Vinit Nijhawan: Serial Entrepreneur, Venture Capitalist

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    Passage to India Part 1

    New Delhi December 4, 2008

    I arrived in Delhi near midnight off a packed flight and to a crowded international airport, no sign of any slowdown in activity as a result of the recent terrorist incidents in Mumbai. The cool winter air is thick with construction dust, there is a new airport being completed and an extensive subway system, including a line running to the airport.

    My first task was to get a local SIM for the Sony Ericsson phone I borrowed from my son. I went to a Bharti Airtel customer service center in a south Delhi market in Lajpat Nagar. It was packed with about a dozen customer service reps (see photo), a payment kiosk and about twenty customers. The rep looked at my phone and said that it was locked to the Rogers network (my son goes to college in Canada) and I should go down the street to a shop to get it unlocked. I went to the shop titled “Orange Teleservices” (see photo) and they promptly said they could unlock it for Rs.650 (about $13) and it would take two hours. I then went to get a passport photo taken at a nearby shop called “Kodak Express” (see photo) and paid $1 for 8 color photos. I went back to the Airtel shop and filled out an application for a prepaid account: my photo, passport information and local address was attached to the application. I was told that my SIM would take a day to activate after my application information was verified. This was a new procedure as a result of foreign terrorists acquiring India cellphone accounts to escape being tracked. Seems like the recent terrorists were a step ahead, they bought satellite phones in Dubai to communicate with their handlers in Pakistan.

     

    Airtel Customer Service:

     

    Getting a sim from airtel

    The entire experience with getting a local phone service was much more cumbersome than activating a phone in the US or Canada. Then again I imagine if I was an Indian citizen visiting the US, walking into an AT&T store I might also have to wait a day to get activation? I was astonished by how many stores there were all over south Delhi offering mobile phones and services. With 300M subscribers, up from about 100M when I was last here two years back it is becoming a huge industry here.

     

    Getting my phone unlocked:

    Getting my phone unlocked 

    Getting my photo for the Airtel cellphone SIM application:

    Getting my photo for the sim  

    December 06, 2008 in Cellphone, Current Affairs, Internet, Private Equity, Venture Capital, Web/Tech | Permalink | Comments (0) | TrackBack (0)

    A Walk on the Dark Side

    I have been part of the entrepreneurial ecosystem for over 25 years, mostly as an entrepreneur but also as a VC and angel investor. I firmly believe that the symbiotic relationship of entrepreneurs and smart capital is the key to economic development around the world.

    I have spent the past six years either running VC backed startup companies or as an investor at Key Venture Partners. Here are some of my observations from my time on the Dark Side:

    • If one rates what it takes to be a successful VC partner, sourcing deals is usually the number one task. Therefore it is surprising how many VCs are slow to respond to phone calls and emails from entrepreneurs, even when referrals come from trusted sources.
    • The VC business requires long term thinking but very few VC partners are willing to invest in relationships with entrepreneurs that may not bear fruit for years. I believe that those VCs that develop long term relatioships, tend to outperform those that don't.
    • Being a VC is learning how to drink from a fire hose. In the two years I was a VC I sourced 220 deals and invested in one company. That doesn't count all the other deals that we discussed in partners' meetings. One has to develop judgement on a deal very quickly even if it means that you may decline what turns out to be a good deal.
    • My philosophy in dealing with entrepreneurs was that I always gave something back to them for the time they spent with me. Even if I declined to invest I would give them a VC or customer lead, or some advice about their business. In my view, this created the foundation for a longer term relationship. Many VCs have lost sight that they are service providers to entrepreneurs not the other way round.
    • As experienced entrepreneurs know, not all VC partners add value to their portfolio companies. Some can even add friction to the governance process and can be distracting for management. Usually this results from differences in opinion about exit timing but also sometimes from ego issues.
    • I thought hard about how we as a firm might add value to our portfolio companies. One area that a CEO is responsible for but always seems to get relegated to lower priority, because day-to-day operations take precedence, is exit planning. At Key Ventures we developed an exit template for all our portfolio companies that included: investment banks with relevant focus, analysts, potential acquirers (and we built a relationship with their VP Business Development), public company valuations, etc.
    • It is known that serial entrepreneurs matched with serial VC partners generally leads to successful companies. The problem, in my opinion, is a shortage of serially successful VC partners in the US and especially in Massachusetts. I have joined Boston University's Institute for Technology Entrepreneurship and Commercialization and will endeavor to address this shortage by researching what makes the good ones so effective and then teach these best practices to aspiring VCs.
    • The symbiotic relationship between entrepreneurs and VCs is recognized as the best way to develop an economy. It has been over 60 years since General Doriot and others founded American Research & Development Corp. (in June 1946), the first organised venture capital firm. In 2006 venture-backed companies' revenue made up 17.6% of the GDP and 9.1% of private sector employment in the US according to the NVCA. Similarily China and India have accelerated their economic growth rates as a result of unleashed entrepreneurial energy in the past 20 years. The rest of the world is now adopting this model.
    • I believe this model needs some tweaking in the US as it gets applied to new innovative industries such as life sciences, energy and nanomaterials.

    January 12, 2008 in Internet, IPO, M&A, Private Equity, Venture Capital, Web/Tech | Permalink | Comments (1) | TrackBack (0)

    Predictions for 2008

    Here are my predictions for 2008:

    1. Buzz--The buzz topic of 2007 will continue to be energy and cleantech. We will see a huge growth in VC investments in such companies.
    2. Exits--We will see a dramatic increase in cross-border M&A with many Indian and Chinese companies acquiring US and European companies.
    3. National--We will experience a recession.
    4. International--The Flat World concept (Friedman) will be replaced with the lumpy world (Ghemawat). Companies will have to deal with a global skills shortage in very local ways.
    5. Mobile--Apple's greatest innovation in the iPhone is its browsing capability as a result the mobile internet will finally take off.

    Here is how I fared with my 2007 predictions:

    1. Buzz--The buzz topic of 2007 will be energy and cleantech. We will see a huge growth in VC investments in such companies. I was right on. CleanTech investments by US venture capital firms reached $2.6 billion from 168 deals in the first three quarters of 2007, according to data from Thomson Financial and the National Venture Capital Association. The year to date 2007 dollar volume represents a 46% increase over full year 2006 dollar volume.
    2. Exits--After a six year hiatus Nasdaq IPOs are back and we will see a significant increase in Nasdaq technology company IPOs. Again I was correct. In the US there were 224 IPOs, raising $50bn. Additionally, Europe had a record year with a total of 651 IPOs, raising $90bn.
    3. National--We will see a slowdown in growth and may even experience a recession. I was partially correct, the sub-prime crisis did cause a dramatic drop in the housing market but while the overall economic growth slowed, there was no recession.
    4. International--There will be significant growth in US VC firms investing in India, especially in Infrastructure related growth opportunities. I was dead on. India is expected to place $13.5bn in VC/PE investments in 2007, up from $7.5bn in 2006. There are 366 PE firms operating in India with another 66 raising funds.
    5. Mobile--The Apple iPhone will have disappointing sales. I was totally wrong, the Apple iPhone lived up to its expectations and is selling briskly.

    January 02, 2008 in Cellphone, Current Affairs, Internet, IPO, M&A, Private Equity, Venture Capital | Permalink | Comments (1) | TrackBack (0)

    Predictions for 2007

    A little into the year but here are my predictions for 2007:

    1. Buzz--The buzz topic of 2007 will be energy and cleantech. We will see a huge growth in VC investments in such companies.
    2. Exits--After a six year hiatus Nasdaq IPOs are back and we will see a significant increase in Nasdaq technology company IPOs.
    3. National--We will see a slowdown in growth and may even experience a recession.
    4. International--There will be significant growth in US VC firms investing in India, especially in Infrastructure related growth opportunities.
    5. Mobile--The Apple iPhone will have disappointing sales.

    BTW, here is my scorecard on my 2006 predictions:

    1. Buzz--Like Web 2.0 was the buzz topic of 2005, the buzz topic of 2006 will be video over the internet. We will see an explosion of amateur video content creation with distribution to PCs . I was dead on: Google acquired YouTube for billions, and internet video companies raised hundreds of millions from VCs.
    2. Exits--We will see many US technology companies looking to exit on the London Stock Exchange's AIM exchange which has a lower hurdle than Nasdaq but is increasingly providing liquidity. I was partially right, there were a few AIM listings but not as many as I thought there would be.
    3. National--After being eclipsed by silicon valley in 2005 Massachusetts will be back: companies to watch are Airvana, Netezza, Starent, Virtusa, Airwide, Confluent Surgical. I was dead on: Airvana, Netezza, Starent and Virtusa all filed for Nasdaq IPOs. Confluent Surgical was acquired for $245M by Tyco. The CEOs of all these companies will be on a panel at www.tieconeast.com on June 16th. Airwide added over 15 new wireless operator customers.
    4. International--Indian IT companies will acquire US and European IT companies. I was dead on: 60% of total M&A or $8.4B was outbound M&A, though pharma was in the lead and accounted for $2.2B. IT M&A was second.
    5. Mobile--Music downloads to cellphones (songs not ringtones) will become a billion dollar market. Wireless broadband for "last-mile" internet access by companies will expand dramatically. I was partially right, Clearwire had a billion dollar IPO. Music downloads grew more slowly than wireless "last mile".

    May 06, 2007 in Cellphone, Internet, IPO, M&A, Music, Private Equity, Venture Capital, Web/Tech | Permalink | Comments (1) | TrackBack (0)

    Craigslist, monks and Nantucket

    I just returned from the 8th annual Nantucket Conference (www.nantucketconference.com), an elite gathering of Boston's VC, CEO and entrepreneurs. As always it was a thought provoking two days and a time to solar charge my batteries with the early summer weather.

    Besides the panel I moderated on CEO-Board relationships (:-)), I found Jim Buckmaster, CEO of Craigslist the most fascinating panel at the conference. Jim was interviewed by Jessi Hempel, Innovation Editor of Business Week. Craigslist can best be described as a local community bulletin board, operating in hundreds of cities in the US and around the world. 20 million unique visitors visit Craigslist every month. The entire endeavor is run by just 24 people in San Francisco, mostly developers and customer service representatives.

    Jim clearly had honed his responses to business journalists over the years and provided to-the-point, almost droll responses to all ofJessi's and the audience's questions. There was this sense of confusion and awe in the audience about the mission of Craigslist, a for-profit organization, not maximizing revenue and profits but serving their users' requests. In fact they generted revenue only when users requested it, for example with paid classifieds in a few cities. Jessi estimated their annual revenue to be $25M, but given their large user base, they could generate hundreds of millions of dollars in revenue annually. Jim kept reiterating that the company was not capital constrained in responding to users' needs and really had no need to generate more revenue.

    I went up to Jim afterwards and remarked that the closest organizational parallel to Craigslist I could think of was an order of monks. Like Craigslist monks have a mission to serve their constituents, they raise capital to fullfill that mission (donations, selling homemade jam, etc.) and they can get distracted from that mission by accumulating too much wealth and heirarchy (eg the Catholic Church). Reforming sinners, or spammers in Craiglist's world, is part of that mission. Monks get by with minimal personal comforts and get pleasure in fulfilling their mission, similarly the software developers and customer service people (and Jim and Craig) get the pleasure of peer recognition in satisfying their customers and seem not to be motivated by personal wealth accumulation.

    We watched a movie: 24 hours on Craigslist, which provoked another thought. Perhaps online communities like Craigslist could provide analytical fodder for measuring the health of real world communities. Analytical information such as job creation, etc is already being collected from online communities but I am thinking of things such as the mental health of a community. Data on Craigslist's user base in every city could be analyzed by academics for these kind of indicators.

    I was having a discussion over lunch with Mark Heesen, President of the National Venture Capital Association (www.nvca.org), Don Dodge of Microsoft (http://dondodge.typepad.com/the_next_big_thing/2006/06/microsoft_looki_1.html) and others about this parallel for Craigslist and got quite a discussion going. Mark's observation was that for-profit organizations by focusing on growth generated jobs and that was beneficial to a community and that Craigslist was an aberration. While I am fully in agreement with Mark on job creation, many people, particularly younger people in the US are coming to the realization that personal fullfilment does not come from wealth creation alone. Maybe we should adopt Bhutan's measure of national wealth: GDH or Gross Domestic Happiness instead of GDP!

    May 06, 2007 in Conferences, Current Affairs, Film, Internet, Private Equity, Religion, Venture Capital, Web/Tech | Permalink | Comments (7) | TrackBack (0)

    The World is Lumpy

    I just read a thought-provoking article in Foreign Policy magazine by Pankaj Ghemawat www.ghemawat.org, a Harvard Business School professor on why the world isn't flat. The article was sent to me by Kirk Owen CEO of www.merscom.com, an online casual games developer with a global footprint. Ghemawat talks about the "10 Percent Presumption"--that by most indicators, on average, globalization is closer to 10%. One of the indicators he points to is long-term human migration which stood at 3% of global population in 1900 and was 2.9% in 2005. His point is that not only is the entire world not flat, but even where it is flat, it can easily develop a bump. For example with democracy there appears to be a groundswell movement back to socialism in South America. In fact for most of us in the U.S. we are constantly perplexed by citizen choices for governments that are detrimental to their well being, eg Hamas in Palestine. Yes the world is lumpy.

    AT Kearney recently published their Globalization Index that ranks countries by how global they are: http://www.atkearney.com/shared_res/pdf/Globalization-Index_FP_Nov-Dec-06_S.pdf. Singapore (a city rather than a country!) ranks first. The U.S. ranks third, China 51st and India 61st. The only category that India is ranked high on is remittances! China on the other hand gets high marks for economic and FDI categories. All three U.S., India and China get low marks for the "personal" category, which makes sense since these are large countries the majority of whose populations do not travel abroad.

    Having run one, I have personally experienced the rise of the "micro-multinational" companies. These are startup companies that an early stage company go global--for customers and/or talent. In some sectors early adopter customers are no longer in the U.S. or Europe, for example telecommunications where most of the innovative service providers are in emerging markets led by India and China.

    Yes globalization is happening, then again it was happening in the 1400s when European powers spread and began becoming colonial powers. Even then the world was not flat but lumpy. The British ran India differently than they ran Kenya to accomodate local norms and conditions. Economic opportunities in macro terms tend to be the same around the world, people want food, shelter, clothing, education for their children, etc.. However there are local variations because of tastes, climate, culture and so on. Most importantly humans clearly like to be in geographically local communities. Growth on the Internet has been faster within countries than between them. Less than 10% of phone calls are non-domestic.

    To get a global perspective in technology and life sciences attend www.tieconeast.com titled "The New World Keiretsu". There will be speakers like Ram Sriram who was an angel investor in Google and sits on the Google board, Governor Deval Patrick, and Dean Kamen the prolific inventor. This is the best conference in Boston to network with entrepreneurs, businessmen, financiers from around the world to get a perspective on our lumpy world.

    April 18, 2007 in Current Affairs, Internet, Private Equity, Venture Capital, Web/Tech | Permalink | Comments (1) | TrackBack (0)

    The Battle of the Smartphone-- Google Phone vs Apple iPhone vs Microsoft

    There is a huge amount of interest in the lowly cellphone, why, because a 960M of them were sold last year. The majority of them were so-called feature and entry-level phones. Only 50M or so were smartphones, the category that Google and Apple are planning to dominate by leveraging their ubiquitous branding and user interface (UI) skills. So what exactly are Google and Apple planning?

    There has been a great deal of speculation in the blogosphere about the nature of the upcoming Google Phone: http://blogs.business2.com/apple/2007/03/photo_is_this_t.html and http://www.engadget.com/2007/03/15/google-exec-confirms-phone-in-the-labs/. Much of what is being discussed is nonsense. Here are my predictions:

    Apple: Enough has been written on the iPhone's features but not on Apple's strategic moves. The most important is Apple sees the necessity of partnering with wireless carriers. This partnership is unlike the relationship other handset vendors have with carriers. Nokia, Motorola, Samsung and other handset vendors do develop new handset concepts but in the end they customise "standard" handsets to carrier specifications. Apple's iPhone is more akin to RIM where the carrier is a distribution channel for a standard iPhone handset. As far as the iPhone's two differentiated features: a touchscreen and voicemail integration, these remind of the Apple Newton, Steve Jobs' invention of the PDA category. It was not a huge success and I am betting that the iPhone will not be a huge success. It is very hard to change user behavior and the telephone keypad and Qwerty keyboard have been around for over 30 years. Nonetheless I hope the iPhone makes me a convert to touchscreens.

    Google: Google's business model is slightly different for their Google phone. Google has spent more than $50M to acquire companies (i.e. Android) and software licenses to create a handset operating system (OS) that I believe Google intends to offer handset manufacturers for free (essentially open source like Linux). Just like most PC users enter the internet via Google's home page, Google's intention is to have cellphone users do the same by making their handset OS ubiquitous. So far HTC is running the Google OS on a handset but I believe many other handset ODMs will follow. In this business model the handset ODMs will offer the Google Phone to carriers for distribution.

    Microsoft: Microsoft is about the release Windows Mobile 6.0. When I was CEO of Kinetic we developed the first Windows Mobile (then called Windows CE) vehicle computer using version 2.0. We were on the bleeding edge and soon discovered that Microsoft had no idea how to develop an embedded OS nor understood user behavior for mobile phones. Microsoft's strategy of connecting Windows Mobile to Windows Office appeals to large enterprises but I'm certain they will lose out in the consumer market. I was urging Microsoft's Windows CE product managers to focus on the enterprise market back in 1999 but they felt that market was too small. Just deserts--Microsoft sold just 10M Windows Mobile OSs in 2006.

    Nokia: Nokia's wholly owned OS subsidiary Symbian is more ubiquitous than any of the other smartphone OSs as it dominates the high end of the feature phone market. My prediction is that Symbian will soon be used only in Nokia handsets. I also believe that it will be the big loser in the smartphone OS battles.

    Motorola: Motorola is betting on all the above OSs including embedded Linux but not Symbian. They will eventually become like Dell, dependent on TI (equivalent to Intel in the PC world) and OS vendors.

    March 16, 2007 in Cellphone, Current Affairs, Games, Internet, Music, Web/Tech | Permalink | Comments (1) | TrackBack (0)

    The Coming Global Skills Shortage

    There are a number of recent studies that connect entrepreneurship to the role of immigrants in the U.S.:

    National Venture Capital Association: http://www.nvca.org/pdf/AmericanMade_study.pdf

    Duke University: http://memp.pratt.duke.edu/downloads/americas_new_immigrant_entrepreneurs.pdf

    Kaufmann Foundation for Entrepreneurship: http://www.kauffman.org/pdf/Entrepreneurial_Roadmap_web.pdf

    They all essentially say the same thing: skilled immigrants coming to America have been a significant driver of new business creation. America has attracted many of the best brains in the world because of our wealthy post-secondary educational institutions, our enlightened immigration policy and, in my opinion, the quality of our "soft infrastructure" (the attitude and actions of Americans and institutions in favor of entrepreneurs and wealth creation). We were fortunate that many countries were unable to retain these brains for political and economic reasons and they migrated here.

    The opportunity for skilled labor has changed dramatically. Two decades of sustained global expansion, ubiquitous digital communications allowing services to be perfomed remotely and the end of the cold war now means that many brains can stay home and be economically active. As a result I predict a global skills shortage where companies will troll the world looking for people. The two most populous countries in the world: China and India are already facing skills shortages in tier 1 cities and the quality of the hordes of "engineers" they are graduating is suspect. America, the third most populous country, is facing the retirement of tens of millions of baby boomers over the next 20 years.

    The fear is that global growth will slow down as a result of this skills shortage. Alternatively, productivity could increase thus decreasing the demand for skilled workers. The issue is that it is hard to automate skilled work. Even relatively simple tasks such as computer programming are still labor-intensive and the productivity of programmers has not improved significantly in 30 years. Plus the universe of skills is increasing exponentially--subjects such as bioinformatics, nanotechnology did not exist two decades ago but now attract tens of thousands skilled workers.

    So what is the solution? The studies above have a number of recommendations for U.S. policy makers. However they don't address the global skill shortage problem. I think the only viable, large-scale solution is for companies to take the lead to educate new employees for skills that the companies need, either through in-house educational institutions or by paying for employees to go to school. This will be harder for smaller companies, but they might be able to work through their industry organizations to educate employees. Each skilled educator can generate hundreds of skilled workers annually.

    Public schooling was promised to provide equal educational opportunity to every citizen. In most countries public education is unable to keep up with the pace of change of educational needs for youth, primarily because of teachers' unions and shortage of funds. I believe that private companies are where the skilled labor is needed and private companies will have to get into the education business.

    March 01, 2007 in Current Affairs, Internet, Private Equity, Science, Venture Capital, Web/Tech | Permalink | Comments (0) | TrackBack (1)

    Sunita Williams and Bangalore

    As Sunita Williams circles overhead our mutual hometown of greater Boston on the International Space Station, I am struck by the ascension of us Indians around the globe. We can be proud that a quarter of all technology startups in the United States in the past ten years with an immigrant CEO or CTO founder was an Indian-American. Proud that Bangalore and Gurgaon are as well known as Boston and Silicon Valley in technology circles. In contrast, having just returned from a whirlwind tour of four Indian cities, poverty, urban decay and a general lack of world class infrastructure, belie this new view of India and Indians.

    Bangalore’s rise as one of the technology capitals of the world was not accidental. Government decisions made fifty years ago to locate defense research establishments, the Indian Space Research Organisation (ISRO) and the Indian Institute of Science in Bangalore were key to what Bangalore is today. In particular ISRO headquarters established by Vikram Sarabhai in 1969 was an astonishing organization. I had the good fortune of meeting two of ISRO’s leaders: Prof. Satish Dhawan and Prof. U.R. Rao in the mid-80s. They exemplified today’s leaders in Bangalore: self-assured, humble and with a quite determination to have India join the league of leading scientific and engineering nations.

    As a young overseas Indian visiting ISRO in the mid-80s, the place was an eye-opener for me. I discovered an India that was fresh, egalitarian and self-confident. This self-confidence in particular was refreshing—ISRO was building satellites, rockets and related technology completely indigenously with no outside help. This was in part because of the U.S. embargo on technology transfer but it was also a result of Homi Bhabha’s legacy. He set India on an independent path of nuclear and space ascendancy that has created the technical self-confidence evident in Bangalore, greater Delhi, Chennai, and Hyderabad. I recall hours of discussion with Kiran Karnik at ISRO SAC in Ahmedabad, when he was a young turk representing Doordarshan at ISRO. The country was planning on putting a satellite receiver in every village in India, beaming information from indigenous INSAT satellites. We speculated that there would be great social upheaval once villagers had access to the world and woke up to their potential. We were both right and wrong. There has been much change in India these past 20 years, but it has mainly affected urban India, villages essentially have remained the same.

    Clearly there were visionaries in the government that set India on the right path fifty years ago with these great research institutions, and great post-secondary institutions such as IITs and IIMs. It allowed generations of leaders and managers to emerge that form the foundation of the industrial growth the country is experiencing and will do so over the next decade. What was lost was the will and vision to educate and make healthy every Indian child. In some ways these were the competing visions of economic development of India at Independence. Nehru felt that a top-down Soviet planning model was the fastest way to industrialize and bring people out of poverty. Gandhi’s instinct was to distribute economic development to the villages, using the spinning wheel as a metaphor. Clearly both economic growth models are needed.

    We know that vision from government is necessary but best in the form of incentives to the private sector. India has a unique opportunity to learn from best governance practices in other large, diverse countries. These practices have to be applied to the unique situations in India. Let’s take transportation as an example. China has built thousands of kilometers of roads and dozens of airports but in the process hundreds of thousands of people have been displaced. India’s democracy will not allow the same displacement of people. Clearly a different vision has to emerge for giving people and goods in rural India access to transportation. Will it be low cost jet aircraft flying from new regional airports or perhaps coastal ferries, or maybe light-rail? Most likely an innovative combination of all these will be needed.

    There appears to be a political consensus forming in India that the country cannot skip the development of its agricultural and manufacturing economies. The service economy, though booming and world class, cannot provide employment to 80 million youth over the next two decades. In order for agriculture and manufacturing to thrive, India needs to invest billions in physical infrastructure: transportation, logistics, power, and telecommunications. India also needs to spend billions in soft infrastructure: education, and health.

    Sunita Williams, a product of pluralistic India, is an inspiration for all, not just Indians. Even more so is the story of a non-profit organization Akshay Patra. Akshay Patra delivers half a million lunches daily to Indian elementary school children for Rs. 5 per lunch. Patra was founded by Indian entrepreneurs who have applied modern day logistics and distribution thinking to achieve enormous scale. With the right incentives Indian entrepreneurs can reach the moon!

    January 27, 2007 in Current Affairs, Internet, Science, Travel, Web/Tech | Permalink | Comments (16) | TrackBack (0)

    Wireless Spectrum: a scarce commodity?

    Wireless spectrum is a public commodity that has increasingly become very valuable for national governments: as a source of public finance and for public policy. In the US the FCC is in the midst of auctioning 3G spectrum and the bids have reached over $13B. While this may seem like a lot of money, wireless operators in Europe paid almost $100B a few years back for 3G spectrum. In the current auction the highest price paid per megahertz per head of population (MHz-POP) was in Washington DC at $1.59. In contrast UK and German operators paid $4.22 and $3.86 MHz-POP respectively. T-Mobile USA was the biggest bidder paying over $4B. US spectrum is also less restrictive than European spectrum--operators can deploy any technology they want whereas European operators had to deploy W-CDMA technology which at the time was too immature.

    In India the regulators do not sell spectrum but provide it on a revenue-share basis to operators. As a result operators do not need as much capital to provide services but do get hurt in their Opex. Since India is a hyper-competitive market with 12 operators resulting in the lowest voice tarrifs in the world, increased Opex is meaningful. Nonetheless the top operator in India Bharati Airtel is profitable at ARPU of $6. This compares to ARPUs of $45 in the US. Bharati's operations are very innovative and I predict that operators around the world will move in their direction. Bharati has outsourced most of its major activities: radio infrastructure to Nokia and Ericsson, business support services (BSS) to IBM. The radio infrastructure deal is particularly clever: it is revenue share based on $/erlang. In other words, Bharati has incented Nokia and Ericsson to efficiently utilize their spectrum, thus passing on the revenue share arrangement from the regulator.

    I am less familiar with how China regulates its spectrum. Since its main operator China Mobile is majority government owned it is likely that they get "subsidized" spectrum. China has held out offering 3G spectrum to encourage a home grown standard SD-CDMA to evolve. The government hopes to use it's huge domestic market as leverage for its equipment and handset vendors to get a head start for global exports. This strategy backfired for broadband wireless with WiMax defeating a home grown standard.

    September 14, 2006 in Internet, M&A, Private Equity, Science, Venture Capital, Web/Tech | Permalink | Comments (3) | TrackBack (0)

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