Wednesday, March 19, 2008

Mitchell Kertzman:On Power of Silicon Valley

Mitchell Kertzman, Managing Director of Hummer Winblad Venture Partners, regards entrepreneurs of Silicon Valley as its power. Here is what he tells about innovation and future trend of investments...

How one city in Silicon Valley tries to solve its bandwidth problem

Silicon Valley is renowned as the technology hub of the world, yet broadband speeds are, at best, 10 percent of what is available in markets such as Japan, Korea and Northern Europe. Why is sufficient bandwidth such a rare commodity in this global center for innovation and what’s being done about it?

“We are an innovative region, innovation is our life blood. Not having world class communications in a city like Palo Alto becomes a threat to our brand”, says Bob Harrington, a resident of Palo Alto and an advocate for the community citywide fiber initiative started in 2001.

As opposed to the copper cables of telephones and television wires, fiber optic cables convey information in the form of hyperquick laser pulses. Consumers hooked up with fiber-optic communication can get speeds up to 1000 times faster than standard DSL and Cable networks. The future promises even more. In recent experiments, broadband rates of up to 14.000 Gigabits per second have been reached over a single fiber.

While Palo Alto does have a limited municipal area fiber network and the incumbent cable and phone providers have some fiber in the city, cost and availability means that the vast majority of the residents, small and middle-sized companies have to do without fiber.

“Today the infrastructure is not in place so if you want fiber, it takes a lot of time, money, and effort to get connected”, says Brian Ward, Utilities Account Representative at the City of Palo Alto. “Residents call us all the time saying they want access to high-speed Internet so we’re eager to find a solution that works for everybody”, says Ward.

This problem is not unique for Palo Alto. Finding functioning business models to build fiber to the home in places with low population density is a challenge currently facing communities across America. Thus even though it is the self-proclaimed high-tech capital of the world with some of the highest property values in America, with only 60,000 residents, Palo Alto is too small to warrant a purely private Fiber to the Home investment.

Not having a solution for the business model challenge in low density environments is hurting the competitive position of the U.S. According to the Organization for Economic Cooperation and Development (OECD), the U.S. has dropped from 4th to 15th place in the world when it comes to broadband penetration since 2001. The International Telecommunications Union’s digital opportunity index which considers price and capacity shows even worse ratings with the U.S. coming in at 21st place. Broadband subscribers in the U.S. pay twice as much as their Asian or European counterparts for one-twentieth the speed.

Broadband policy in the United States is focused on driving "facilities based" competition and maintaining relatively light regulation, thus giving state agencies limited or no jurisdiction over broadband providers, including telecommunications, wireless, and video carriers and satellite providers. While this policy has succeeded in driving more private-sector investment in broadband infrastructure, it also means that it is difficult to get companies to invest in the deployment of fiber in less profitable areas.

In 1994, with strong citizen encouragement, Palo Alto first started exploring the possibility of building a city fiber network in phases, a fiber network designed to serve big companies would be built first, then if proven feasible, a citywide fiber to the home network would be added. A 32-mile city-owned fiber network was built in 1996, designed to serve big companies who could install and manage their own electronics on either end of the point-to-point fiber strand they leased by the mile by the month. It was, and is, quite successful.

In 2001, planning for a citywide "fiber to the home" network began in earnest. However, the project was suspended in 2005 by the city council because of regulatory issues and because it was considered too expensive to carry out with public funding alone. The city has been searching for a legally and financially viable solution ever since.
Now it seems they may finally have found one.

“Working 9 to 5 is not enough in a place like Silicon Valley," Harrington says. "Our most important innovative assets, the people, go home at night and we need to make sure they have continued access to reliable communications. If you want to work from home, a Mickey Mouse connection is not enough."

Through a public Request for Proposal (RFP) process, the city of Palo Alto identified a private consortium that has come up with an innovative business model for enabling the building of the network.

“The plan our group has developed has the potential to transform the way citizens in Palo Alto live, work and play with very limited risk to the city”, says Matt Wenger, President of PacketFront Inc, one of the companies in the consortium and a global pioneer in community fiber networks.

The consortium has proposed a model that would leverage existing city assets like rights-of-way, conduits, and poles to create the stimulus necessary to attract private investment in "fiber to the home" projects.

"The idea behind our approach is to enable cities like Palo Alto to achieve their vision without the financial, legal, or operational risks usually associated with community owned and operated networks,” says Wenger. “Both the public and private sectors are daunted by the expense of building fiber to the home in small communities like this. Only by working together can we overcome those obstacles.”

The consortium hopes the city will formally agree to participate in the project in the next few months. If the city does, proponents claim they will be able to connect the first residents and businesses before the end of the year.

Concentration in Web searching raises worries about fairness

During the last five years, the internet search market has consolidated into a duopoly, with very few alternatives to the two dominating services. That -- and not Microsofts current proposal to buy Yahoo -- is the real big issue for the average internet user.

Eric Schmidt, CEO Google CEO, recently said that a merger between Yahoo and Microsoft might harm the openness of the internet and the free flow of information.

But in reality, it is hard to see how the proposed merger would change the present situation significantly. Since Microsoft launched its proposal to acquire Yahoo in February, Yahoo’s management have tried to fend off the unwanted suitor. Their main argument, as repeated in a business presentation on Tuesday, is simple:

Google is big, so are we and Microsoft is far behind, and that will make us extremely profitable in the future. (Which of course is just the reason why Microsoft’s management wants to buy the company.)

If Jerry Yang’s estimates of market share are correct, the two leadings search engines already have a nearly total dominance. Which means that we have a duopoly in place, Microsoft merger or not.

That could be bad news, some say, for new approaches to navigating the web.

“I think it is worrisome, primarily because it might stifle innovation," says James Hendler, professor at Rensselaer Polytechnic in New York. "We have seen that happening before in operating systems, web browsers. I don’t think it will change our view of the world, but it means that a lot of new approaches in search that won’t get tried.”

In his own research, Mr. Hendler aims at making information on the web searchable in new ways.

“People who are trying to launch new search engines are going to have a very hard time," he says, given the concentration in the industry.

So, why would anyone want a new search engine? Well, you can regard the databases and the search algorithms used as a representation of the web, in the same manner as the photo is a representation of a piece of the physical reality. Change the angle, the lightning or the focus and the character of the picture changes. In the same way, there are differences in how different search engines find and rank pages, in their perspective of the web so to say.

One example of a different approach to search is Mahalo, an attempt to create a service based on input from users, in a manner reminding of Wikipedia. At least in theory, human-powered search could give quite different results from computerized search.

Another issue is "trust." The big search engines use their own proprietary technology to find and rank web pages. So how do you know that the results are fair?

Well, you don’t, some say.

“In particular, since there are no regulatory agencies watching how search engines determine which result should be number one and which should be number 393,551, what happens if that's not actually fair?” asks Dave Taylor, a Colorado-based blogger.

Mr. Taylor's concerns are shared by Mr. Hendler who opines, “It is easy to manipulate searches. Google has chosen to differentiate between sponsord search results from non-sponsored. But we only have their word for it.”

“You have to trust Google or Microsoft," he adds. "But in the end there is the question, why am I trusting them? And if I don’t trust them, where will I go if there is only one or two of them?”

Weak dollar speeds Tesla's European plans

Tesla Motors president and CEO, Ze’ev Drori, confirmed that the company this week began regular production of its all-electric sports car, the Tesla Roadster. The 600 cars to be produced in 2008 are already sold. Tesla is currently taking orders for its 2009 model. To date, about 300 cars for the 2009 model have been ordered.

The price of the car – $100,000 – might sound high, but the falling value of the dollar rate effectively makes the car cheaper for Europeans and Asians to buy and more expensive to build, since Tesla buys parts from non-dollar countries and assembles the car in England. The euro has strengthened 18 per cent against the dollar in the past year. It continued to rise 2 per cent last week, following the interest rate cut by U.S. Federal Reserve. Prospects for further falls in the value of the dollar are likely, according to economists.

Tesla now hopes to achieve a better balance between income and cost currencies, by starting to sell the car in Europe.

“We have always wanted to distribute in Europe, but with the low dollar we are going to move quicker,” says Darryl Siry, Vice President of Sales, Marketing and Service at Tesla. “The introduction date for the Roadster in Europe will be announced in a couple of months.”

The U.S. and the European car markets operate under different regulatory frameworks.
In order to sell the car in Europe, Tesla has to cope with a whole new set of emissions and safety standards.

“Emissions regulations we have no problem meeting,” Mr. Siry says with a smile.

Tesla hasn't selected its initial target countries in Europe yet, but Sweden and Norway are considered attractive. While these countries are small, they are early adopters of environmentally-friendly technologies. All-electric cars definitely fall in this category. In addition, Norway and Sweden offer tax incentives to domestic buyers of low-emission cars that effectively will reduce the price of the Tesla model.

The car runs on a lithium ion battery that allows it to go for 220 miles on a single charge. These estimates are derived from climate conditions in California. Lithium-ion batteries might not last as long in a cold climate.

“A big challenge for electric cars in cold countries is to resist the low temperature,” says Niklas Gustavsson, environmental spokesperson for Volvo, which is using the same type of battery in its hybrid prototype vehicle. “We know that the capacity of lithium ion batteries decreases in lower temperature.”