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Under-fire and unrepentant: American tech VCs turn nasty

Same bubble again, please!

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"You cannot deftly manipulate the control stick if you are suffering from diarrhoea" - [from a previously unpublished manual for Japanese Kamikaze pilots]

You'd think that with the equities markets suffering a slow motion freefall on a scale of the 1929 Wall Street Crash, and with so much "new economy" hype now exposed as huckster hubris, that this would be a time for reassessment and introspection in investment circles.

Not so.

We can confidently, if not happily, predict that the next tech crash of 2010 is going to look remarkably similar to the one we've just endured.

The cream of American Venture Capital - once thought of as the wellspring of the nation's economic well being - isn't just unrepentant, it seems determined to remake the next bubble with the same muddle-headed assumptions as it spun the last one.

On the evidence below, it's adjusted itself to the post-crash world by refusing to acknowledge that the rest of the world exists, which is unsettling. But on the evidence we present, we must now reluctantly conclude that instead of performing some liverish regeneration, co-opting the best ideas from the Pacific and Europe, it's opted instead for a form of defiant isolationism: a definitive a gesture as dyking the Atlantic.

Both exhibits discuss the wireless industry. One is written by a VC, the other is written in the VC's jazz-mag, Red Herring. Wireless is an area which has seen American consumers lag, and miss out on the network benefits that even "third world" countries enjoy, but remember that the US has lagged before - in radio, computers and television - and responded first by assessing the problem, and then rebounding with such coherence and vigor and that the early anxieties are now completely forgotten.

So let's hear the cream of VCs on wireless, shall we?

Before we do, we ought to point out that not all VCs exhibit the same blinding cluelessness, the same wild trolling that wireless VCs claim as their preserve. Capital is a fact of life - at least as long as the Bread of Shame (ie, usury) remains a legitimate exercise. Modern capitalism coincidentally began life at the point when money lending stopped being a pariah activity - and now finance capital is the grease of the economy. It can be deployed wisely, or foolishly, and here you can judge how well it's being invested, right now, on your behalf.

Kids hate phones

Exhibit One is an article (datelined Monday, 2 September - but you can read it today, which shows you how far into the future the author really is!) in Forbes magazine.

After his obligatory conflict of interest disclosure Stewart Alsop (for it is he) gives wireless start-up Danger Inc. the death sign. The Palo Alto, CA based company is licensing a low-cost and very appealing communicator into a market which needs such a kick start. But it's probably going to fail, he reckons. Because it's too expensive. Because teenagers won't pony up the $200 to text message their friends.

As John Paczkowski at the San Jose Mercury pointed out, he's gormlessly underestimate the spending power of teens. A survey of teenage spending power suggests that this is one of the most promising markets at which to point a $200 gossip-enabler.

And I've got news for Stewie. I've been back in Europe for two months, and it's apparent to me that teenagers here would be embarrassed to pay as little as $200 for a cool phone. Alsop only needs to travel across either pond to realize that there's a parallel communications network - a parallel Internet, if you like - based around phones. They're already the world's most popular communications device, despite the complexity of using numerical keypads for the user interface, But that's a leap too far for our intrepid VC, who can't get to the most basic research data in his rush to knock out an opinion.

This is a shame: for instead of trying to nurture this market - a proven winner in Asia and Europe - the bumbler is doing what he can to strangle it before it can do us all some good.

(For historical reasons, draped in shadey Gilder nineties hucksterism, the US cut itself off from the GSM standard that the rest of the world now uses as the radio interface for mobile phones, and deprived itself of the network effects that arise from everyone sharing such a standard. But fixing this isn't difficult: it just needs the carriers to agree on open gateways, and for the regulators to ensure that some real competition can take place in local markets, and the USA can quickly make up lost ground).

Beware geeks bearing phones

Alas, our resident brainiac doesn't seem to get it. He's pointing every which way for culprits instead, and the finger is now pointing at some terrible, international cabal of cellphone manufacturers who stand between him and his investments, such as Handspring.

Alsop's sideswipe particularly intrigued us. Danger is boldly innovating, says Alsop - and here we must quote directly -

"You have to credit Danger for trying something original. That's more than can be said for consumer electronics manufacturers like Sony or Panasonic or handset makers like Nokia or Motorola. None of them take the risks necessary to make such an innovative device."

At this stage, we realized that not only does the venerable VC not have a passport, but he evidently employs a proxy to do his shopping. For sure Japan, then Europe get all the cool new phones first, innovation can be found on American high streets, too in abundance. Danger is innovating - I think it's doing so brilliantly - but who is Alsop kidding when he demonizes the phone giants?

I see no innovation

The phone world recently surpassed the commoditized PC world as the place where manufacturers test new technologies, and where consumer electronics manufactures fling weird and wild ideas at the market. Take, for example, such curious and fascinating devices as this [from Nokia] at or Moto's beautiful V70. They're not my cup of tea, but they're both examples of daring industrial design. There's an iMac every month in this business, but sometimes the "innovation" is hard to spot.

A good example is the disappearing external aerial: an complex engineering challenge. Nokia held an eighteen month lead by creating sleek phones which needed no sticky-out bits, and now all phones have internal aerials. Ericsson, which invested so much of its brand and visual hallmark in having the squarest, fattest external aerials of 'em all, went into a two-year freefall as a result.

Another example is the upcoming organic LCD technology, which uses 40 per cent of the power of today's displays. These are being primed not for the laptop market, but for smartphones, because that's where the manufacturers believe the volumes will lie. It's cheaper to start with smaller displays too, so Dell and other PC OEMs, who desperately need this to extend the battery life of their notebooks, will get this technology last.

But trumping them all, and this is what should sort a wise VC from a time-marker, is the most obvious: smartphones are the first open computer platform for twenty years. Alliances are being struck every day, but there aren't any clear winners as yet, and this should set every red blooded investor's pulse racing.

Alas, Alsop makes a habit of being spectacularly wrong, as often as he can, as spectacularly as possible, it seems. (There's little to differentiate him from the bought-and-paid-for Qualcomm stooge, who pluckily imagines that the San Diego monster can single handedly conquer the world, even though the rest of the world collectively shrugged its shoulders, and headed off down a different path roundabout 1996, the year Alsop joined NEA to give them the benefit of his wisdom.)

If you're not with us...
Alsop was following a lead set by Exhibit Two: this front page lead in Red Herringmagazine. We're too nice to point out - although it's as good a time as any - that this glossy porn mag for budding capitalists has been wrong on every single New Economy prediction it's made in the past five years. Only it wants to get wronger. And how.

Red Herring had already decided the story in advance of gathering evidence, and was determined to depict an international cabal of giants (the MEN is Motorola, Ericsson and Nokia) conspired to send fresh-faced American youth to be slaughtered in some wicked, wicked conspiracy.

(When you want to get populist in Europe, you make emotive arguments for social justice. In America, where social justice doesn't exist, you must appeal on the grounds of opportunity and choice. Even if "choice" means cutting your own arms and legs off in the process. Or as snotty, sneedly Europeans like to point out - there are 200 channels on TV, but there's nothing worth watching).

The Herring didn't quite put it in such emotive terms, but you didn't have to reach far for the subtext. The mag's evidence relies on a couple of facts: that the MEN conspiracy funds cash-strapped carriers, which is true, and which tends to exclude plucky entrepreneur Joe BaseStations from bidding for the lucrative network contracts.

This much is true: the carrier business is open to few - a smaller number than the OPEC cartel - and new entrants don't get a look in. But this is a mature market. If you're going to sign on the dotted line with a Sprint, you're going to have to prove this stuff works and that you can deliver. We've moved on, and no one without a portfolio of patents several thousand deep can enter this market. For that, you have to blame intellectual property laws, or the demon of your choice. It doesn't matter, because we've moved on. Now if you give any of these scheming cabal members a break, you'll realize that each is simply trying to grow the market in a way that benefits them all. Telcos like to think like that - or at least, the enlightened ones do.

The GSM standard is an open book - the CDMA standard is a royalty cash cow for Qualcomm. Take your pick.

The second piece of evidence flung at "MEN" is that it excludes small start-ups from industry consortia. OpenWave's CEO is cited as complaining that the company had been excluded from the "Global
Village" initiative.

Now we can shoot this one down before it's even spluttered into the bails of hay that line the end of the runway. OpenWave is a sound and honest company that knows all about making standards public: it's the result of a merger of two companies, one of which gave us the open(-ish) WAP specification. That WAP failed was no fault of OpenWave.

But the more germane point is that the Global Village initiative is no such open standard: it's a marketing junket designed to let employees of wireless vendors clock up some valuable air miles, and is as about as pivotal to the future of wireless as my left foot is to England's chances in the 2006 World Cup. I'm surprised that the CEO of OpenWave lent his name to this cynical hatchet job. We know relationships in this business can be extremely - how shall we say? - delicate, and this can't have been helpful.

Nonetheless, instead of beseeching US carriers to greater interoperability, or US manufacturers to join emerging standards and then execute on them better than anyone else, Red Herring chose to raise the isolationist flag, gather up a few bleats, and then wrap the whole lot in a 90 point Helvetica headline. It's the glossiest whinge in wireless history, and it's quite reprehensible.

Missed opportunities

A brief digression. A company I'd never heard of until a month ago, based in Finland called Hantro (featured in Time's top 50 start-ups) has produced a video recorder for the Series 60. (This is the UI that Nokia has licensed to Panasonic, Siemens and Samsung for forthcoming smartphones). With this, I captured an eight second video of MPEG4 (that I could play back on my Mac, with no funny codecs) that was 34kb. Now then: I can't even do JPEGs that small. If you don't believe me, I'll send it to you.

Another start-up here is going to revolutionize casual sex - I can't tell you more, because I'm sworn to secrecy - but you can probably guess if I list the following buzzwords: Bluetooth, vibrating phone, and "location based services".

Now why isn't American enjoying such an investment opportunity? Because party-poopers such as the wise Alsop and opinion formers such as Red Herring prefer to isolate themselves from the important technology currents. Heck, Alsop can't even be bothered to look up basic market research.

A novelist I know toured Thai prisons and shared with me how the executions are performed: the guards get drunk, sharing a gallows humor, hold up a white sheet in front of the condemned, and then shoot indiscriminately into the sheet. American wireless investment seems to be following the same cowardly practice.

However, we all pay. These men are in charge of your pensions. In fact, occupational pensions have fallen $30 per month as a result of the equities crash in Europe, and that's a consequence of fund managers listening to the wisdom of prophets such as All-slop. Unfortunately the same mantras continue, and the only new notes that both our Exhibits introduced are ones of paranoia, isolationism and self-pity.

I know America deserves better, but who will save its capitalism from such buffoons? ®

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