Thursday, June 5, 2008

Investor's View: Jon Auerbach on mobile

By James M. Connolly

There’s a cycle in mobile computing, where new devices spawn new applications, which get users excited about new possibilities in terms of still more new applications and broader access, leading hardware and software vendors to respond with more technologies. Through it all, consumers expect carriers to meet their growing demands for wireless bandwidth and universal coverage. To get a taste of the mobile services sector, Mass High Tech Associate Editor James M. Connolly interviewed Jon Auerbach, general partner with Charles River Ventures. Auerbach specializes in the mobile technology market and co-led the Highland Capital Partners LLC investment in Starent Networks Corp., and has been involved in financing for companies such as CCTV Wireless, Cyren Call and Optasite Inc.

MHT: Is the mobile services sector a hot market for investment today?
JA: It depends. Building wireless companies can be difficult because they typically require relatively large investments, and you are selling to a relatively small customer base. The number is so large in terms of the customer base that a lot of investors rushed into the space without a lot experience, and they have discovered it’s harder than you think. That said, it’s still a very attractive space. As investors, we are interested in it because we have 84 percent penetration for mobile devices in the U.S. That’s not as high as some foreign markets where they actually may have more than 100 percent penetration because some people have more than one device. However, that 84 percent is significant. On top of that you have the question of voice revenue; the carriers are offering more and more buckets of minutes with no change in revenue. So, they need a new source of revenue, and that’s data. On the other side of the argument, we have a consolidated market, and it’s especially difficult for teams without experience in selling into the carrier market.

MHT: How are companies gaining that experience in the carrier market: Through partners?
JA: Either that or it requires a good team with a track record. A lot of this boils down to how good is the technology. The best startups in this space are those that deliver performance that is multiple times better than anything else out there. The second issue is the team, a team that is fluent in carrier-speak.

MHT: What are VCs looking for as opportunities in the mobile services space?
JA: You can see interest in broad categories. In no particular order: Femtocells, because it’s an area where it’s clearly beneficial for carriers to have a more distributed network where they can reduce (capital expenditure) costs and coverage costs. And, you can expand your presence in the home where the bulk of mobile minutes are consumed. Some other areas seeing a lot of interest include mobile payments. Now that we have these devices in our hands, how can we do more with them? Also, open networks and the iPhone: Come up with something that is easy to use and the customers will accept it. The iPhone has truly blurred the line between your home computer and the cell phone. Location-based applications, advertising based on where you are, is another area where I see lot of interest.

MHT: If money is going into mobile, where is it coming out of?
JA: We’ve seen a pullback in past couple years in capital-intensive investments... at the same time, some of largest paybacks are in those areas. One other area of investment opportunity is in the plumbing — building towers for operators to do backhaul from the cell site back to network — and from innovative carrier models. For example, Metro PCS, a national carrier, has built networks in key cities with an unlimited usage model.

MHT: There seems to be an insatiable demand for mobile technologies on the part of consumers. Is that true?
JA: Consumers have a tremendous demand for more and more services. The question is how much are they willing to pay for them, particularly in an economy like we have today. Minutes are cheaper and cheaper, but demand depends on the demographics. In the next five or 10 years your cell phone is going to do a lot more. People will pay for it, but they are looking for true value.