Building a Super Cell Phone

The newest wave of tech entrepreneurs is focused on transforming our mobile phones into truly personal computers

It was 2001, Jud Bowman's first week at Stanford University. His roommate showed up with a slim, pink, music-playing cell phone received as a gift from a girlfriend in Japan, where wireless downloading had already taken off.

The phone couldn't make domestic calls, but Bowman carried the curio up and down Sand Hill Road to try to convince venture capitalists that the market for downloadable songs and ringtones was about to explode in the U.S., too.

Bowman, 25, only lasted a month at Stanford, but six years later his company, Motricity, has raised $218.5 million in venture backing, including $50 million from financier Carl Icahn that Motricity plans to use to buy smaller companies. It has hired Goldman Sachs (GS) and Morgan Stanley (MS) to prepare for a possible initial public offering—though a takeover isn't out of the question.

Motricity's software powers downloads of ringtones, games, and other mobile-phone applications for the more than 60 million subscribers of Cingular/AT&T (T), and customers including Viacom's (VIA) MTV Networks and NBC Universal's The Apprentice use it to sell ringtones and let viewers vote on the outcome of shows.

The World Wide Cell

On Mar. 26, Motricity plans to announce a deal with a seventh wireless carrier, Bell Mobility in Canada. "The most pervasive digital device in the world is the cell phone," says Bowman, Motricity's chief technology officer. "We realized these devices would be computing platforms."

Bowman is at the vanguard of young entrepreneurs looking outside already crowded corners of the consumer-focused Web, including social networking, Internet video, and online photo-sharing. These innovators are trying to extend those applications by putting them on cell phones.

He's joined in the pursuit by rising entrepreneurs like Sam Altman, co-founder and chief executive officer of Loopt, a maker of software that uses phones' GPS chips to help friends find each other when they're nearby. Their hope is that the market for mobile-phone software will take off as more consumers get their hands on phones that pack more computing power, larger screens, and location-aware technologies like GPS. "You have your phone with you all the time—it's so much more personal than a computer," says Altman, 21.

For investors, mobile-phone applications represent a fresh way to benefit from rising Internet traffic in a field where Google (GOOG) has a tight grip on ad sales linked to searches and companies have struggled to convert instant-messaging via PC into sales. More than 100,000 subscribers of Sprint Nextel's (S) Boost Mobile service subscribe to Loopt's $3-a-month software, which sends an alert when someone on a buddy list is nearby, potentially game for a meet-up.

"Where do you find the next Google?" says David Weiden, a general partner at Khosla Ventures, who owns a personal stake in Loopt. "It sure isn't in online advertising."

On the horizon could be a host of new mobile services, such as seamless hand-offs between cellular and Internet-based calls, enabled by new standards and the appearance of Wi-Fi chips in more phones.

Getting Carriers to Pick Up

Youthful engineers running startups are by no means alone in recognizing the computing power of cell phones. Microsoft (MSFT) on Mar. 14 bought TellMe Networks, a maker of software that recognizes voice commands, in part to expand the speech recognition capabilities of Windows-powered mobile phones (see, 3/15/07, "Microsoft's Expansive Plans for TellMe").

Research In Motion's (RIMM) latest handheld, the BlackBerry 8800, uses a GPS chip to help users find directions (see, 2/13/07, "BlackBerry Gets Back to Business"). Apple's (AAPL) iPhone, which includes software for e-mail, maps, and search, is due to reach stores in June.

Yahoo! (YHOO) on Mar. 20 expanded its mobile-phone search software to work on more mobile handsets. Even Google is said to be developing a mobile phone.

It's one thing to devise a clever new wireless application. The hard part is getting it onto phones and into consumers' pockets.

Software developers need to ink deals with wireless carriers, but such deals can be costly. "Unless you have a deal with a carrier, it's very hard to get onto a phone," says Bill Hughes, a principal analyst at market researcher In-Stat. "It's not open like on a PC."

One of the biggest challenges is standing out from the pack. "When you look at the things that are popular on wireless handsets, some are created by the big media companies, but many are created by small software developers," says Suzanne King, a partner at New Enterprise Associates who sits on Motricity's board.

"That makes it very difficult for the carriers like Cingular and Verizon [Wireless]. You've got thousands of five-men-and-a-dog content developers out there. How do they ever find each other?"

Loopt's Altman counts 78 competitors including Google, whose Dodgeball mobile-phone software also lets users find each other. Helio, owned by EarthLink (ELNK) and South Korea's SK Telecom (SKM), aims to build social networks on phones using GPS and triangulation technologies involving cell towers.

The company's software also lets users post photos from phones to their MySpace (NWS) pages. Other big players including Nokia (NOK), Qualcomm (QCOM), and Ericsson (ERICB) are already in or considering joining the fray.

Wireless carriers keep a tight rein on software that's advertised for download on their handsets, and collect an average of 25% to 30% of sales of that software—sometimes as much as half, says Bill Gurley, a partner at Benchmark Capital. "You have to dance carefully with the carriers to be successful," he says.

The carriers themselves toy with having a bigger first-hand presence in mobile applications like searching and directions. They're "schizophrenic about whether they should be in or not," Gurley says.

How to Popularize a Product

Then there's the question of how quickly mobile-phone users will take to downloading software. Location-aware software is at the top of things consumers want included with phones, according to In-Stat. But downloading still hasn't taken off.

In-Stat asked 1,363 tech-savvy consumers last April what they wanted to do with their phones beside talk. The top three responses: calling up maps and directions, finding friends and family members, and avoiding traffic jams, Hughes says. But in another survey of early adopters later that year, 29% said they'd never downloaded software, and 17% said they'd downloaded one application. For average U.S. citizens, adoption is likely even lower, Hughes says.

Despite the need to change consumers' behavior and promote products to carriers, mobile software startups are under pressure from investors to keep advertising and marketing expenses low. That's partly a function of too many competitors vying for customers and deals. "I see, unfortunately, a frothy, overcapitalized investment environment" in consumer Internet and mobile companies, says Jim Breyer, a managing partner at Accel Partners.

Breyer, who sits on the board of social network Facebook, urges startups in his portfolio to use word-of-mouth advertising and other capital-efficient ways to promote themselves. One recommendation: that consumer-focused Internet companies spend no more than 2.5% of their budget on marketing, or about a tenth of their research and development expenses.

"At board meetings we very often challenge the management to find as many creative ways as possible to build the business on a zero-dollars budget, he says. "If companies don't have that kind of grass-roots rigor, they're unlikely to build a long-term, standalone business."

Ray Rothrock, a managing general partner at Venrock Associates, advises startups to promote themselves with viral marketing. "In the early days, it's all about doing it without spending money," he says. "The cost of sales should be zero."

One startup that has taken such advice to heart is Twitter, a service of Obvious that lets users send SMS messages to groups of acquaintances—or the entire Web-surfing world—about what they're doing at a given moment (see, 4/2/07, "Twitter: All Trivia, All the Time").

Twitter is experimenting with corporate promotions: The service was a popular way for attendees at the South by Southwest Interactive conference in Austin, Tex., in March to comment on speakers and organize social outings, says Jack Dorsey, who leads the Twitter project for Obvious. Dorsey says he's working with Microsoft to promote Twitter at the software company's Mix07 Web technology conference, which runs from Apr. 30 to May 2 in Las Vegas.

Cut the Power

Software isn't the only mobile category attracting attention from VCs. Startup Azuro makes a software development tool that can reduce the power output of semiconductors in cell phones, MP3 players, and other portable devices by 15% to 25%.

Azuro has raised $13.3 million in venture funding from Benchmark Capital and other investors. Broadcom (BRCM), Cambridge Silicon Radio, and other chipmakers have used Azuro's software to design silicon that appears in handsets, a set-top box, laptops, and other consumer and medical electronics, says founder and CEO Paul Cunningham, 29.

Mini-application "widgets" that can pass on useful pieces of information and help companies track their usage are also gaining popularity. Clearspring Technologies develops widgets for Time Warner (TWX), Gannett's (GCI) USA Today, NBC Universal Pictures, the National Basketball Association's, and the Indianapolis Colts, this year's Super Bowl winner.

The widgets can help Web surfers grab pieces of content and move them onto other Web pages. The company on Mar. 6 closed a $5.5 million investment round led by Novak Biddle Venture Partners, bringing its total funding to $7.5 million, including a stake held by America Online founder Steve Case.

While Clearspring's current efforts are focused on the Web, wireless widgets could appear in the future. "On mobile devices, people need similar bits of information," says co-founder Austin Fath, 26. "We want to become a platform to allow users to easily track and find content they want, anywhere."

Lots of startups are going after that same audience—many of them with great ideas. To win, they'll just need to get the carriers and customers on board without breaking the bank.

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