|North America 2008
|Mobile revolution and telecom investing
|Dan D. Yang
|General Partner of Dowslake Venture and Founder/CEO
Dan D. Yang is a General Partner of Dowslake Venture and Founder/CEO of Dowslake Microsystems a private investment firm specialized in tech investing such as telecom, bio-tech and new energy. Prior to Dowslake Micro, Ms Yang founded AFC Technologies which was acquired by JDSU in 1999 Ms Yang holds 11 United States patents related to optical networking technology. Dan D. Yang obtained her Ph.D. and M.S. in Optics and Photonics from University Paris-Orsay, France, and has a B.S. in Physics from Nanjing University, China.
The mobile market is changing rapidly, product life cycles are extremely short, and technology is becoming an inexpensive commodity. Disruptive technologies do not emerge every day, and not every company has the skill to make it happen. It takes more than nice boxes and good salesmen to succeed. A strong, well-managed company and a product with truly substantial technological and cost advantages – preferably in a smaller form factor – is needed to displace the competition and sell to the operators.
January 29th, 2007, China Mobile said it is going to effectively ignore the 3G standard for mobile phones and go to 4G by joining LTE (Long Term Evolution) trials already being carried out by Vodafone and Verizon Wireless. By looking at consumer patterns in an emerging country like China, readers can understand why the technology is going slower than the market. In a report released in 2005, Analysis International estimated the following 3G user profile: • Young people between 20 and 28 account for 55.5 per cent, more than half of the total potential users; • Users with college education and below account for 78.4 per cent and university graduates 21.6 per cent. The average academic qualification is far higher than the nationwide average. Students, private owners, and commercial services personnel are potential users; • The potential users have a large capacity for consumption with a monthly telecommunication budget greater than 100 Yuan (US15$); and • Most of the potential users enjoy an affluent lifestyle that emphasizes family and social activities. They actively pursue new experiences and work hard to create the life they want. These percentages represent 150 million subscribers and US$2.25 billion per month in potential revenue in China alone, without including India, Russia, Brazil and other emerging markets. Challenge for telecom investors The rapidly growing number of mobile technology users puts great pressure upon all tech companies from hardware to software and from chip sets to product design. Handset makers must not only support the high bandwidth demand, but also follow the latest fashions since ‘twenty-something’ consumers change their handsets every few months. Mobile equipment vendors must provide compatibility across the generations of standards, combining voice, data and eventually video. Mobile backhaul equipment that connects the cell base stations to the core network must not only supply bandwidth, but also support a variety of interfaces from TDM to Ethernet. Backbone equipment needs to handle constantly increasing, highly dynamic, data traffic, from fixed and mobile lines while remaining highly flexible to handle fast changing traffic patterns. These emerging trends can be easily summarized: product life cycles are becoming extremely short, and the technology – no longer restricted to a small number of elite users – is increasingly becoming an inexpensive commodity due to the great number of users who want the best, but at the lowest price. What does this mean to telecom investors? Start-up challenges After the telecom market burst several years ago, a number of high profile start-ups went broke, despite the hundreds of million dollars invested in some. Gradually, venture capitalists (VCs) and start-up executives learned that the chance of survival is not necessarily proportional to the money they put in. Why? because disruptive technologies do not emerge every day, and not every company has the luck and skill to make it happen. It takes more than some nice boxes and a charismatic, expensive, CEO to sell them to major telcos – that’s yesterday’s dream; you need more than a nice box, today. Today’s start-ups need to carefully identify every market opportunity from two perspectives: 1) You have a disruptive technology that nobody has. Good, but evaluate how this disruptive technology can be used by operators – both short and long term, and if and why operators might change from existing technologies to this new one. As operators do not invest in equipment every day, it can be an uphill battle, so you need a really, really stuffed war-chest. Are you are really another Infinera (breakthrough optical equipment manufacturer) or something else? 2) You have something better than anything similar on the market (lower Capex, lower Opex, etc.) – all very good, but operators will not switch for a 20 per cent saving. Think again, you will compete with established vendors who with recognised brand name; the cost saving is important, but they will not look at you if you cannot save at least 50 per cent, and the incumbent vendor can cut their prices defensively. Are you willing to engage in a price war? You need more than cost savings – you need all the rest, including attentive local service teams, training, access to your network engineering expertise, and knowledge sharing. This does not mean start-ups cannot succeed. Looking at our industry’s few successful examples, here are some models Innovation in material science There are still lots of things to do in photonics. Material science such as applications for liquid crystals and the resulting component technology, is still growing at a very fast pace. Who imagined Verizon could grow their ROADM network from zero to a thousand node installations a year? While networks are moving from static to dynamic, more innovative components are needed to change from today’s bulky optics to tomorrow’s optical chipsets. Photonic integration seems to have demonstrated lowest cost per bit. Can somebody put SFPs (small form-factor pluggable – a compact optical transceiver for communications) together with aMUX/DEMUX (Multiplexer – Demultiplexer) so it does not need much board space for WDM (wave division multiplexing) transport? Will today’s 10G transponders be upgradable to 40G tomorrow? Can ROADMs cost the same as transceivers? All these examples show there is still a lot to do at the components and materials level. Innovation in equipment Innovation as a gradual change of concept rather than a complete break could be easier to sell to established operators. If you can do something significant, significantly better, they are willing to listen. Multi-purpose, multi-service equipment covering several network layers and eases network management is eye-catching, as long as it does not cost more money than single purpose equipment would. Multi-tasking is always interesting. The picture shows an example of multi-purpose equipment. It combines WDM and Layer 2 functions into a small chassis and gives operators transport and service delivery in one package and eliminates boxes from multiple vendors, which have difficulty speaking to one another. Operational excellence Operational excellence is often ignored by VCs. Everybody is looking for the next Cisco, but few recognise Cisco’s operational efficiency as the way it survives against major competitors. When start-ups look for funding, VCs look at their story, their CEO and/or CTO, but the VP of Operations is secondary. This is wrong. Who ensures that R&D results are quickly translated into prototypes and customer demos? Who helps the designer avoid specifying parts that might delay the first shipment by six weeks? Who communicates with customers that won’t read lengthy user manuals? What happens if the contract manufacturer’s board yields are only 50 per cent? If your lead designer has a car accident, will you be able to continue as a company? When I was studying for an executive MBA at Stanford, I was impressed by case studies of companies that have been there for over a hundred years; they have one thing in common – an efficient customer focused corporate culture. Technology changes rapidly – today it’s 4G, tomorrow it’s 100G. One thing that does not change over time is the pursuit of excellence, backed by strong operations as a foundation. The telecom investor’s challenge Today’s market is no longer one where any interesting idea can sell. It is much tougher today and any idea of a quick exit for investors is pure illusion. The average time for a good exit has changed from two to three years in the late 90s to five to eight years today. Major private equity funds and venture capital firms have set up their China or India arms to invest in these places where investments are spent carefully over time – unlike in Silicon Valley where millions have been burnt through in a few months. All investors, if they have a million or a billion, need careful evaluation, hard work, handholding, and patience to earn a good return. Earning a ten times return on every investment is only a dream. The question is how well the companies you invest in listen to market and customers needs, execute and deliver on their plans, and can provide innovative products and solutions that fit today’s mobile revolution.