Stuff that sucks less

With the tsunami of CES press releases this week and in keeping with the theme of, "I don't need more stuff, I need stuff that sucks less," I want to mention two inexpensive products I've been trying over the holidays:

Dropcam – https://www.dropcam.com All security systems are compromises, but I may have found a solution that addresses my meager needs.  A ton of technology in tiny package, fast and to easy set-up, very cool iPhone, iPad and web interfaces to the cloud based DVR functions with motion, sound and disconnect alerts.

Roku - http://www.roku.com My only justification is HDTV access to Amazon Prime content; not sure if any of the other "channels" are worth a damn. Easy hook-up, initialization and user interface.  Given how little TV I watch, I'd really like fire my two cable companies, but on-demand access of the desired content has eluded me.  The Roku is an experiment in this endeavor. 

Both of these devices are bandwidth hogs, so you don't want to use them on a metered broadband service. We pay about $600 a month in connectivity costs; two homes (cable, broadband and telephone), two cell phones and a Verizon MiFi.  My naive expectation is that $7,200 a year would buy fantastic mobile connectivity and content.  Waiting......

I don't have positions in either company..wish I did!

Immersion search and browsing

The landscape is littered with dead bodies, but is it not time for someone to take another shot at a richer search and browsing experience?  Exploration of new topics via search (movies, music, art, science, travel, sports, and even shopping) is often as much about the journey as the destination.  I'd love to be able to navigate a visual array like the Safari Top Sites display that would tile Wiki's, stack videos, and other pertinent sites for me to rapidly explore a single search term.  Google has emphasized speed and simplicity (I suggest that you read In The Plexif you have not already done so) and delivered a highly efficient but sterile solution.

Instead of trying to compete with Google in search (SeachMe, Viewzi, Grokker failed for many reasons), possibly the immersion experience comes from an application, maybe a browser plug-in, or an app like FlipBoard, that leverages the power of Google search API and the steadily ramping network and processor bandwidth.  Search-Cube heads in the right direction, but it is ugly and inefficient; wouldn't you always want the Wiki page, video stack, etc. in the same spot on the screen every time so you wouldn't need to visually decipher or manipulate the presentation?

Apple does a fine job at user interfaces and could leverage the building blocks inherent in Safari, but I cannot imagine them investing in a utility that has Google search as its underlying technology.  Beyond a brilliant 2D search environment, I look forward to the day we have a true immersion search, browsing and computing interface.  Take a good look at Oblong Industries if you want a glimpse of the future.

Thoughts on the Freescale IPO

Bloomberg Businessweek published a solid summary of this week's Freescale IPO, but there is more to the story.  I have great respect for Rich Beyer leaving the comfort of Intersil and walking into the burning building in 2008, albeit with a outstanding compensation package averaging $5M cash per year plus equity, to rescue Freescale on behalf of their private equity investors.  The industry dominating business practices, technology innovation and quality that was Motorola Semiconductor of the 1980's died a horrible death in the 1990's and spawned On Semiconductor and Freescale in 1999 and 2004 respectively.  Both companies have had to navigate the semiconductor industry cycles with suffocating debt, and in the case of Freescale, fleeing talent, fleeing customers and collapsing markets. I've actively recruited engineers and business leaders away from Freescale over the past decade, but the well is nearly dry.  Those who are left acknowledge that they may be out of a job any day due to the relentless cutting, but they are generally unemployable elsewhere.


There is money to be made in all segments of the semiconductor industry, both as an employee and shareholder, but the Freescale story will continue to be one of gains driven by business and debt restructuring not from innovation or market disruption.


Good luck Rich!

The Smell of Success

Over the past year I’ve been helping one of my clients build their engineering team and executive staff. One of their projects for a new market and new customers required a new engineering team, new software tools, new manufacturing technology, new technology partners, etc…….often a recipe for “Fail Fast” lessons. We went from zero to sampling a revolutionary new product in 15 months and I attribute this success to the new team’s leader, the great engineers he was fortunate to hire and the company’s culture.

Venture capital and entrepreneurial communities all sing the familiar song that says that failure is OK….it’s a learning experience…..that which does not kill you will make you stronger…etc. I completely agree that mistakes and failures are powerful learning opportunities if your ego allows you to be introspective, but don't not lose sight of the fact that you shouldn’t be rewarded for failure. You may collect a salary (and severance) and be able to raise future capital, but you haven’t done your job.

I have written previously about “What do I look for when building a team?” and would like to add one more quality:

“Knows what success smells like.”

You must build leadership teams with people who have known great technical and/or business success. There is an intangible element of decision-making, risk analysis and leadership that comes from knowing what success smells like and how to find it.  I’ve likely reviewed 10,000 resumes in my career and hired about 250 engineers and executives. If you have been the industry for 10 years and haven’t contributed a major technical or business success, you’re not in the running for my organization. If you think your failures can be blamed on a succession of companies collapsing around you, maybe you chose the wrong companies in which to build your career.


Fail Fast is a very valuable concept because it allows you to move quickly onto your next Success.

Understanding the Semiconductor IP Companies

ARM, MIPS, Tessera, Rambus, InterDigital, Patriot Scientific and Mosaid (Toronto) derive a majority of their revenue from licensing intellectual property (IP) to semiconductor manufacturers. IP revenue is also a significant fraction of the revenue stream for Qualcomm (33%), Silicon Image (20%) Synopsys (13%), Cadence and Mentor Graphics.

Think of their business model as software development, sales and support with no exposure to the supply chain and yield headaches that periodically strike semiconductor manufactures and shock their shareholders.

The customers of these companies often face make-versus-buy decisions….do I invest time and money to design my own widget, or do I buy the building block from an IP vendor? Both options present different technical and financial risks and the IP companies work to compel you, with both stick and carrot, to buy! 

Companies like ARM and MIPS invest heavily in R&D and deliver critical new technologies for highly competitive consumer and communications infrastructure markets, some (Mosaid, Patriot Scientific, InterDigital) are exploiting patent portfolios through licensing and litigation, and others (Tessera and Rambus) are a mixture of both models.

Quick comments on a few of these companies:

ARM Holdings (ARMH) – I’m very bullish about ARM’s continuing global technology contributions and revenue growth for embedded microprocessors. They are a well respected vendor, highly responsive to the niche performance demands of consumer products (smart phones, tablets, automotive, etc.) and may make inroads against giant Intel in the cloud computing server market.

MIPS (MIPS) – While they have failed to take significant market share in the highest volume consumer markets, MIPS’ processor designs are utilized by Broadcom, Cavium Networks, Cisco, Entropic, Juniper, Netlogic Microsystems, Renesas Electronics, Sony, and Toshiba in set top boxes (cable and satellite), video games and network communications. They lost focus on the microprocessor business with their 2007 acquisition of analog IP vendor Chipidea that was divested in 2009. MIPS will likely exist as a runner-up to ARM until a customer or competitor acquires them.

Tessera (TSRA) – Licenses their portfolio of semiconductor packaging and imaging technology patents. Their continued revenue growth requires them to acquire and author new patents to replace portfolio patents that expire or are determined to be invalid by the courts or government patent offices. Companies like Tessera, Rambus and Patriot Scientific are not so affectionately referred to as patent trolls in the industry. They don’t have much in the way of a sales force, but they are expert intimidators and litigators.

Synopsys (SNPS), Cadence (CDNS) and Mentor Graphics (MENT) all supply software design tools to the semiconductor industry and added IP design and licensing to their portfolio of products.

Intel - No longer ideas, just wasted tweets

My friend Howard Lindzon's Twitter steam is genuinely his stream of consciousness.  He's usually funny and occasionally profane, and there are daily messages of wisdom.  One of todays tweets was:

Nice, a joke and some wisdom.

In an earlier post I made the case that Intel should buy ARM to maintain a dominant position in the microprocessor business. I have little doubt that we will unknowingly buy Intel processors buried in consumer electronics for decades to come and that they will maintain acceptable margins and moderate growth......but the story ends there.

Indeed....no longer ideas, just wasted Tweets.

Warning about warnings!

Given Japan's March 11th earthquake and tsunami's likely impact on the semiconductor and consumer electronics supply chain, I'm truly puzzled by how few revenue warnings have been released.  We just haven't heard much from the cell phone, PC and tablet companies........and their suppliers.

For component suppliers, this is NOT just a supply side issue.

Here is one of the Rumsfeldian "know unknowns" that haunts the consumer electronics supply chain.  Your semiconductor company may have escaped a disaster unharmed, but if there is supply disruption of ANY component (capacitors, resistors, inductors, specialty adhesives, packaging resins, flex connectors, LCD displays, etc.) for your customer's product (PC, cell phone, TV, etc.), production stops and your sales are slammed too!

In good times, semiconductor suppliers have horrible visibility into their sales channel. They typically ship into a logistics and distribution channel which provides supply to an ODM (Foxconn Compal, etc.), who in-turn supplies the name brand electronics company (Dell, HP, Nokia, etc.), who in-turn supplies retailers who sell to real consumers. When something goes horribly wrong, it can take weeks for inventories to back-up into the semiconductor supply lines and get then you get hit with order de-bookings.

It's not obvious if these risks are being priced into the market's recent retrenchment. As we move into the semiconductor industry quarterly earnings calls and forecasts...you have been warned!

Initial thoughts on Texas Instruments acquisition of National Semiconductor

While I cannot explain the 78% premium that Texas Instruments has agreed to pay for National Semiconductor, we can reasonably assume that they knew what it would take to get the deal done. As recently as January, dissident shareholder Ralph Whitworth and Relational Investors held 20.6M National shares (8.61% of outstanding) at basis of $16.29. The fundamental value in National Semiconductor is their position in Analog integrated circuits which are the highest margin (>60% GM) and longest lifetime (often > 20 years) products in the semiconductor industry. The market leaders are shown in a recent Analog Devices SEC 8K filing.

The hindsight is easy.  ADI, Maxim and Linear Technology closed today a P/E premium 30-300% compared to National.  Over the past eight years, National refocused on margins over top-line growth and shed many their less profitable endeavors.  TI and National have highly compatible business and technology cultures, where the second generation analog companies like Maxim and Linear could be very difficult to integrate.

I'm a bit of a broken record on the point, but the semiconductor industry is now 50 years old and consolidation will be a strategic play throughout the supply chain, from wafer fabrication all the way through distribution and logistics.  In the analog space, I own Intersil due to their technology, team and chosen markets and have long advocated that someone buy Micrel and tug that company out of the 1980's and into the new millennium.  I don't bet on M&A plays, but for the under appreciated analog companies wallowing at P/E's below 15, this news will be a welcomed boost!  

Why Intel must buy ARM

Last week Intel, the largest and most profitable semiconductor manufacturer, announced record sales and profit, but their performance by product segment combined with cataclysmic shifts in both retail and enterprise computing markets foretell Intel's growth to be in serious jeopardy if they do not acquire ARM.

Intel’s legacy PC processor business will never again be a growth engine. Consumers have an insatiable demand for electronics that enhance their experience in social networking, personal communications, portable gaming, electronic media (music, video, books, etc.), shopping, and financial management. In these markets the PC is losing badly to smart phones and tablets where ARM based processors dominate.  The decline in the PC's value (processor speed and data storage) will also be fueled by commercial customers moving their business management solutions to the cloud

The Data Center Group, which provides technology for enterprise servers and cloud computing, is Intel’s only promising growth business and delivered 23% of the top line revenue and 28% of the operating profit last quarter. But industry powerhouses like Nvidia, Marvell, IBM and start-ups like Calxeda (backed by TI, ARM, and the government of Abu Dhabi which also owns two of the largest semiconductor wafer suppliers) are preparing to launch very high performance ARM based products targeted to eclipse Intel in servers. There is little doubt that Intel will attempt to leverage supply and pricing of PC processors to retain server business with companies like Dell and HP, but they will have little sway over cloud computing companies like Google who develop their own server solutions. 

In the past 30 years, Intel has only done one thing well; microprocessors. If they are to maintain their dominance in the microprocessor business and grow shareholder value, they must acquire ARM while they can still afford the valuation. Too bad they have recently inked deals to acquire McAfee for $7.7B (strategically puzzling) and Infineon’s Wireless business for $1.4B (returning to a market where they have repeatedly failed). Capital poorly invested.

Let the consolodation begin

I've pontificated for the last 18 months that the semiconductor industry is poised for firestorm of consolidation, but there has been very little action due to the stalled capital markets and executive leadership teams focused on revenues, cost cutting, balance sheet clean-up and falling stock prices. Small M&A deals have been closing quietly, much to the satisfaction of a handful of boutique advisory firms. In the last six weeks though, several larger mergers and carve-out acquisitions have been announced:

• QLogic acquires NetXen
• NetLogic acquires "search engine" carve-out from IDT
• IDT hijacks Tundra from suitor Gennum
• Microsemi acquires "defense and security" carve-out from Endwave
• Ikanos acquires "broadband access" carve-out from Conexant
• Broadcom launches unfriendly acquisition of Emulex
• Microsemi acquires "rad hard" carve-out from Spectrum Control
• Microchip acquires R&E International
• Rambus acquires packaging patents from Inapac
• LSI acquires "RAID adapter" carve-out from AMCC
• Trident Microsystems acquires "frame rate conversion and audio" carve-outs from Micronas
• Western Digital acquires SiliconSystems
• Microchip accumulates 9.2% of Supertex
  

The stage is now set with irrationally low market valuations, very poor (wafer, assembly & test) capacity utilization, a maturing industry where scale is attractive and revenues having declined significantly. Seems like very dry kindling waiting for a spark........

Will the semiconductor industry consolidate in an orderly and logical progression resulting in bigger and healthier competitors benefiting all parties? Or, will we follow the path of other 50 year-old industries and consolidate in a fury of ego and hubris which transfers shareholder equity into the ether?

We pay for the illusion of safety; are we getting a good deal?

In what warped universe does a mutual fund that has lost 30% in the past 14 months deserve a 5-Star rating?

Selling is the act to convince a buyer they will receive good value for money. It is important that we consider the actual value of safety, as it is a key selling point for every transaction. Our purchases of food, medicine, automobiles, airline tickets and investments rest on a foundation of safety.

We fund government agencies (SEC, FDA, USDA, DOT, etc.) to regulate some products and their sales with the belief that a high level of safety will be established and maintained, or at least the open disclosure of risk will allow buyers to make informed decisions. The conspicuous public outrage directed at Bernard Madoff and his $50B Ponzi scheme is a societal response to an individual’s outrageous behavior and the failure of our government’s regulation. While investors were lured by their own greed to obtain impossibly consistent returns, all confidence schemes require the perpetrator to sell the illusion of safety to retain their investors. Today Madoff is under house arrest, his known assets seized, and all of his family and business associates are being compelled to answer, “what did you know and when did you know it?”

Our desire for reassurances of safety compel us to fund independent rating agencies such as Underwriters Laboratories, Moody’s, Standard & Poor’s, Morningstar, Insurance Institute for Highway Safety, etc. I’m personally astounded that after catalyzing a global financial disaster, Moody’s and S&P have not only survived, but seemingly thrive today. This leads me back to Morningstar that provides equity research and ratings services to investors. In what warped universe does a mutual fund that has lost 30% in the past 14 months deserve to maintain its Morningstar 5-Star rating which it has held for 10 years? By any rational measure, a 5-Star rating is intended to engender safety and encourage investment in a particular fund. Does the fact that it limited its losses compared to the broader market garner the 5-Star rating? Let us now all acknowledge that the measure of safety provided by the financial ratings agencies was a very poor deal and maybe their CEO should be under house arrest! By the way, how many of us received calls from our “maintain a balanced and diversified portfolio” investment advisors in 2007 telling us to get the hell out of the market? Not I!

What do I look for when building a team?

I've shuffled the priority of these hiring criteria over the years, but this list has served me well:

1. Very high level of professional and personal integrity.  This is profoundly difficult to measure in an interview, but it is the primary value of hiring people with whom you have previously worked and now trust. 
2. Intellectual brilliance.  I'm living proof of how someone can compensate for his shortcomings, but you must surround yourself will the brightest people you can attract to solve the great challenges your business will face.  Aspire to be the dumbest guy in the room.  I've often described this quality as hiring intellectual athletes.  A candidate's work experience might not be precisely what you were seeking, but a keen intellect and a willingness to take on new challenges are much more valuable.
3. Great student.  Loves to learn new things every day.
4. Great teacher.  Loves sharing their knowledge to help others succeed.
5. No jackasses. This is not the same as "no ego" or "team player."  Life is just too short to work with jackasses no matter how valuable you might think they could be to your business.
6. Great work ethic.  Great technologists and business people work hard because they enjoy the challenges and want to succeed.

Optimism and enthusiasm in northern California

For the last two days of this week, I was in San Jose (Santa Clara, Palo Alto, etc.) to meet with old friends in the semiconductor business and to make new connections with investment banks and law firms to whom Parallel Semiconductor LLC may be of service.  I am always delighted by the optimism of the bay area, its entrepreneurs and those supporting their innovation and growth.  Just a few highlights from my trip:

• Santa Clara University School of Law Symposium on Shifting Strategies in Patent Law: How the ITC, Non-Practicing Entities and Inequitable Conduct are changing the Patent Arena.  A very well organized, educational and thought provoking day.  Nicely done!

• The good fortune to hear F. Scott Kieff address the topic of Non Practicing Entities.  If you ever have the opportunity to read or listen to Scott's views (easy to do with so much of his material available on the Hoover Institute web site) he will allow you to see IP and patents in a very new (possibly a very old) light.  Highly recommended! 

Strategy and the game of Battleship

So often we speak to "strategy" as a high level, time based, roadmap of technology and products forecasting years into the future.

Has anyone ever built a successful business implementing such plans?  Not I.  I prefer to craft my strategies using the game of Battleship method.  The original game rules (PDF) for those too young or too old to have played.

Here's my simplistic model:

1. You have to get in the game. You must field a prototype of your product and aggressively gather feedback and market intelligence.  
2. Apply the product feedback and intelligence to adapt your product plans.  Some shots will be misses, but the hits can blossom into entire product lines.

I have no fundamental argument against the traditional approach of mapping SAM, TAM, competitors, SWOT or even executives with "Strategic" in their title.....but please don't call the output of this method a strategy until you have waded into the market and started to map your hits and misses.

Irrational exuberance to fear, uncertainty and doubt

So, the transition is nearly complete.  In little over a decade we have experienced irrational exuberance AND fear, uncertainty and doubt (FUD) in the global economy.  While the Nobel Foundation recognizes the profound complexity of Economic Sciences by awarding an annual prize, will our generation of consumers, investors and business leaders finally acknowledge that it is not the beauty of gaming theory, but psychology, greed, institutionalized deception and hubris which are truly the most powerful factors in economics?  Fear, uncertainty and doubt and now consumes us all.  The FUD is so deep that even aggressive investors and entrepreneurial business leaders are unable to act.  At best we are all dealing with our personal and professional fears, at worst we have bona fide crises (fund losses, crashing sales, crippled personal portfolios, etc.) to be managed.

So, where from here?  If the traditional venture capital model is on hold for now, let's invest our time, expertise and small amounts of private capital to bootstrap the next wave of start-ups.  Great companies like 37signals and those emerging from TechStars depend on great people, a huge investment of time and relatively little money.  Let's stop staring into the headlights!

Phoenix real estate on sale

As highly publicized over the past 18-24 months, home prices in Phoenix metropolitan area have backed-up about six years in established neighborhoods.  The fundamental question is, "Where's the bottom?"  Might today's buyer reasonably expect another 20% decline (equivalent to an additional 2-4 year back-up)?  A new phenomena for me is the market splitting into two segments; wholesale (investors intending to "flip" properties and buying at auctions, short sales and foreclosures) and retail (end buyers intending to live in the home or rent out as a business).

Clearly the next crash will be in commercial properties.  Phoenix currently has more than 33 million square feet of empty commercial space with an additional 3.5M under construction.  Sale and lease asking prices have declined only slightly in the past 12 month, but in the past few weeks it seems as EVERYTHING has been posted for sale; established leased properties (including $150M in Penske automobile dealerships), vacant buildings and raw land....signs everywhere!  I wonder how much more TARP money will be needed to absorb these future bank losses?

Another leap from a perfectly good airplane

Every five to eight years I take my career in a different direction and depart from a perfectly good company.  Early in my career I was seeking greater technical challenges, but I have always had my fingers in both business and technology believing that engineers, as opposed to pure scientists, are judged by their ability to produce revenue and profit.

Early in December 2008, I publicly announced my February 28th, 2009 departure from Standard Microsystems (SMSC).  I've been VP of Corporate Engineering at SMSC since they acquired Gain Technology in June 2002.  In the past eight years, I've had the great privilege to work with some of the industry's best and brightest engineers and business leaders.  Together we have built engineering teams, design centers, great products and successful businesses which transformed a corporation.  I will always be grateful for the opportunities which were offered to me and the triumphs we enjoyed together

So, now what?  From today's global financial wreckage, corporate consolidation on a grand scale is inevitable and great new ventures and business models will emerge.  On March 1st, I will be joining Parallel Semiconductor LLC which provides engineering and management consulting services to semiconductor, financial and legal communities.  I will also be engaging organizations focused on identifying and helping young entrepreneurs succeed!

The next five years promise to be chaotic and fun!

Cheers!

An unusual start to a blog

Most business and technology blogs are pontifications of the author's wisdom and observations.

I'd like to start this blog recapping a few of my failed pontifications of the recent past:

October 2007 - "The market won't see a bottom for AT LEAST three more months!"  In reality, the bottom may be three, or more, years away.

Spring 2008 - "I'm afraid that Barack Obama may not be electable in 2008."  I could not be more proud of my Country's demonstration of color blindness.

Summer 2008 - "We'll never see crude oil below $100 a barrel again!"  Enough said.