Its the P&L, stupid!

I hope that nobody gets offended by this blog! If they do I apologise in advance!

I picked this tweet up which was written by a very respected VC partner and recommended by another very respected VC partner.

I thought - great, I will get some insight from some people who have been in this business longer than me with great track record. What you will find if you read the article is a very basic look at the elements that make up a company's profit & loss account.

I, of course, accept that this is a very important part of any business. The surprising part about the article was the implied assumption that the readers are not very well versed in the various parts of the P&L.

There has been much debate recently about the VC industry and the its business model. I think that also what needs to be debated is the type of mind-set that VC's have created amongst management of the companies that they back.

At Goldrock, we have recently seen a number of companies that have made the initial sales breakthrough reaching several million $'s in sales. However in too many cases this has been at the expense of too much equity capital that has been invested over the previous years, leaving the company in what I call "cap-table trap"!

If managers are used to going back to their VC "sugar daddy" every year for more equity money then they have little or no incentive to worry about basic things like receivables and payables (for the un-initiated, the money a company is owed or owes its trading partners).

In the long term all of us on the investing side need to pay attention to the capital efficiency of our investing models, whether it is at the sharp end of the VC world or the less dramatic world of growth investing or private equity. If we do not, our LP's will not find the justification for supporting this type of investing.

The debate on the VC/PE model must continues, but must also drive everyone on the gravy train to be honest about the way they are achieving returns and the true risks taken in order to make them.

10 years ago today...

Thanks to Richard Holway who picked up on the fact that today is the 10th anniversary of the UK tech market peak, and that NASDAQ will follow shortly afterwards! Please see his article to see the last ten years of tech stock market performance in perspective - "10 Years Ago Today...."

Fragmenting the Mobile Device App Store Concept

This was a major theme throughout the event. The iPhone app store is viewed as the runaway leader in application downloads and sales. Frankly, I believe it is a definition issue, since more than 70% of paid applications are games. If that is true, than the operators have historically had a decent business prior to the iPhone. But off-deck activities, iPhone kills.

Android expectations

Operators view the Android as a real opportunity for them to get in the game of off-deck app stores. The rapid growth thus far of Android and the clear expectations of further dominance have the operators scrambling to put together an android offering for subscribers to try and get a cut out of the business. Growth is clear, since devices are being launched with android and more than 20 million will be in the market in 2010 alone. Google still has not created commitments with operators, but I believe they will, since it is either that or expecting users to create new billing relationships directly with Google. That will be a major barrier for paid content. But they are trying to create their own silo – like apple, with a focus on cloud computing (PC / mobile crossing) and trying to create a more PC like experience with android (flash, etc.). This may be their approach – and may mimic the PC market – where all Google content and services are free and the revenue is from advertising. Google just acquired Admob from $750m to manage the mobile ad business for them. The mobile ad market is a challenging concept, and they know it. So it seems they are keeping their options open.

WAC

To battle Apple, the world’s largest mobile operators have joined forces to launch an open international applications platform. The so-called ‘Wholesale Applications Community’ (WAC) will include the following operators: America Movil, AT&T, Bharti Airtel, China Unicom, Deutsche Telekom, KT, mobilkom Austria, MTN Group, NTT Docomo, Orange, Orascom Telecom, Telecom Italia, Telefonica, Telenor, TeliaSonera, SingTel, SK Telecom, Sprint, VimpelCom, WIND, Vodafone, China Mobile, SoftBank and Verizon Wireless. The group serves a combined 3 billion mobile customers across the globe. LG, Samsung and Sony Ericsson pledged support. The idea is to allow app developers to only need to develop for one standard environment, and not require development per device support. In addition, the operators want a cut of the app market and strengthen their brand. Not sure if it is going to work. Frankly, most people I spoke with (including people from operators on the above list) basically laughed at it. Operators generally demand consensus on industry decisions. So to assume 24 operators can all agree on anything is a bit of a joke.

Ericsson

Ericsson, which is the world's largest mobile infrastructure supplier, has launched a white label app store as a service to mobile operators. The company claims it is already in discussions with a number of operators regarding them using the new service, known as ‘eStore.’ eStore was targeted for use on any device, not just a select few and to create rev share deals for the operators and for Ericsson. Important to note, they are NOT part of the WAC initiative, so unclear where they will fit it, or if the Ericsson + WAC + iPhone + android + RIM + Windows + OVI + Samsung +++++ will actually help or hinder the market fragmentation and confusion.

Samsung

Samsung is hedging itself all over. 10 millio android devices for 2010, 5 million Bada devices, they will launch Windows devices at the end of the year, they are supporting the WAC initiative, etc. The only real definitive issue that they have said was that they are no longer launching Symbian devices. This basically means to me that they are concerned about device sales and not content sales. They may very well emerge as the premier smartphone brand with devices addressing all types of users in all types of markets. In addition, they are backing (my theory of) the mobile operators’ interest to create a very fragmented market to minimize the iPhone control over the market.

Nokia OVI (sucks)

There big announcement – they launched OVI maps. There biggest download category is personalization themes. As my daughter would say, “that is sooooooooo 2002!” They are a few years behind the industry. OVI will also serve the new MeeGo OS, but OVI is thus far a dismal failure. Nokia is still the largest and best feature phone company in the world, but they are clearly lagging in the smartphone industry, which is the main driver to data services. (I saw many Europeans with either an iPhone or Blackberry (or both!) and a Nokia for talking – 3 devices J).

Shopping mall approach (Telstra and others)

There was murmuring about operators acting like malls, while OS and device companies will provide the stores within the malls. Only Telstra from Australia ans some Far Eastern operators viewed it as a real option. I believe that it is somewhat compelling, as long as the mall will enable the app developers to have one development requirement, and the mall will prepare the content per store with standards (similar to WAC). The truth is WAC may morph into a mall.

The New View on Mobile Device Operating Systems

Historically, the device design was viewed as the most important element for the consumer. Colors, buttons, curves, screen size, flip, sliders, etc. They then focused much effort on identifying the objective consumer interest. First, they focused on creating small devices, then thin devices – which were much more successful (i.e. the MOTO RAZR and others). This has been the story, until less than 2 years ago.

Today, with the dominance of BlackBerry in business and iPhone in consumer markets, the industry has realized that operating systems are as important, if not more important, than device design; and using ODMs or in-house teams from device companies to develop smartphone OSs is no longer an option.

iPhone Fears

iPhone came onto the scene a year and a half ago. They are now the most sold single device in the market (40m+). I noticed 4 interesting things about the iPhone at the event that brought me to the conclusion that there is a major fear in the industry:

Operator complaints – speaking to a couple of operators and hearing some sessions, there were generally 3 reactions to iPhone:

1) Some operators felt that iPhone was literally stealing from their infrastructure and customers to make a lot of money without paying a toll.

2) Some operators felt that with direct or indirect coercion, the operator had no choice but to offer the iPhone to their subscribers.

3) Some operators already view themselves as a network pipe and view the iPhone as a way to drastically increase data services and to just focus on gaining more data traffic.

Developer complaints – I heard a number of application developers complaining about the iPhone walled garden, no flash, VoIP being blocked, etc – but they are all focusing on the iPhone even though they have a choice. Everyone has to play by Apple’s rules.

Apple didn’t show up. My conclusion here was that Apple views themselves as an industry killer. Really a different industry. And GSM is for the operator centric market. Just like they turned the music industry on its head, they are now turning the mobile data services market on its head. Operators receive about 30% cut from data services on their network; with iPhone, they get zero. Google is trying to do the same, so far no success, and most content downloaded for android is free, since there is no consumer billing relationship with Google. And Google announced they are willing to work with the operators, but not yet.

Everyone is trying to copy / create valid iPhone competition – from 3 directions: (1) devices to look like the iPhone, (2) OS to act like the iPhone, (3) app stores to provide content like the iPhone.

Android Craze

There was a lot of talk, and I believe hope, from the mobile carriers that Android will emerge as the savior. The OS can compete with the intuitiveness of the iPhone. It is also open for developers – has flash, VoIP, multiple device deals, etc. And Google has no billing relationship and is hinting that they will do the data services with operators. Statistics are showing that over the next 12+ months, the only viable competition to the iPhone in the app market is Android. It is growing fast and there is an expectation of about 20m+ more Android devices sold in 2010.

Samsung Bada

Samsung announced a new iPhone OS competition – Bada – that will be on their first Bada device – Wave. Based on the amount of billboards, videos and talking – they have high hopes for this operating system. Samsung also already has their own app market and they will merge the two.

MSFT Windows Mobile 7

With much skepticism, all listened in anticipation about Windows Mobile 7. Surprisingly, it generated much interest from device manufacturers and there are at least 8 companies (Samsung, LG, Sony Ericsson, HTC, HP, Dell, Toshiba and Garmin Asus) that will run windows X-mas 2010. I spoke with a guy that saw the demo at GSM and he told me that it was fantastic…but too bad it wasn’t launched in 2007; and they may have missed the market. From others that I was talking with (most app companies), they felt it will be easier to develop for MSFT than it is today and it will go up against RIM more than iPhone and Android. I tend to agree, as a MSFT user. That Windows can be a great business tool, with seamless Outlook and Office use. Operators as well have signed on: AT&T, Orange, T-Mobile, Telefonica, Sprint Nextel, Vodafone, SFR, Verizon Wireless, Telstra and Telecom Italia. Microsoft said it will work particularly closely with AT&T and Orange.

Nokia & Intel’s MeeGo

Nokia and Intel are to merge their respective Linux initiatives to form a new platform designed for high-end mobile. Known as 'MeeGo,' the platform will combine Nokia’s Maemo and Intel’s Moblin. Nokia said that they expect 20% of their devices to rum MeeGo by 2011.

This begs the question…what about Symbian?

Nokia & Symbian was nowhere to be found

Nokia had no booth. No new devices launched. No news from Symbian. Device companies did not announce any new Symbian devices. Dying quickly jumped to dead. I believe that Symbian will be reserved for the feature phone market, but no longer labeled a smartphone OS. Nokia is still the largest device manufacturer in the world with tons of cash, but they do not seem to be making any real smart moves in the smartphone market.

My conclusion from the OS part of the GSM event is that there is INTENTIONAL massive fragmentation expected, with iPhone to be the largest single device seller. But the fragmentation will cause complexity for services and operators that need to deal with all – for example gaming, advertising, etc. This fragmentation will be intentional, potentially modeling the laptop market. Windows is still over 80% of the market, but apple is the largest single seller of laptops worldwide. The mobile operators may be hoping that the iPhone may be the single most selling smartphone device in the market – but be only about 10-20% - therefore leaving 80%+ of the market needing applications, services, billing, and strong operating systems.

Tough times...but let's put things in perspective

The western world is definitely feeling some economic hard times...and it may very well be here for a while. But I wanted to put things into perspective by using some common English sayings and their respective sources, mainly from about a few hundred years ago (got this from an email forward):

1) In the olden days, the floor was dirt. Only the wealthy had something other than dirt. Hence the saying, "Dirt poor."

2) In the olden days, they used to use urine to tan animal skins, so families used to all pee in a pot and then once a day it was taken and sold to the tannery. If you had to do this to survive you were "Piss Poor"

3) But worse than that were the really poor folk who couldn't even afford to buy a pot. They "didn't have a pot to piss in" and were the lowest of the low.

Is this where our society is headed? Perhaps we all have to live within our means, and then we won't get there - where society used to be in the middle ages. I believe that the main issue is that the developed economies have largely "outsourced" production to emerging economies and have kept "spending" in-house - as the source of most of the economic base. We need to bring back production on developed country's shores. How? Not via government taxation, protectionism and other forms of government control (which is much scarier than the recession), but through individual responsibility. We should all live within our means.

Any ideas?