Internatioanl pharma giant Pfizer is about to acquire pharma half-giant Wyeth (its market cap is half the size of Pfizer’s) for a staggering USD $68 billion. This leaves many people wondering where does the money come from to finance such a monstrous deal. According to International Herald Tribune article, it appears that the banks are again in shape of financing such marquee customers as Pfizer. Especially after having received hefty chunks of the bailout money:
Pfizer’s bid is being financed by four banks that received U.S. government bailout money: Goldman Sachs, JPMorgan Chase, Citigroup and Bank of America, these people said. Such banks have been criticized for not doing more lending since they received the government funds. In addition, they said, Barclays, which acquired Lehman Brothers out of bankruptcy in the fall, is also providing financing.
For some reason a quote from George Orwell’s book Animal Farm comes to mind – “All animals are equal but some are more equal than others.”
Want to check whether your CEO has accepted the fact that economy has its breaks on and it won’t get prettier for a while? Then read Guy Kawasaki’s Tough Talk for Tough Times: What the CEO Should Be Saying Now posting and see if you find some similarities. Hopefully not…!
iPhone’s App Store is still on fire - in its first month, it generated $1 million a day in sales on 60 million downloads and by now has reached 500 million downloads since the launch. This kind of success has attracted the attention of a lot of developers, investors and enthusiasts, including us at Solon Partners. On the back of all the buzz, I wanted to see if iPhone apps are a realistic way of making money.
iPhone sales figures
Although subject to some controversy and mystery in the past it now appears that Apple has sold roughly 13 million iPhones since 2007. The new generation 3G phones make up 6.9 million of the total. Apple has now become the world’s third largest mobile phone supplier following Nokia and Samsung. IN addition to making money off the phones Apple makes money by taking 30 percent of the total sales from the App Store. The success of the App Store has now reportedly forced RIM, Microsoft and Google to consdier developing their own store fronts.
App pricing and categories
Mobile Orchard has gathered a lot of data that shows that most apps in the Apple store are priced in the $0.99 and Free categories, although there are a few specialty apps out there in the $50 range as well. Mobclix has done a clear and useful bar graph analysis of the pricing trends and offerings. When looking at all of the application in the iPhone store 77.9% are paid and 22.1% free apps. Games (26%) are the top apps category followed by Entertainment (12%), Utilities (9%), Education (7%) and Books (6%). So the most popular offerings are 99 cent games.
Diagnostic tools show usage habits
New York City-based startup Pinch Media, (VC financed by Union Square Ventures, First Round Capital and some angel investors) has created for iPhone SDK developers free analytics tools to track apps usage. According to data gathered through their analytics on average, people use their apps 1.2 times per day with an average usage time of under 5 minutes.
After reading stories of garage developers striking it rich, I was rather surprised to find that most of the top revenue earning games are made by BIG game design houses the games market – Vivendi, SEGA, Apple, PopCap, Gameloft, Xen Games and Electronic Arts. Only two (Fieldrunners and iHunt) in the top 10 are made by smaller developers. I should not have been surprised, this industry is no different than others where brand name recognition, marketing and reputation play a key role in consumers’ buying decisions. Hence we see in the 10 ten games today familiar names such as Bejeweled, Spore, Tetris, Crash Bandicoot, Texas Hold’em and others.
However, there is hope for the little guys too, iShoot Lite sales numbers should motivate the entrepreneurial minded programmers around the world to develop games. This month downloads hit 16,972 in one day, but have averaged approximately 10,000 downloads for over a month which translates into $21,000 of net revenue per day (if somehow sales could be kept at this level for a year this small studio game would make $7.6 million).
Another success story that has been widely publicized is the success of Trism developed by Steve Demeter. The game, which is essentially a bejeweled clone, sells for $5, and has netted the developer over $250,000 so far. Demeter allegedly spent only $5,000 developing the game.
If you can develop and promote an app that people are interested in downloading, and keep your budget under control, real money can be made with iPhone apps. If we assume that you are selling your app for 99 cents, and you could sell it to 10% of the iPhone users in the world (1.3 million users), then after Apple’s cut you would net approximately $900K. Even with 1% total market penetration you would net $90K. Not bad at all, if you can keep your development and marketing costs at 30% or below.
Even on a small scale, entrepreneurs have seen significant success with simple apps like EleMints, which is basically just a copy of a periodic table of elements priced at $4.99, and which sold 3982 in 45 days (netting $13,909 for a few hours of work)
Companies have also launched apps first in the free category and then made the transition to the pay model as most vividly demonstrated by Tapulous’ Tap Tap Revenge, a Guitar Hero style game which currently has over 3 million users. The original free edition was financed partly through advertising revenue, but largely through Angel investors’ financial support. Recently the company released Nine Inch Nails and Weezer versions for $4.99, of which Apple gets 30%, and the remainder gets shared with the bands, labels, and publishers. Tapulous hopes to get to the breakeven point with $1 million in revenue in 2009.
The book offers an excellent deconstruction of the X steps to success style business books and reporting by financial media. Rosenzweig shows how the performance measures of ABB, Lego, Cisco and other companies and their CEOs were strongly influenced by the financial winds at the moment of writing. He exposes the strong bias that business writers have for telling the legendary success/failure story, but only after the outcome is perceived as decided. Writers and analysts are also overly critical once the strong performance recedes, even if the business decline is temporary or due to uncontrollable outside forces. Rosenzweig shows how Business Week and Fortune writers may caracterize the same exact decision as “bold” or “foolish,” “straying” or “expanding,” “innovating” or “straying from its core” and leaders as “timid” or “prudent, “confident” or “arrogant” depending on the fortunes at the moment of writing.
Simply put, his observation is that when things are going well – the CEOs and companies are depicted like mental giants that can do no wrong, and every decision is a stroke of genius and part of a well crafted master plan. When things are going poorly – then everything the companies or CEOs do is wrong, short sighted and reckless, regardless of the implications for the future. The writers connect the dots looking through the prism of the current events backwards in history, and thus see trends events tying together in light of the end result they want to explain.
This not unprofessionalism by the writers, but part of the human desire to tell compelling, simple and powerful stories. This is why urban legends spread a lot faster than sensible well balanced messages. We should not buy into the urban legends we are told about the CEOs and Companies as well. Lets all dig a little deeper.
Sustainable energy has been a very popular investment in the past few years, attracting $148 billion in 2007, up 60% from 2006 (which was also a +50% increase year). Although wind energy got over 50% of that money, solar projects attracted over $28 billion of new capital ($3.7 billion in venture capital and private equity investment). Up until now solar panel market has been an economic anomaly where in a capitalist system supply consistently exceeds demand. That has now begun to change.
I saw the free flow of money into cleantech businesses when became involved with the solar power industry when I was hired to find financing and rebrand a small Finnish chemical company. We were able to take a product that was previously sold to the display industry and develop a product for the Solar panel manufactures that greatly increases their efficiency by directing more light into the active area of the cell to generate more power. This kind of a product offering greatly increased company valuation, created industry buzz and enabled us to get new investment into the company. However, it was clear that it was an industry in flux.
After researching and studying the market dynamics and manufacturing issues and negotiating with clients in Germany, US, China and Japan it became clear that manufacturing capacity was increasing at geometric rates, while market uptake was more on an arithmetic track. Therefore, I was not surprised to read recent reports by Goldman Sachs and other analysts warning of significant oversupply problems. New Energy analysts project an oversupply of approximately 4 GW of modules in 2009.
Oversupply and economic slowdown is causing at least 20% price declines
The market is already showing the effects of oversupply as the cost for rooftop solar systems, including installations, have declined approximately 10 percent in the past 6 months, and with the credit crisis and slowing economy the pricing is expected to decline another 20% in the coming year. Sun Power executives have already promised to be rolling out a 20% price decrease.
In the long run I see this as a very positive thing for the industry. The oversupply will force industry competition and lower prices. In order for the energy to really cross into the mainstream and become a viable self-sustaining part of the energy economy, the price per kW of solar power generation must reach parity with traditional energy sources. Currently the price parity is achieved artificially through feed in tariffs, taxes, incentives and other government interventions.
Thin-film technology driving down the prices
It should be noted that great advances have been made recently in reaching this price parity through the scale up of thin-film technologies manufacturing. The top player for this field is Nanosolar which has raised over $500 million in the past few years. They have opened up 600,000 square meters production facilities in Europe and US, that will house their 1 GW roll to roll panel material printers. Nanosolar claims that the efficiency of their panels is approximately 14% and volume sales can be done at the price of $0.99 /Watt (€0.78/Watt). The savings are achieved through replacement of glass and expensive substrates with metal foil and polymer layers, which also allows for the mass production using the roll to roll printing methods. Konarka and MioSol have also recently unveiled their roll to roll processing technologies and upgrading manufacturing capacities.
The mass production, elimination of expensive materials and competition between the various technolgies could allow solar power energy production to reach the €0.07 per kW mark where it begins to equal average indust rial electricity prices in Europe and US.
My friend and gaming industry fan/expert Tom Bissell spent half a year in Tallinn writing a new book and recently found time to also publish a great article in The New Yorker magazine entitled “The Grammar of Fun“ regarding Epic Games’ best selling hit Gears of War2. The article lets you take a peek behind the scenes of making blockbuster games. Epic’s Design Director Cliff Bleszinski offers some rare insights into the motivation behind some of the tone, mood and game-play elements.
Tom will soon have an article also appearing in GQ magazine regarding the gaming industry, there are also some rumors of a gaming themed book on the horizon.
I also strongly recommend reading Tom’s books Chasing the Sea: Lost Among the Ghosts of Empire in Central Asia (2003), God Lives in St Petersburg: And Other Stories (2005), The Father of All Things: A Marine, His Son, and the Legacy of Vietnam (2007).
In the past three years I have read and heard hundreds of business plans and pitches in Scandinavia and the Baltics. The two weakest topics have consistently been the business model (how you will actually make money) intellectual property status (how will you keep others from copying and underselling you). It is worth remaining that these are the two most important parts of the business plan. I leave the business model discussion for another posting, but will address some basic issues related to IP here.
IP strategy needs to be part of any business plan
Everyone should absolutely have a business plan section or power point slides dedicated to IP. Even if you think that your know-how or invention is not patentable there are many different ways to still address this issue. Average cost of filing one US patent including legal and filing fees is approximately $15,000 plus future maintenance fees. A good system of IP agreements will cost you 75% less, and may offer you even more practical protection. A system that educates your workforce regarding the importance of protecting the businesses’ trade secrets and proprietary information, and instills the use of NDAs, professional employment agreements that clearly delineate intellectual property and invention ownership issues, invention award and motivations policies, proper documentation of know-how, noncompetition agreements, digital watermarking, document security procedures, publication review procedures, and proper labeling of confidential documents will go a long way in securing your valuable intellectual assets. Showing investors that you have thought of these issues and are doing something about them will usually set you above your peers in sophistication, and will encourage investors to take a harder look at your business plan or presentation.
Know your patent facts
If you do have patents, make sure you present them clearly. Make sure that you clearly indicate which regions are covered, when do they expire and clearly state what they cover – method, device, application etc. A key patent that is well written and has defensible claims can be worth a lot more than any other asset in your company. However, such patents are usually not a matter of accident or luck, but skillful writing by the scientist and an experienced IP lawyer. Improper presentation of pending patents is one item that can flag you as a dilettante for investors. Pending patents are just that – pending – a process that will be anywhere from 18 months to many years – during which they can easily also be denied, thus making them worthless. Also keep in mind that pending patents do not give you any legal rights to keep your competitors from putting out their identical product today.
Consider cheaper and faster IP protection alternatives
Consider the use of trademarks, copyrights, and design rights in protecting your intellectual assets. Often these protections are cheaper and easier to achieve than patents. These tools may be especially relevant for protecting your software business.
Be creative with IP strategy
Finally, there are other creative ways to prevent competitors from getting strategic intellectual property under their control. One such trick is “defensive publishing” which is a technique of publicizing an idea by posting it in a public forum such as IP.com. Such a public dissemination marks it as prior art under patent laws, and limits patentability of such ideas by others. If the invention is not part of your core business, but you do not want others to have the power to prevent you from using it, this technique is a much cheaper, easier and faster alternative to patenting.
I’ll be teaching an IP development training course for Arengufond on March 8, and will get more in depth on these issues.
This week on VentureBeat I picked up an announcement that American Idol has decided to create a branded community within Habbo Hotel. The wildly popular Finnish online virtual world Habbo Hotel has close to 10 million members worldwide, and 3 million members in the United States.
As a fan of gaming, and a strong believer in the multiplayer online gaming market, it is good to see that major international brands like American Idol (valued at over $2.6 billion) are attracted to that world, and have enough faith in the Finnish brand to team up with them. I strongly encourage Estonian developers to think big and emulate the daring approach of the guys at Sulake Corp. They dropped the Finnish name for the game Hotelli Kultakala (trans “Hotel Goldfish”) and from the beginning focused on conquering the worldwide market.
Recently lunch conversation in Estonia, as probably elsewhere in the world, has been dominated by news of companies and industries reporting record losses.
My friends are probably tired of hearing it, but as a fan of electronic games industry and a veteran gamer (already from the days of ColecoVision and Commodore64) I do not tire from touting the results and the financial potential of the games industry. It is one of the only industries in the world that has shown signs of life in the past year. Even in the last three months of the year as sales results declined across the board, game sales continued to grow by 10% compared to 2007 sales. The picture for the whole year is equally strong. According to industry analysts NPD Group, Americans purchased $21.33 billion worth of video game systems, software and accessories in 2008. This is a 17% total increase, and a 26% software sales increase as compared to the 2007 figures.
It is time to start taking the gaming industry seriously, as its sales are already larger than Hollywood box office take which grossed $9.6 billion in ticket sales last year, and together with game rentals have even passed the $22.4 billion DVD sales and rental market, which declined 5.5% in 2008.
This is significant for Estonia because the gaming industry is an area where even relatively small players with limited resources can make a significant impact internationally. For example, Finnish designers from Sulake Corp. launched in 2000 Habbo Hotel, an online game which today has reached $77 million in revenue, 9 million unique visitors monthly, and has found Venture Capital backing from such well known players as Benchmark Capital. Polish developer team from CD Project also had a hit game in 2007 with Witcher, which sold over one million copies worldwide, and received the coveted “RPG Game of the Year” award from PC Gamer.
We are in the process of looking for energetic programmers with game ideas and excess enthusiasm for a potential startup project, so let us know!