also adding value to its carrier partners.  Despite the fact that Nokia is one of the few companies that sells a significant number of phones direct to the consumer, carriers still matter.  To that end, it will be interesting to see how VOIP plays into this delicate balance.  For more on this, take a look at Michael Robertson’s latest blog post (full disclosure-Dawntreader is an investor in GIzmo5 and I am on the board) on the world’s smallest dual mode wifi phone.  6300iwithball_2 Yes, dual mode wifi means the phone can make VOIP calls over wifi networks.  As MIchael says:

"This is not Nokia’s first wifi phone, but it is significant for several reasons:         

It has a street price of $200-300 (vs $400-900 for previous phones)

    Power utilization has improved so it can do ~3 hrs VoIP calls and ~4 days WLAN standby (historically wifi phones have had awful battery life) It’s Nokia’s first s40 wifi phone (the majority of Nokia’s phones are built with s40 parts so it will be very easy to create many more wifi models)

From my perspective, what is great is that the price point is falling quickly for dual-mode handsets, the battery usage/life is getting better, and manufacturers like Nokia are willing to offer innovative services on them through partners like Gizmo5.  2008 will surely shape up to be an interesting year in the wireless industry.

Wireless and the lowest common denominator

There is a ton of hype on the wireless front especially with the announcement of Android, the Google operating system for mobile phones.  I too am quite excited about the prospects of having applications that are written once on the Google OS that can be ported to any other phone on any other network that also supports the Google OS.  If any of you have developed apps in the wireless world, that is not exactly how it works as even apps built on the Java Micro Edition Platform need to be tweaked for different devices and different networks.  The idea of having phones and web-based apps that are truly easy to use and truly cross platform is a big one but the proof will be in the details.  The impact will be dependent on how many devices on how many networks that are truly open will be in the hands of the consumer.  In the short term, what Android really does is put pressure on the other wireless players like Nokia to respond.  All of this reminds me of an email that Michael Robertson (CEO of portfolio company Sipphone/Gizmo Project) just sent me.  UntitledIt represents the reality and the opportunity for wireless applications – the majority of people today only send SMS messages and a relative minority use their phones for mobile browsing, email, and other applications. Will easier to use phones, faster networks, and better applications change that?  I am sure that it will as users like my wife and her friends who are not the most technically savvy are starting to get iPhones and using it to post pictures to websites and view Youtube videos on the run. However, in the meantime, I would also remember that the lowest common denominator is still SMS so don’t forget that user base when building mobile apps like community based functions, social networking, games, advertising, etc. because that crowd is still dominating the here and now.

The GPhone

As I have said before, Nokia’s biggest competitor in the future may be Google.  If Nokia doesn’t offer value added services and software on its phones, Google, Yahoo, and Microsoft will.  In a world of shrinking margins on handset hardware sales, finding every valuable cent per user per ad or selling services for monthyl revenue is incredibly important.  Where is Motorola in all of this?  Take a look at this article and excerpt from the Wall Street Journal about the pending Google phone:

Now it is drafting specifications for phones that can display all of Google’s mobile applications at their best, and it is developing new software to run on them. The company is conducting much of the development work at a facility in Boston, and is working on a sophisticated new Web browser for cellphones, people familiar with the plans say.

The prize for Google: the potential to broker ads on the mobile phones, complementing the huge ad business it has built online. Google even envisions a phone service one day that is free of monthly subscription charges and supported entirely through ad revenue, people familiar with the matter say.

I’d say Nokia is still in pole position right now – the stock is up 7.7% after it sold 100mm handsets in Q2.

"Though sales grew more slowly in mobile phones (+1 percent), and much faster in multimedia (+42 percent) and enterprise (+94 percent) than we expected, margins were way ahead in each case," he wrote.

Notice the phenomenal growth in the multimedia division – that is where the n-series phones, many with wifi and other computer-like capabilities are situated. This is also the division that will reap the many benfits of their software/Internet services acquisitions like Twango and Gate5.

Learning lessons from Amp'd Mobile

I am not here to pile on the Amp’d Mobile situation, but I find it is always important to learn as much as you can from your mistakes and from other people’s mistakes.  Rafat Ali has a great interview with Peter Adderton, the former CEO of Amp’d Mobile.  Here are a couple of interesting points that Peter says helped to ultimately bring the company down:

— You don’t raise $400 million in 18 months by spending time inside the office. Trying to ambiguously raise that amount of money, while at the same time trying to create something new and different was a challenge that caught up with us in time.
— On the financing, we were learning as we went along. With the amount of cash that we required, it probably made more sense to go with one or two big pockets than a lot of smaller pockets.
— The biggest struggle I had [with the board] was agreement on where the company should go. We had way too many board members and then we had observers at top, and the any partner could dial in, to a point where it became very difficult for the management to manage.

Rather than dive into some of the operational or economic lessons like how a company that raises $400mm can’t get to profitability, I thought I would focus more on the financing side that Peter discussed with Rafat.  In short, some of the lessons learned from Peter include having too many investors and too many board members.  One VC once told me that having a great board did not guarantee success but having a bad board can almost certainly guarantee failure.  Speaking from personal experience, it is pretty easy to see how differences in strategic direction and plans combined with egos can get in the way of real productivity.  The more people you add to the mix and the more complicated and time consuming it can get.  In fact, I remember spending at least 3/4 of my time on one of the weak boards dealing with bickering between other board members instead of spending my time helping management and focusing on the important issues.  The CEO also had to spend just as much time massaging egos and different incentives to keep driving the company forward.  At times, It was close to impossible for the board to come to agreement on a budget, hiring plans, and strategy and ultimately the company missed many opportunities.  I can only imagine what Amp’d board meetings were like when you mix in a number of VCs, hedge funds, and strategics, all of whom invested in different rounds at different prices and with different preferences.  So one of the lessons to be learned is to choose your partners wisely and less is more.  Rather than try to spread out ownership of your business with lots of investors so one or two don’t have too much control, you are better off looking for a couple of investment partners who share the same vision of the business and who you believe will act rational through both good and bad times.  This is where references can help tremendously. 

One other point, every second you spend fundraising is another second you are not running your business.  Companies have to be well prepared and go through a number of meetings to raise $5mm let alone $400mm in 18 months. It is not hard to see how the CEO and management can get distracted and not spend enough time on operational issues when they are constantly raising capital. And of course, the more money you raise, the bigger the exit you need to get investors their 8-10x.  I am not saying this happened in the Amp’d situation, but when capital is abundant and the pressure to create significant returns exist, it can force companies to try to get big fast and try to spend their way to success instead of finding the right mix of organic and inorganic growth.  That is why I have always loved capital efficient business models.

The wireless Internet is heating up

The Wall Street Journal announced another Nokia mobile internet purchase today of a company called Twango which allows users to share photos, video, and media.  According to the WSJ, the Twango service will be integrated into Nokia phones and will start with a free and premium based subscription model.  While this acquisition in and of itself is not mind blowing, the fact that Nokia has made a number of acquisitions over the last 18 months encroaching on possible carrier revenue does make the story more compelling (see an earlier post-Nokia’s Coopetition with Carriers).

Taking a step back and looking at the wireless industry overall, one can continue to hear the buzz about Apple’s entry into the wireless handset market with the iPhone.  And as much as analyts and the like want to pit Apple vs. Nokia and others, I see lots of similarities between both companies.  In fact, the more I look at the world, the more I see Nokia taking a page out of the Apple playbook and vice versa.  Apple, as we all know, has done a tremendous job with its vertical integration strategy – developing new products from start to finish, controlling the design, hardware, and software to create insanely great products which are incredibly powerful yet elegant and simple to use.  That is why the Mac gets the margins it does and why the iPod has been doing so well versus the competitors who have solely focused on one piece of the device ecosystem, software, hardware, etc.  Looking at Nokia, it seems to me that the company could clearly go into a couple of different directions – go the Dell route by providing awesome hardware or going the Apple route and providing a full end-to-end elegant experience for the consumer.  What I mean by that is that Nokia can either just be a dumb handset manufacturer with decreasing margins like Motorola or it can try to figure out how to control and provide a seamless and great user experience from handset to desktop for its customers.  What is at stake are significant margins and dollars. 

Given that Nokia has always had expertise in the hardware side of the world, the fact that the company is increasingly buying software companies for its devices (loudeye, gate5, intellisync, and now twango) and integrating it into the handsets shows that it is bulking up and getting ready for the next battleground, the phone as minicomputer and gateway to the Internet. As you know more people around the world access the web from a mobile device versus a PC or laptop.  The blurring of cell phone and mini computer is only increasing as Apple, RIM, Nokia, and others come out with devices that can do more and more-take/share/view pictures/video, listen to music, surf the interent, make VOIP calls, and watch television.  What is at stake is a bigger opportunity that will bring Apple, Nokia, RIM and others head-to-head with the large Internet players like Google, Yahoo, and Microsoft.  At the end of the day, Nokia is more like Apple than you can imagine as it is starting to take control of its destiny and beginning to offer its own web-based and wireless services directly to the consumer. Like Apple, it is increasingly clear that Nokia wants to provide its consumers with a holistic end-to-end experience delivering everything from the hardware to the operating system to the applications that reside on the phone and desktop.  This is an important shift and one that Motorola does not seem to be getting and consequently one of the many reasons its stock has been floundering.  As mentioned in an earlier post, Nokia has acquired Loudeye for a future music offering, gate5 for turn by turn navigation, intellisync for syncing software and email, and now twango for music, photo, and video sharing. Nokia ships around 350mm handsets every year and it can either let the Internet players GYM seize the opportunity or go after itself.  This is an interesting transformation that will take years but think about how much money Nokia could make if it could extract an extra $0.50 or $1 per month from a customer.  Of course the carriers won’t like that but this is why watching the wireless Internet market is so fun.

Microsoft’s next battleground – wireless

I am sure you have seen the news all over the web and Techmeme about Microsoft’s purchase of TellMe, which is rumored to be around $800mm.  As you can see from this Microsoft press release, the big opportunity is for Microsoft to use the TellMe voice-driven user interface as a key component for mobile handsets:

We’ve made great strides in speech technologies, but have only scratched the surface of what is possible,” said Jeff Raikes, president of the Microsoft Business Division. “The acquisition of Tellme will bolster Microsoft’s existing speech capabilities, bringing both immediate and longer-term value to our customers and partners.”

“Tellme was founded with the idea that anyone should be able to simply say what they want and get it from any device, starting with the phone,” said Mike McCue, co-founder and CEO of Tellme. “Now, with Microsoft, we’ll be able to extend that vision to millions of businesses and consumers around the world.”

I remember when I started in the VC world over 11 years ago, the question we always had to ask ourselves before we made an investment was "what is Microsoft doing or going to do?"  As I reflect on the last decade, I never really did think that as an investor in software and the Internet that the question would become almost irrelevant and would change to "what is Google doing or going to do?"  Given all of the discussion about Microsoft being dead, I must say that while they are still a distant third in the search space, they did make a brilliant move in acquiring TellMe.  While most of the revenue does come from TellMe’s hosted speech applications for customer service, the big value in the long run will be Microsoft’s ability to incorporate TellMe’s mobile search and voice-driven search through the mobile handset.  In other words, it seems that while Microsoft is not conceding to Google in search, that it does recognize that the mobile opportunity is potentially much larger and that this acquisition will clearly give it a big lead in the mobile space.  Think about it – when you leave home, you grab your keys, wallet, and cell phone.  The opportunity to reach and market to this third screen is huge and just in the first inning.

Even Tim Berner’s Lee in this week’s Economist (sorry, password required) highlights the next wave on the Internet being around mobile:

Although he is somewhat sceptical of the hype around Web 2.0, Sir Tim is excited by three other areas of the web’s development: its spread to millions of new users via mobile devices, the growing interest in the technology’s social and political impact and the “semantic” web, in which information is labelled so that it makes sense to machines as well as people. “If you look at the number of internet-capable mobile phones, PDAs and so on, they are rapidly outnumbering the things we think of as computers,” he says. “As the price of these devices falls, large parts of the developing world will get web access. When you have a large mass of new users, you will get many new applications, written by people with other needs.”

The number of internet users reached 1 billion in 2005. But although about 70% of the population now has access to the internet in North America, the figure is just 11% in Asia and less than 4% in Africa. To the jaundiced observer who remembers the disappointment of WAP, the first attempt to bring the internet to mobile phones, Sir Tim’s enthusiasm for mobile-internet access may sound like déjà vu. But he insists that there are crucial differences. “WAP was not based on standard internet protocols, there was no competition for browsers, and operators had a stranglehold on access,” he says.

Maybe with this acquisition and Microsoft’s commitment to mobile, I and other VCs will find ourselves once again asking the question, "what is MIcrosoft doing or going to do?"

As an FYI, there should be more to come on this topic as I will be at the Microsoft VC Summit tomorrow learning more about their plans for the next year.

Nokia’s coopetition with carriers

I noticed today that Nokia released a free mapping program called Smart2Go which can easily be downloaded over the air to cell phones.  In and of itself, I did not find the news terribly interesting as Google Maps is a great app which is also free and there are countless others going after the space.  However what is interesting is that Nokia is offering this service through an acquisition they recently made.  In addition, for users with GPS chips in their phones, Nokia is offering a premium turn-by-turn service which will be paid for on a monthly basis.  In other words, from a business model perspective, Nokia is going directly after the end consumer and encroaching on precious data and subscription revenue of their carrier partners.  Take this thought further and ask yourself why Nokia is offering phones with dual-mode chips (wifi and cellular) and even offering VOIP services?  I wonder where this ends up in the long run but what is clear is that smart handset manufacturers understand that there may be potentially more revenue in the monthly subscription fee than one-time sale of hardware.  We should certainly keep an eye out for Nokia and every new app they launch in the future.  We also need to figure out if they are doing it with partners or doing it themselves either from an internally built application or through an acquisition.  For me, it is pretty clear where Nokia is trying to go.  By the way, combine this new map application with their purchase of Loudeye last summer and you can start to put the pieces in place.  As it says from the press release in August:

Loudeye operates 60 live services in over 20 countries and multiple languages across Europe and South Africa, Australia and New Zealand. Loudeye aggregates rights and content from all the major labels and hundreds of independents and currently offers licensed catalog and complete media for over 1.6 million tracks.

Why would Nokia need Loudeye if it wasn’t planning to offer its own music service direct to consumers.  Once again, for Nokia, recurring monthly revenue from every new cell phone buyer is a wonderful thing.  Everyone knows that margins on hardware are declining quickly, carriers are increasingly looking to Taiwan to private-label handsets to consumer to drive margins down even faster, and that ultimately cell phone manufacturers need to find alternative revenue streams.  The only question is when will this happen, not if.  So going after their wireless carrier partners’ data revenue may be controversial but in the end could be a must have for survival.

One hurdle to a true wireless revolution – ease of use

It is pretty clear that Scott McNealy’s pitch years ago that the "Network is the Computer" is finally coming into fruition with broadband penetration at 50% and wireless data speeds getting faster and faster every year.  Having a network available to you 24/7 makes it easier to keep your data in the cloud and accessible by any device, anytime, and anywhere.  I had an interesting discussion yesterday about what many people call the third screen, your mobile device, and why I believe it is still early in the game.  Sure there are a plethora of startups going after this market with a whole host of new applications including streaming video, blogging, geotagging, social networking, gaming, and advertising services.  But I still believe the one missing piece is that our third screen or our wireless devices still need to be easier to use.  There are only so many early adopters out there and I strongly believe that the big money will be made when cell phone and software companies figure out simpler and easier ways for consumers to access wireless data services.  Only when the so-called "soccer moms" and other more mainstream users are able to discover new applications/services and easily install and access them will we have a true wireless explosion.  This past Christmas I witnessed firsthand the power of wireless killer apps when I sent some MMS photos of my family to my parents and in-laws who were instantly hooked and upgraded their phones and plans to make it easier for them to use the new services.  Of course, they started playing around with their phones and started asking me about other new applications they could use but partly gave up because some of them weren’t exactly intuitive.  Sure, I understand that it is partly a chicken and egg problem as well since pricing is still high for data services and it still isn’t easy to use and there aren’t enough killer apps to make people want to pay.  To that end, it is great to see companies like Alltel make an attempt at solving this problem.  Of course, the devil is in the details, but having a widgetized , personalized home page which any developer can build to is a first great step in making this happen.   Also keep an eye out for Yahoo and others like Netomat (full disclosure- i am on the board) who are both working in different ways to make web-based services as easily accessible on the phone as our computer.

Why wireless apps are tough

As you know, it is no secret to look to Europe and Asia to understand the future of new wireless services.  As I mentioned in the past, having a hit wireless app can be a big play, but the chances of making it happen are far and few between, especially since business success hinges on relationships with the carriers.  Look at what happened in China recently for what a change in mobile carrier policies can do to its partners.  China Mobile recently made some changes in how their customers subscribed to wireless value-added services changing per-message fees to monthly fees and making its partners offer the first month of service for free.  Granted, this was done to make sure that customer satisfaction is improved for its user base, but this one change gave many public wireless service plays a beating in the market.  According to an article in China Daily, several analysts outlined the near-term impact of the changes.

"We believe service providers would likely see significant revenue volatility over the next one to two quarters," JP Morgan analyst Dick Wei wrote in a research note.

"We expect roughly a 10 percent to 20 percent revenue impact across the second quarter of 2006 to the third quarter of 2006."

Piper Jaffray analyst Safa Rashtchy also expected "major impact" on wireless service providers.

"We believe the total impact of these services will be severe and could reduce revenues by 20 percent-30 percent in 2007, with potentially much more near-term impact," Piper Jaffray wrote.

While there is always a tradeoff of how to get your wireless app in front of millions of users with the  revenue share and loss of control to the carrier, I just hope that the wireless walled gardens will crumble to give many of us the freedom and opportunity to use new applications like Google Maps on our devices. Whle this carrier policy shift was meant for the good of the customer, it still shows us how vulnerable a wireless service provider can be to its carrier partner.  As I have seen in other situations, the wireless carriers could have just as easily changed the percentage on the revenue share leaving its partners with less of the pie. The allure of creating a hit wireless app is compelling but reliance on the carriers can make life extremely difficult.  If you go it alone you will have more control but there will still be significant barriers to market your app to potential users, get them to download it on their phone, and finally to actually have it work on their device.  We are still far away from making open access a reality, but when it happens, there will truly be tremendous growth in the use of new wireless services.