With the proliferation of the new iPhone, Mobile Applications as a viable VC investment category is dead.
Companies like Digital Chocolate (founded by software gaming pioneer Trip Hawkins) are now painfully aware of that. Recently switching gears, it is debatable whether they can compete with the endless supply of a new free-market.
The future of many companies like Aeroprise, still basking in the glory of a proprietary Blackberry environment and tucked away in the enterprise mobile markets, will be severely threatened by standards-based technology running on any internet-capable device, very soon.
The premium market of mobile applications protected by walled gardens has been changed to a free-market by Apple’s iPhone and the App Store. Macro-economics, discussed in this blog many times before, at work again.
Rather than single-minded companies being able to protect their turf with a collection of proprietary applications (usually aimed at businesses), now individuals will start to create applications for other users. By the people, for the people. N/N : the airplane code for Steve Jobs’ Gulfstream. Get it already?
User-generated-content (one of those awkward Silicon Valley attempts of describing content that resides in a free marketplace) has a brand new companion, it is called: applications.
But these applications are no longer mobile applications, they are internet applications – that happen to run on a great mobile internet device. And they will run on many other internet devices, hard-wired or mobile. Think of them as the big brother of widgets, task-oriented applications that remove the need to use a browser to benefit from the Internet. They target regular consumers, not internet savvy technologists and they self-configure, based on location and other user preferences.
So the investment model for mobile has changed dramatically and the recently announced $100M iFund (by top investment firm KPCB) and a similar one by BlackBerry – the vehicle of purportedly investing $1M per application vendor – makes no sense at all. Here is why:
1/ User-generated content does not provide a great foundation for a large upside – let alone an acquisition or IPO that is priced to produce interesting VC returns.
2/ The value to the VC is in the “winner-takes-all” platform, not the content (albeit that produces great value and choice to the consumer). Apple, with the App Store platform for distributing applications using free-market principles (although still not perfect, check out our marketplace rules) will again walk away with the same benefits it reaped from the iTunes store, direct and halo.
3/ Application development is a very high-cost business, especially in a highly competitive marketplace. The gaming industry wrapped in a slower transition from premium to free-market is finding that out too.
4/ Mobile used to be a proprietary and protectable path to the internet. No longer. The intelligence of the backend service, accessed through mobile or hard-wired computing devices is where the value is.
So, I suggest renaming the iFund in Software-As- A-Service fund, agnostic to access paradigm.
Nokia and Blackberry (RIM) will have to follow quickly. But they would need to start hiring people who understand macro-economics, not just technologists that create poor copies of Apple’s implementation.
All phones need to have a real operating system inside, and Roger McNamee’s investment in Palm may make sense in that way, but they better step it up quickly. Nokia is off playing with Symbian, Microsoft has its own concoction. All of them pretty much asleep at the macro-economic wheel.
Yet for individuals, on the supply and buy side, all this disruption leads to new opportunities that are derived from a meritocracy. Fantastic applications are being developed and used in massive numbers. The world is indeed flat after all.
