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Wireless is Alive and Well in…Southern California

Wireless is Alive and Well in…Southern California

Just as northern California drew the greatest technical talent in the semiconductor industry to Silicon Valley, southern California has become a hotbed for the telecommunications industry in San Diego. This mecca for engineers, software developers, and technical managers has also become the unofficial headquarters for the venture capital industry. Now that the hype has died down, it's time to look at the next phase of wireless ideas being generated there.

Fortunately for us, we're living in an era where technological progress can be measured in "Internet Time" - the somewhat cloudy concept that innovation, profitability, return on investment, supply chain, market creation, customer acquisition, and most every element of business can and will move forward at a lightning-fast pace due to the increasing connectedness of it all.

We as observers and participants are free to summarize any e-business, i-business, or m-business before us, as if it was a player in a fully developed industry with quantifiable contributions to our daily lives. Many are. Marketing hype and true technological progress, which may one day be seen in some small historical context, are nowadays rarely separated. It seems that every start-up touts itself as a leader in whatever new market segment it can conjure up for promotional purposes.

Amazingly, some even assume these positions of leadership before their first product is released. Bar charts, which form steep mountains of projected revenue, rise to such heights that even a 1% market share would seem to justify a multibillion-dollar valuation just a few years out. So many contemporary start-ups claim revolution that they must be intoxicated by a belief that they're contributing to the most important developments in the history of human communication. They "drink their own Kool-Aid," in the words of an industry parable recalling the People's Temple cult of Jim Jones and their 1978 mass suicide. In fact, some of the very communications technology companies that lifted the NASDAQ into the thin air of irrational exuberance last year are merely the evolutionary markers of a networked communications industry that dates back to early electronic data networks, most notably, the telegraph.

Perhaps it's the concept of Internet Time that also gives industry pundits and prognosticators the certification necessary to preach their ongoing versions of Revisionist Internet History. In the ultimate sense of irony, their far-out foresights and accounts of yesterday's category-defining business concepts will probably reside on some long-forgotten server, destined to resurface on search engines for years to come.

Billion-Dollar Markets Gone Dry
Excuse me professor, but didn't you once say that consumers would gravitate towards online pet supply purchases? Wasn't that going to be a billion-dollar market? And wasn't this going to be the new golden age of advertising? What happened? If things really move faster in Internet Time, then wouldn't it stand to reason that Internet-based start-ups would be out of the red in record time? If hindsight is 20/20, then the Internet allows us to see the carnage in the rearview mirror with an increased level of magnification.

Internet Time is attached to many discussions of communications technology, and the term itself seems to have acquired an almost parasitic nature. No sooner does it latch on, than it begins to sap the momentum from its host. You hear it used in a positive context when matters of efficiency are mentioned. Then there are references where competitors are overtaken, and perceived market-entry windows have closed. Three years ago, a company could get from first round to IPO before the bloodletting had even begun, but those days are gone.

Strangely enough, the concept of time is increasingly referenced on the very Web sites that once touted revolutionary progress, when the companies go under. Typically the accompanying text on these tombstone pages serves to thank the workers who toiled on in pursuit of a great leap into the "next generation" and the investors who believed in the plan. Summing up the closure of the organization and the loss of all jobs is usually an overstated admission that the product or service was ahead of its time. This recent dot-com Darwinism will taint not just Internet companies, but all companies in communications technology fields for the near term.

The emergence of $2 billion in venture funds, and the rush to participate in the mythical New Economy, may have obscured the view of what is truly groundbreaking among the me-too companies that have been created. The Newton, in all of its celebrated failures, was clearly ahead of its time. Just look at the PDA market today. But because of the sheer numbers of wireless and Internet mobility companies that attracted funding over the last year or so, most will not even live to create a memorable legacy of failure. They'll just be surprised to learn that their next round of funding will never materialize. Applications in search of infrastructure are bound to have a tough time of it. Don't believe the hype. Your own or otherwise.

Internet Time makes it so much easier to dismiss what has come before, and quickly fast-forward into new generations of overstatement. So maybe you shouldn't put all your eggs in the 3G basket quite yet. Since the long-promised 3G networks seem destined to experience delayed deployments, the marketeers are busy repositioning. You can see European "winners" of recent wireless license auctions hemorrhaging from their overzealous bids. But we have 2.5G and 2.75G to keep us occupied in the meantime, and all matter of newly dreamed up micromarkets.

If you launch a company to address the 2.877G market, you're sure to be the first mover and assume the early market leadership position. You see, even business buzzwords have a limited shelf life before they have to be renamed, recycled, and re-coined. Still, there's no shortage of revolutionary and "disruptive" technologies seeking to be funded. And these first movers are ready to exploit the perceived demand for next-generation products and services.

Has anyone trademarked mPets yet? Imagine a service where you can walk your dog and buy made-to-order fresh canine delicacies from your handset (or PDA) that will be delivered to your exact location minutes later. The system would undoubtedly be based on a series of proprietary and patent-pending technologies. Talk about location-based services! The market is going to be huge, and my dog has the charts to prove it.

A New Wireless Era Is Emerging
So where to look for truly promising companies? In reporting that first-quarter 2001 venture capital investment activity had declined to 1999 levels, Venture Economics VP Jesse Reyes notes that, "While it is true that VCs are no longer backing every Internet idea out there, they are continuing to invest in the future the Internet promises."

Since it's now high time to move the "Path to Profitability" slide to the front of your PowerPoint presentation, I look to San Diego to provide the clearest glimpse of the brave new world of wireless. There's a rumbling in southern California that's unmatched elsewhere and it isn't an earthquake this time. It's a seismic shift of an entirely different nature, and it may elevate the greater San Diego region to a technology plateau that sits a little higher than San Jose and the rest of Silicon Valley - well, at least as far as wireless telecommunications is concerned.

I think that three San Diego area start-ups - Littlefeet, M7 Networks, and Zucotto Wireless - are emblematic of the dynamic new wireless era. Even after all of the adjectives are stripped away, these companies represent distinct departures from the status quo.

Noting the strengths of the greater San Diego region today is like charting the factors that led to the rise of Silicon Valley nearly 65 years ago. The symbiotic relationships among the university, research, and investment communities, the burgeoning pools of technical talent, and the rising degrees of entrepreneurial risk are each factors in the equation.

Silicon Valley, which stretches north from San Jose and encompasses the San Francisco Bay area, has been a garden of innovation that gave life to the semiconductor, computer hardware, software, networking, and content-delivery industries. While technology has developed and been cultivated in regional pockets throughout the world, these industries, in particular, can trace their lineage to a common ancestry of companies.

The flashpoints of Silicon Valley growth might be traced to concepts that were nurtured there by Frederick Tiernan and William Shockley. History tells us that Tiernan was a professor at Stanford University in 1937 when he loaned about $500 to two of his graduate students: William Hewlett and David Packard. They were trying to commercialize an audio oscillator, which had been a master's thesis project of Hewlett's. Tiernan, who would later serve as provost at Stanford, subsequently arranged for a bank loan to aid his protégés as they worked in their now-famous garage. Essentially, he provided the seed capital and managerial mentoring for what would become the Hewlett-Packard Corporation, and he continued to encourage future entrepreneurial achievements at the school for decades to come.

Shockley, on the other hand, is credited with the development of the transistor and is seen as the father of the modern semiconductor industry. His company, Shockley Semiconductor, quickly attracted some of the best and brightest technical talent available at the time. In the mid-'50s, he was the victim of a rebellion by eight of his key employees who resigned to start their own company.

The group that left Shockley included future Intel founders Gordon Moore and Robert Noyce, and collectively came to be known as the "Traitorous Eight" in Valley mythology. By starting a new venture, Fairchild Semiconductor, they touched off a wave of entrepreneurial risk-taking that has regenerated itself with every new spin-off and defection from an established company. The large company serves as a proving ground for engineers and developers who may one day be motivated to attempt to productize their own ideas in a smaller setting.

The cities of San Jose, Cupertino, Mountain View, Sunnyvale, Palo Alto, Berkeley, Fremont, Santa Clara, and many others with familiar-sounding names to those in the technology world, have given rise to household names such as Cisco, Apple, Juniper, 3Com, Oracle, Sun, and countless others that would not have been able to grow and prosper as quickly, or perhaps at all, in another environment. Silicon Valley companies that can't directly trace their lineage back to HP or Shockley Semiconductor are, at the very least, the benefactors of the environment they helped to create.

The global migration of technical talent to the region over the years, in combination with those trained at the local universities, has created a robust cluster of engineers, software developers, and technical management personnel that might be unmatched elsewhere. It has also become the de facto headquarters for the venture capital industry.

The New Silicon Valley
San Diego's potential to emerge as the center of a wireless telecommunications universe seems so great because of the momentum that's hastening the arrival of investment, technical talent, and research programs. Most important, new companies are continually created and remain firmly planted within the region. San Diego has been acclaimed by Forbes as one of the top 15 cities in the world in which to do business, and by Time as one of the top cities in which to start a company.

PacketAir, a 13-person wireless start-up founded this past November, has come full circle after being spun off from Nomadix, a Los Angeles area company. All of the founders - and most of the employees - can trace their roots to local companies such as Qualcomm and Datron Systems according to cofounder John Winn. He adds that, "The area is rich with engineering talent and most of the major players in the wireless space have set up shop here." The area is also equally strong in biotechnology which, in yet another parallel, is a trait shared by Silicon Valley.

The most well-intentioned chamber of commerce or elected official cannot will a particular community to greatness in a given industry. It's a secret recipe of workforce, motivation, capital, manufacturing, spirit, partisanship, spin-offs, successes, failures, and a host of economic factors that create the environment that kinetically generates support from within the educational communities, the local governments and planning commissions, and in turn, attracts a constellation of research facilities, contract manufacturers, and component suppliers.

Or, maybe not. Government economists and doctoral-degreed think tank analysts probably sacrifice more brain cells trying to quantify these phenomena than an entire undergraduate class at a keg party. Suffice it to say, that however these elements come together, they seem to be doing it in San Diego.

Leap Wireless International, NeoPoint, Titan Wireless, Stellcom, Novatel Wireless, Widcomm, Wireless Facilities, PacketVideo, Ronin Wireless, REMEC, Silicon Wave, WaveWare Communications, and Wireless Knowledge are just a few names that represent the variety of wireless technology companies headquartered in the region. Sony launched a state-of-the-art wireless research center there and other Asian industrial giants have also recognized the appeal. Mitsubishi's Mobile Communications Technology Center, LG InfoComm's U.S. headquarters, Denso Wireless Systems America, and Kyocera America are among those whose handset and mobile wireless business units call San Diego home. This is in addition to the large installations of Nokia and Ericsson.

PacketAir's Winn suggests that these corporations, and start-ups alike, "have also enjoyed the support of organizations like the San Diego Telecom Council that is striving to give San Diego the national recognition it deserves as ground zero for the development of innovative wireless technology."

Arguably positioned in the center of San Diego's telecom universe is CDMA kingpin, Qualcomm. Dr. Irwin Jacobs, its chairman and CEO, and Dr. Andrew Viterbi, its former vice-chairman, may be seen as the founding fathers for the region in much the same way as Shockley, Tiernan, Moore, Noyce, Hewlett, and Packard were for Silicon Valley.

In fact, the engineering school at the University of California at San Diego (UCSD) already bears Jacobs' name. In the late 1960s Jacobs left M.I.T. to accept a position at UCSD and crossed paths with UCLA professor Viterbi. Their first collaboration was a part-time consulting firm called Linkabit, which grew to such a critical mass that it was purchased by M/A-COM in 1980. The lore of Linkabit is so strong in San Diego because the company was active in early digital telecommunications and spawned dozens of future entrepreneurial enterprises - including Qualcomm itself - that are the foundations of today's growth in the area. M7 Networks, Littlefeet, and Zucotto are new branches of this legacy.

Zucotto Takes Off
Zucotto Wireless has 130 employees and has closed on over $41 million in funding to ensure that the value of Java technology will reside in future wireless devices. From its La Jolla headquarters, it has made tremendous progress toward this goal since it was founded less than two years ago. The company's focus on the handset market for its Xpresso semiconductor and related products, and its understanding of battery requirements for ever-smaller handheld devices, may give it a good chance to score big with mobile phone manufacturers. Zucotto feels they can extend the benefits of Java 2 Micro Edition (J2ME) to the wireless Internet and mobile multimedia markets with their Xpresso processor, which natively executes Java bytecode.

A sizable pool of Zucotto talent is drawn from other local companies, in the Silicon Valley tradition. Employees from Qualcomm, Hughes, Wireless Knowledge, NeoPoint, Silicon Wave, IBM, and Motorola are in the mix. The founders of the company have more than 50 years of combined wireless, semiconductor, and Java experience from the likes of Nortel, Nokia, Sun Microsystems, and Intel. According to chief marketing officer Dave Wenk, the company chose the San Diego area for its base of operations "in order to be at the forefront of this exciting industry and reach out to the mass pool of telecommunications talent." Zucotto also has offices in Ottawa, Canada and Copenhagen, Denmark.

With a focus on wireless Java, strong ties with the developer community are crucial to Zucotto's success. Thus they offer the standard edition of their WHITEboard software development kit as a free download on their Web site. At first glance, Zucotto seems to be dependent on next-generation wireless networks for their success, but ultimately they've recognized that the Killer App is the application itself. Wenk's term for this is application mobility, which is wrapped up in the concept of "mass personalization."

Simply put, everyone buys a similar phone, but we download the applications that are most important to us. In that way, custom features reside individually at the handset level, free to be upgraded and replaced as conditions warrant. The features on the phone of a traveling salesman and on that of a nurse could be completely tailored to their jobs and interests, even if the hardware is identical.

Seen in this light, what Zucotto offers is actually an enabling technology that could preserve wireless operators' investments in their current infrastructure. Instead of comparing the new calendar, audio, and contact management features that vendors are putting into their handsets, the real questions might be "What phone do you use with your applications?" and more important, "What applications do you put on your phone?"

M7 Plays Off Partnering
M7 Networks is leveraging relationships with wireless technology heavyweights Ericsson (NASDAQ: ERICY) and Qualcomm (NASDAQ: QCOM) to further the development and adoption of its mobile application hosting business. The company's genesis last year at ideaEdge Ventures puts it in a unique position, which should accelerate its prospects for growth. Nuance Communications (NASDAQ: NUAN), which develops voice interface software and voice-enabled e-commerce technologies, is contributing to the M7 equation. Complementing this expertise is an alliance with hosting giant Exodus Communications (NASDAQ:EXDS).

It's not too hard to see why the team at ideaEDGE is looking for great success from their first investment. Ellen Hancock, chairman and CEO at Exodus, says that companies are making significant investments in implementing mobile applications and mobile-enabling their Web sites ... and on a global scale. This is the area that M7 hopes to compete in.

ideaEdge Ventures is the type of venture capital firm that takes a hands-on approach in the development of their portfolio. They seem to possess most of the strong bullet points from the short-lived incubator era, in terms of management expertise and interests that encompass a narrow market space, without the baggage of dozens of unprofitable start-ups spanning multiple (and mostly immature) industry segments. Investment firms are fleeing from the incubator moniker in the wake of troubles at CMGI, Internet Capital Group, and idealab!, while at the same time we're seeing very focused groups, such as Comstellar and Raza Foundries, emerge with fresher terms like accelerator, venture-creator, and meta-company. If all goes as planned, ideaEDGE will facilitate the rapid development of a small group of companies, focusing solely on the mobile Internet sector and its related applications.

The names that appear on the ideaEdge Advisory Board speak to that focus: Dr. Paul Jacobs, president, Qualcomm; Koh Bon Hwee, chairman, SingTel; John Major, CEO, Novatel Wireless; Dr. David Nagel, CTO, AT&T and president of AT&T Labs; Sven-Christer Nilsson, former CEO of Ericsson; and Dr. Larry Smarr, the director of the California Institute for Telecommunications and Information Technology, among others.

M7 Networks closed its Series-A round of funding in November of last year and comes out of the gate with a pedigree that is probably unmatched in the mobile data arena. While their bloodlines are no guarantee of success or even future profitability, silver spoons such as M7 elevate them into a class of heavily advantaged young start-ups. William Erickson, the company's recently named CEO, believes that they are well positioned, and "poised to provide customers with what they need most today - mobile voice and data applications that deliver increased productivity, tangible cost savings, and new revenue streams."

Liya Sharif of ideaEdge suggests that the financial and travel industries are textbook examples of the vertical markets that will benefit most from M7. She doesn't hesitate to point out that M7 is the only nonoperator that utilizes Ericsson's innovative User Service Center (USC) platform, which provides maximum capabilities for provisioning data services. I can only imagine the degree of anticipation that the business development team will feel as they prepare for questions about scalability. "Carrier class," one of the most overused clichés in telecom, truly applies to the M7 hosting environment.

As a quick-to-market solution, another M7 advantage is that they can exploit the demand that exists today among the early adopters and "turbo users" of mobile apps, while positioning themselves for the eventual deployments of 3G and beyond. We're just seeing the beginning of this growth curve as shipping companies and the hospitality industry launch new mobile data services. WAP, SMS, and voice-based applications, which can be offered in a highly secure, reliable, and scalable environment, have great potential in the enterprise market today, and while the revenue involved hardly registers when compared to projected growth patterns over the next five years, there is money to be made in niche markets right now. That, and the support received from their impressive list of partners, could quickly boost a company like M7 into profit mode.

Littlefeet Thinks SPICE Is the Cure
About 12 miles northeast of San Diego, in Poway, California, lies the recently expanded headquarters of Littlefeet, Inc. This second-round start-up has designed an innovative solution for network operators to address the escalating requirements for high-quality voice-, data-, and Internet-enabled services. Their solution attacks the problems created by demanding data services and subscriber growth from the infrastructure side.

It's not a repeater and it's not a base station. They call their SPICE product a distributed antenna system, and the motivation for creating it was to give service providers the highest degree of quality coverage within a given network footprint. The name Littlefeet, itself, is a reference to the small, concentrated footprint of coverage generated by each SPICE unit. Optimal quality will be necessary for operators to retain their customers so they can be transitioned to the more lucrative services that are on the horizon. SPICE may be the product that can bridge the gaps and alleviate the growing pains during this process.

Interestingly, the company was founded in San Jose and moved south in July of 1999 to leverage the benefits of "the business climate, the talent pool, and the concentration of wireless technology innovators" according to Beth Nelson, Littlefeet's director of marketing. A handful of the earliest management team members joined the company from ADC Wireless, which was previously PCSI, a direct descendent of the Linkabit family. With 110 employees and two rounds of funding behind them, Littlefeet hopes to build on the early success of a trial site in Australia, and the first U.S. deployment within the GSM network of an unnamed operator in the Midwest. Typically, mobile wireless networks utilize powerful transmitters that occupy a nucleus-like position within each cell. Their centralization and their height above the average terrain allows for somewhat optimized communication with each subscriber remote station. The coverage footprints generated by each base station are heavily influenced by topology, tower site location, and local zoning restrictions.

The variations in propagation create very unique and irregular patterns. New applications with higher data rate requirements put heavy demands on the base station, which can cause the coverage footprints to shrink inward. The problems of network overload, interference, dropped calls, and changing concentrations of subscribers are exacerbated by the fact that optimal network upgrades don't pass easily through local governments and planning commissions.

Janice Parvin, chairperson of the planning commission for the city of Moorpark, California, says that city managers ultimately make decisions on whether or not to approve tower and cellular network construction within their communities. In many cases a community development director is tasked with researching the safety, environmental, and aesthetic concerns of each proposed project. Wireless operator representatives commonly lobby for approvals and come armed with proposals that feature all manner of artificial camouflage and horticulture designed to lessen the visual impact of new towers and antennas. Development officers may consult with a wide variety of impartial experts to explain the health risks and safety concerns on behalf of their constituency as well. Whether or not they have access to a local university professor or power company technician who can accurately portray these impacts is a great unknown. Wireless operators must deal with these issues in every community and in every country with varying degrees of endorsement and cooperation.

So where does Littlefeet hope to fit into this mixture? By first seasoning the GSM market with SPICE. Although the company has dedicated resources to develop future products for UMTS and CDMA-based networks, they have their (little) feet firmly planted in the present. GSM is the standard on which the company was founded and is undeniably the largest market today, representing more than half of the wireless subscribers on earth. Their solution consists of cSPICE units, which provide the coverage functions, and bSPICE units, which are attached to existing base stations and transmit to and from the cSPICE coverage units.

Ultimately, a clustered network of SPICE units can be designed to maximize coverage and capacity within the network. They're designed to be vendor-agnostic, which means that the units can be integrated into an operator's network and will work with base stations manufactured by Motorola, Nokia, Ericsson, and others.

The dual benefits of their proposal are the seamless high-quality coverage that they can add to a network and the low power requirements that their units demand. These advantages stem from the fact that handsets within a SPICE network can receive signals from multiple cSPICE units simultaneously and conversely, multiple cSPICE units receive the transmission signals. This multiple signal source architecture makes it possible to operate the units with low power and to mount them at lower heights.

After all, the ideal scenario is to install them on light or utility poles, which would also serve as their source of electricity. If Littlefeet can execute their business plan, the twin issues of safety and reliance on new towers would be vanquished. Take me to your planning commission!

Ted Alexander, a general partner with San Diego-based Mission Ventures, calls southern California at large a "hotbed for wireless engineers and technology," and goes on to say that "the universities seem to have a particular research expertise in this segment as well," referencing Cal Tech, UCSD, UCLA, and UCSB. He called attention to California Governor Gray Davis and his recent announcement of the Cal-(IT)2 initiative. This heavily funded partnership, which draws from a $100-million state allocation matched by more than $200 million from industry, federal, private, and university resources, is formally called the California Institute for Telecommunications and Information Technology. More significant than the new research dollars might be the fact that UCSD, in cooperation with UC Irvine, was chosen to lead the prestigious project. It remains to be seen how many venture capital firms will join Mission Ventures in San Diego in the coming years, but it's a safe bet that some of the smart money in wireless has already started on a southward migration.

More Stories By Tim Bresien

Tim Bresien is WBT's VC editor, the principal consultant with infraStar, Inc., and a freelance writer covering investments in the wireless communications sector. He is a former research analyst with the telecommunications consulting firm of Bond & Pecaro, Inc., Washington, DC, and a cofounder of the Telecom Investor Forum, held annually at SUPERCOMM.

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