Spam war too big for Microsoft to fight alone

One of the most profitable Internet business models is a direct marketing tactic expected to cost U.S. companies billions this year. The worldwide problem is so expensive that even cash-rich Microsoft Corp. has thrown down the gauntlet by coordinating with law enforcement agencies and organizing a détente with competitors to fight the intrusive culprit — e-mail spam.

Microsoft says it needs outside help to prevent unwanted e-mail from driving

BY DAVID SPEAKMAN

One of the most profitable Internet business models is a direct marketing tactic expected to cost U.S. companies billions this year. The worldwide problem is so expensive that even cash-rich Microsoft Corp. has thrown down the gauntlet by coordinating with law enforcement agencies and organizing a détente with competitors to fight the intrusive culprit — e-mail spam.

Microsoft says it needs outside help to prevent unwanted e-mail from driving away its e-mail customers. A key ally is San Francisco software company Brightmail Inc., which recently inked a deal with Redmond, Wash.-based company to filter spam from Microsoft’s MSN Hotmail service.

Thirty percent of incoming e-mail to Internet service providers (ISP) is spam, and between 15 and 20 percent of corporate e-mail is spam, according to Ferris Research of San Francisco. Spam will cost U.S. companies $10 billion this year, says Ferris. That’s 20 times the price to rebuild the World Trade Center.

“Spam consumes computing resources, e-mail administrator and helpdesk personnel time and reduces workers’ productivity,” states a recent Ferris research report. “Despite the increasing deployment of antispam services and technology, the number of spam messages, and their size, is continuing to grow.”

Spam messages aren’t limited to text and links to Web pages. These days many spammers include graphic attachments and interactive audio and video presentations in their unsolicited e-mails. Those big attachments choke Internet bandwidth. Brightmail estimates spam accounts for about 41 percent of all global Internet traffic, making it by far Web’s the largest single use.

“Historically, Microsoft has redirected spam to a junk-mail folder in a user’s Hotmail account,” says Brightmail spokesman François Lavaste.

The problem has become so enormous that Microsoft stopped being passive and turned to Brightmail for help stopping spam from polluting its MSN service, he says. Hotmail also caps the number of “blocked” spam e-mail addresses at 250 — meaning users can block the first 250 and after that they’re out of luck.

“Microsoft is working on many fronts to help address the growing problem of spam for consumers,” the company declared in a written statement to Biz Ink. “This includes ongoing technological innovations, intensifying our efforts to cooperate with other ISPs in fighting spam, and working with [the] government to enforce current anti-spam laws.”

MSN’s arch rival, America Online ISP, relies on in-house software to block about 780 million spam messages a day — more than half the daily 1.46 billion incoming e-mails AOL processes.

“I get spam too, and I’m as fed up with it as all of our members are,” says Jonathan Miller, CEO of the America Online ISP, in a press statement addressing AOL’s antispam effort. “I, too, have become outraged by the tide of spam that’s drowning the legitimate e-mail I want to get.”

As much as 15 percent of each America Online monthly subscribers’ bill are costs associated with spam, according to past reports by AOL, which is owned by AOL Time Warner Inc. of New York.

Yahoo Inc. of Sunnyvale is also going it alone against spammers with its SpamGuard filtering software, launched in 1999.

“Yahoo continues to make headway in our fight against spammers who are infiltrating in-boxes with intrusive spam e-mail,” says spokeswoman Mary Osako.

By going it alone, AOL and Yahoo are in the minority. Brightmail claims six of the 10 largest Internet companies as clients.

“ISPs turn to Brightmail to keep up on the arms race with spammers,” Brightmail’s Lavaste says. “Our software has to adjust itself dynamically every 10 minutes because spammers constantly adapt to get through filters.”

Spammers are extremely persistent because they receive an attractive return on investment. On average, only one out of 100,000 people who receive a spam e-mail must respond for the marketing tactic to make money, Microsoft says.

While spammers are fattening their bank accounts, spam’s cost to society is so high that even the traditional junk mail and telemarketing industries are lobbying the U.S. Congress to act against unsolicted e-mail.

The Direct Marketing Association (DMA) is urging federal lawmakers to re-introduce the Anti-Spamming Act to create uniform, federal laws restricting e-mail spam. The bill (HR1017) failed to pass last year. If approved, it would replace a crazy quilt of state laws regulating e-mail spam.

California state Sen. Debra Bowen, D-Marina Del Rey, seeks support for legislation to strengthen the state’s anti-spam laws by allowing consumers to sue spammers $500 for each unwanted e-mail received.

Part of DMA’s motivation for a uniform, federal law levying heavy fines — as much as $11,000 for each unsolicited spam e-mail message sent — is to keep spammers from giving legitimate, direct marketing a reputation worse than it already has for filling mail boxes with junk mail offers and catalogs.

In the war against e-mail spam, U.S. Rep. Zoe Lofgren, D-San Jose, says she plans to introduce antispam legislation later this year.

Helping technology leap into consumer hearts

Even in the down economy, Silicon Valley princesses are lining up to kiss this frog

Since its birth more than 34 years ago in Germany’s Black Forest region, Frog Design Inc., now based in Sunnyvale, has been a leader in creating the “coolness” factor for some of biggest consumer tech brands.

Frog’s philosophy is based on creating a mind meld of technology and human emotion to make other brands famous. During the

Even in the down economy, Silicon Valley princesses are lining up to kiss this frog

Since its birth more than 34 years ago in Germany’s Black Forest region, Frog Design Inc., now based in Sunnyvale, has been a leader in creating the “coolness” factor for some of biggest consumer tech brands.

Frog’s philosophy is based on creating a mind meld of technology and human emotion to make other brands famous. During the past 30 years, its employees, called “frogs,” have been instrumental in designing consumer electronics that gain seemingly instant public adulation for a Who’s Who of tech companies, including Sony Corp., Microsoft Corp. and Apple Computer Inc.

Jojo Roy, vice president of corporate development, is Frog’s chief strategist. He joined the Frog team about three years ago after holding similar positions at IBM’s Tivoli Systems and at now-defunct Apple Macintosh clone maker, Power Computing Corp.

Roy talked with Biz Ink reporter David Speakman about the impact great design has on creating a memorable brand.

Why should technology companies care about consumer emotion?

Frog started as an industrial design firm in the late ’60s with a simple concept: Form follows emotion. The core philosophy of Frog’s founder, Hartmut Esslinger, is that to create a financially successful product, a product needs to go beyond functional competence. It must create excitement or emotional resonance with the user. Great design means great business results.

Is it true Frog’s success started with Sony?

One of Frog’s first clients was the European company WEGA. WEGA and Frog won much attention and many awards in Europe for a sleek, modern designs for a variety of consumer electronic products, including futuristic but extremely usable televisions. WEGA caught the eye of a then up-and-coming Japanese manufacturer, Sony, which later bought WEGA. After the acquisition, a team of frogs went to Japan to work with Sony on a variety of products. The first sweeping initiative resulted in the creation of a design that took advantage of unique Sony television tube technologies. The Sony Trinitron televisions moved the world away from the wood grain vinyl box to the black, “picture frame” aesthetic of the modern television monitor. Frog designed three successive generations of the Trinitron for Sony. In addition, Frog designed introduced and refined such concepts as the first front-load VCR and a variety of portables, including the Walkman. The Sony/Frog relationship lasted for well over 20 years. The interesting part of the Frog/Sony story is that it established for both companies that there was tremendous brand and marketing power in making “products indistinguishable from brand.”

How did you polish Apple?

In the early 1980s, Frog’s work with Sony caught the attention of Steve Jobs, who had a revolutionary technology platform in development at the time. He invited Frog to compete in a global competition to establish a groundbreaking, strategic design language for the to-be-introduced Macintosh platform. Frog won the competition and relocated its headquarters to Silicon Valley. A key goal of the program was — as in the case of Sony — to establish the Macintosh product family as visually distinctive from the functionally competent but bland, beige metal boxes that characterized computers at the time. The result was an extensible design language, called “Snow White” which created design guidelines for a full road map of products. At every sight and touch, the Mac products had a distinctive Apple feel, and stood out in the ocean of undifferentiated boxes at computer retailers. Again, no one had to see a logo to know it was an Apple product when they walked into a store — and the product became inseparable from the brand itself.

How did Frog tackle Windows XP?

Frog has been working with Microsoft on a variety of strategic projects since 1996. The XP team asked Frog to provide a variety of concepts on how to make the Windows experience warmer and friendlier. Microsoft appreciated the value of our interdisciplinary approach, which combines strategists, industrial designers, brand experts, and engineers to create innovative concepts. We thought about the operating system experience as though functions were triggered by three dimensional, physical contact. Many of the concepts were folded into the final release of XP.

Have you ever turned away potential customers?

We have turned away customers. Generally, this occurs when a prospect does not have a clear point of view regarding their business objectives for a project. The last thing Frog wants to do is waste the client’s and our time and money.

Why should companies spend money on branding?

Brand-building, especially by focusing on the core product, is critical. When a company is doing well, it can’t sit still and rest on its laurels. The competitive environment is too dynamic and fast moving. When a company is struggling in the marketplace, they have no choice but to spend on the things that matter if they are to succeed. One theme we’ve encountered repeatedly from clients and prospects in the last year and a half is, roughly, “We must ‘innovate ourselves’ out of tough times.”

Isn’t branding one of the first things cut in “tough times”?

If anything, in a downturn, our clients understand that the product is the core of the experience. The best brand or marketing campaign in the world won’t make a difference if the product itself is bad. Other places where customers touch the brand, like advertising or customer or technical support, can be sporadic and unpredictable in frequency. The unchanging touch point that customers have with a brand is the product itself.

How can Silicon Valley companies use this outlook to make money?

Being the center of the technology universe, many Silicon Valley companies fall in love with the technical aspects of a concept instead of focusing on the real problems a product might solve for a user. The history of the valley is littered with great technical ideas that missed the mark from a user or customer perspective. Relevant innovation is the key, not innovation for the sake of innovation.

Nokia disconnects from Telecom Valley

Despite alarms that sounded when Nokia Corp. raised the spectre of consolidating operations into its Finnish homeland, the telecommunications company’s Mountain View facility will continue on unscathed.

The same can’t be said for a sister operation up north.

By announcing the closure of its Santa Rosa broadband operations later this year, Nokia Corp. becomes the latest high-tech company to pull up and move out of Sonoma County’s battered Telecom Valley.

The

BY DAVID SPEAKMAN

Despite alarms that sounded when Nokia Corp. raised the spectre of consolidating operations into its Finnish homeland, the telecommunications company’s Mountain View facility will continue on unscathed.

The same can’t be said for a sister operation up north.

By announcing the closure of its Santa Rosa broadband operations later this year, Nokia Corp. becomes the latest high-tech company to pull up and move out of Sonoma County’s battered Telecom Valley.

The 240-employee Santa Rosa location houses what is left of Diamond Lane Communications, a digital subscriber line startup Nokia bought in 1999 for $125 million. Diamond was renamed Nokia Networks and became Nokia’s first operation headquartered outside of Finland.

Besides becoming a cornerstone of Sonoma County’s burgeoning telecommunications hub, last year the company moved into a custom-built, 130,000-square-foot office complex.

But on Feb. 12, Nokia unveiled a major restructuring of its broadband and research and development operations that will shut down the Santa Rosa building. That leaves Nokia’s massive Mountain View campus as its sole Bay Area research and development facility.

Some Nokia Networks jobs in Santa Rosa will be eliminated when broadband operations are transferred to Finland. Other research and development jobs will relocate to Mountain View.

An unnamed company spokesman told Finland’s largest daily newspaper, the Helsingin Sanomat, that salaries of product development engineers cost three times more in the U.S. than in Finland and the company wants to consolidate research in as few locations as possible.

In all, 550 of the company’s 19,579 research-and-development employees worldwide will be dismissed, with half of those job cuts in the United States. During the past two years, Nokia has dismissed 8,500 workers.

As part of the restructuring, the company is severely curtailing ambitions for its broadband Internet equipment operations, which will be relocated solely in Espoo, Finland.

Nokia did not return telephone calls requesting comment for this article, but in a news release, the company said the move will allow Nokia to focus on its core business — wireless telephones.

“I think that was a great move,” says Casey Ryan, a San Francisco-based analyst with Wells Fargo Securities. “To be honest, I was never a fan of Nokia getting into broadband.”

In a research report written before Nokia’s restructuring, Ryan voiced concern about the prospects for infrastructure equipment sales in 2003 and stated that Nokia’s ability to profit from the unit could end this year. Ryan applauds the company’s decision to close the broadband venture before it caused further damage.

Bailing out of broadband means Nokia will focus research and development on its profitable, wireless and handset markets. There is activity in those sectors. Since the Santa Rosa closure announcement, Nokia announced wireless deals with New York-based IBM and Sun Microsystems Inc. of Santa Clara.

After lackluster holiday sales, some expect an uptick in Nokia’s wireless business.

This quarter, Ryan says, “we believe that Nokia should begin to see some benefits from launching its latest phones with color screen and embedded cameras.”

He recently changed his “sell” rating on the company to a “hold” recommendation.

SoundView Technology analyst Matt Hoffman agrees.

“Underlying phone demand is better than expected, driven by good subscriber growth,” he says.

Hoffman says Nokia recently replaced Motorola Inc. as his “best idea” in the wireless space. He says Nokia’s new products combined with the upcoming trade show season should give Nokia a boost during the next several months.

Nokia is not abandoning its broadband operations completely and plans to hold on to the 2 million telephone lines on which it currently offers broadband service. But, the company said, it may increase reliance on third-party service providers to handle that market.

In addition to leaving Telecom Valley, a Nokia Networks facility in Kista, Sweden will close.

TechTV revamping with eye on edgy, fun shows

Like the breakthrough technologies and gurus it features, national cable-television channel TechTV is revamping its programming while resisting the temptation to pattern itself after standard cable fare.

Its unconventional approach has attracted 38 million cable and satellite subscribers in the five years since the San Francisco channel went on the air, but hasn’t made a profit. While staying true to its mainstay audience of male viewers who quickly latch

BY DAVID SPEAKMAN

Like the breakthrough technologies and gurus it features, national cable-television channel TechTV is revamping its programming while resisting the temptation to pattern itself after standard cable fare.

Its unconventional approach has attracted 38 million cable and satellite subscribers in the five years since the San Francisco channel went on the air, but hasn’t made a profit. While staying true to its mainstay audience of male viewers who quickly latch onto edgy electronics, TechTV wants to lure younger viewers who find technology fun.

“Technology has been looked at as a tool box,” says Greg Brannan, an E Networks alumnus who’s at the helm of TechTV’s programming. “The time has come to look at it as a toy box as well.”

TechTV believes revamping programming and creating buzz-worthy shows will attract more viewers and more revenue. Brannan is searching for TechTV’s first cult hit to do what “South Park” did for Comedy Central or what “The Osbournes” did for MTV ratings. The channel’s new half-hour series “Wired for Sex” and “Spy School” are expected to tempt younger and younger-thinking viewers.

“We’re targeting, in particular, a younger viewer,” Brannan says. “And, I don’t necessarily mean demographically, but attitudinally; people who really love this space. They use technology for business efficiency like the generation that preceded them, but they also use it for recreation and entertainment. The network to date hasn’t fully taken advantage of that.”

“We’re here to make a profit,” TechTV COO Joe Gillespie says. “I don’t know of any cable startup that turned a profit within its first five years.”

Gillespie joined the privately held company when Ziff-Davis Inc. launched it in May 1998 as ZDTV. In 2000 Microsoft Corp. cofounder Paul Allen bought ZDTV through his Seattle-based Vulcan Inc. investment firm and later renamed the station TechTV. It is carried as Channel 294 on most local cable systems.

“Paul has a real keen sense of what it takes to build an infrastructure,” he says. “It’s all about defining and attracting an audience and he knows it’s got to be about that first and foremost.”

The majority of cable network revenues flow from two streams: advertising and carriage fees paid by local cable companies. The more households tuned in, the greater the revenues.

Although TechTV’s 38 million households seem like large numbers, by cable industry standards a network isn’t fully accessible until 70 million households are watching. So far, TechTV primarily attracts the highly sought after advertiser demographic of educated, affluent male viewers, ages 18 to 35. These are “first adopters,” who buy expensive items, like high-tech toys and cars, as soon as they hit the market.

“TechTV needs to expand to get a broader viewer base,” says Mark Kersey, senior analyst with ARS Inc. of La Jolla. “It’s definitely going to take quite a bit more than 38 million homes. With mainly satellite and digital cable, the channel has limited reach.”

Kersey says there are two ways to grow: by gaining a larger share of the current demographic or to expand into other audiences, women or senior citizens, for example.

TechTV is challenged by going it alone in a cable universe dominated by giant companies, such as AOL Time Warner Inc., Liberty Media Corp. and Viacom Inc., that own multiple channels.

“The key is to get over yourself and realize your perceived weaknesses are your strengths,” Gillespie says. “I like the fact I’m independent because I can be original. I don’t have to be the 15th version of the Discovery Channel. There’s nothing else like TechTV on the planet.”

Could that strength be a weakness?

“When you look around and you don’t see any competitors, either you’re really smart or you’re nuts,” says TV critic Rick Ellis from AllYourTV.com of Birmingham, Ala. But TechTV has “a good chance of survival with an interesting niche and good advertisers.”

True to the Silicon Valley ethos, TechTV is out to prove to the TV establishment that people who defy convention can be profitable.

Milpitas firm capitalizes on new regulations

One Milpitas telecommunications-hardware company claims it’s poised to profit as the telephone company wars shift to wireless Internet services. With fewer than 100 employees, 3-year-old Aperto Networks expects two recent regulatory decisions will help it make a giant leap toward profitability.

In the past two weeks, while many were occupied by a possible

Aperto Networks poised to take advantage of federal rulings that allow access to an additional wireless frequency

BY DAVID SPEAKMAN

One Milpitas telecommunications-hardware company claims it’s poised to profit as the telephone company wars shift to wireless Internet services. With fewer than 100 employees, 3-year-old Aperto Networks expects two recent regulatory decisions will help it make a giant leap toward profitability.

In the past two weeks, while many were occupied by a possible war against Iraq or the latest exploits of the television show “Joe Millionaire,” two milestones shook the wireless broadband industry. The Federal Communications Commission (FCC) ruled that wireless, broadband Internet service providers could use the 5.8 gigahertz frequency and the Institute of Electrical and Electronics Engineers (IEEE) approved the 802.16a standard for fixed, wireless metropolitan-area network (MAN) technology, known as WirelessMAN.

The actions mean energy-efficient, wireless Internet, similar to the 802.11 Wi-Fi standard, is no longer limited to the workplace and home.

Internet service providers have the go-ahead to build towers for fixed, wireless networks that reach two to 30 miles. This creates a huge potential for companies, such as Aperto and Malibu Networks of El Dorado Hills, whose hardware both broadcasts and receives WirelessMAN signals.

“This could propel the whole industry forward,” says Aperto CEO Reza Ahy.

He predicts WirelessMAN could help digital subscriber line providers expand into competitors’ turf without paying toll fees to use the local telephone monopoly’s copper wires.

The new FCC ruling lets Aperto almost double the range of each of its broadband Internet towers to eight miles. The IEEE open standard should result in many chip manufacturers building chip sets that support 802.16a technology, a move that could drive down prices, Ahy says.

“The new IEEE 802.16a standard reshapes the broadband landscape,” says Roger Marks, chairman of the IEEE committee that ironed out the technical details for WirelessMAN. “It closes the first-mile gap, giving users an easily installable, wire-free method to access core networks for multimedia applications.”

Ahy believes the new technology can be easily adapted to the current one.

“Because the technology integrates well with IEEE 802.11 wireless LANs, IEEE 802.16a base stations are excellent candidates for wirelessly linking 802.11 [Wi-Fi] hotspots to the Internet,” he says.

“We believe an open standard will benefit all of us, the end-user in particular as economies of scale make wireless broadband more affordable,” Ahy says.

Ahy sees opportunity for profits in an approaching turf war among telecommunications giants, such as SBC, Verizon and Sprint, as they build nationwide, wireless, broadband networks and battle for market share.

Watchdog chides eBay’s ‘monopoly’

Doubling revenue annually to gain 90 percent market share, one technology company has left so many competitors in the dust that consumer advocates are crying foul and claiming it’s a monopoly. No, this is not another story about Redmond, Wash.-based Microsoft Corp. It’s the saga of San Jose’s own eBay Inc.

Since its founding in a San Jose living room by entrepreneur Pierre Omidyar in 1995, eBay has grown

BY DAVID SPEAKMAN

Doubling revenue annually to gain 90 percent market share, one technology company has left so many competitors in the dust that consumer advocates are crying foul and claiming it’s a monopoly. No, this is not another story about Redmond, Wash.-based Microsoft Corp. It’s the saga of San Jose’s own eBay Inc.

Since its founding in a San Jose living room by entrepreneur Pierre Omidyar in 1995, eBay has grown profitable netting $249.9 million last year, up from a profit of $90.4 million in 2001. If it keeps on this path, it could grow up to be a blue-chip company.

eBay (Nasdaq: EBAY) is one of the few Internet companies in analysts’ good graces. Of the 14 Wall Street brokerages that follow the online auctioneer, 10 rate it a “strong buy” or “buy” while four have a “hold” rating on the stock, which closed Feb. 10 at $73.56 per share.

“We believe that eBay still has multiple layers of growth looking into future quarters,” says Jeetil Patel of Deutsche Bank Securities Inc. in San Francisco, who gives it a “buy” rating.

He believes eBay’s major growth will be generated by being an Internet sales outlet for traditional retailers. According to industry and analyst reports, eBay dominates online auctions with a market share of between 85 and 90 percent, which many consider de facto monopoly status. Other online auctioneers include Yahoo Inc. of Sunnyvale and uBid Inc. of Chicago.

eBay refused to talk about complaints regarding its de facto monopoly.

San Jose State University accounting and finance professor Frank Jones says when a company has strong enough market position to be a de facto monopoly, there are four things to evaluate: competition, corporate structure, monopolistic practices and the markets it serves.

“It seems eBay may end up with a structure that looks like a monopoly,” says Jones. “It doesn’t look like they are engaging in any monopolistic practices like Microsoft was.”

Industry watchdog The Auction Guild Inc. of Fayette, N.Y. disagrees, saying eBay uses software upgrades to disrupt third-party software access to its listing network.

“As for monopolies, it’s probably not as important as the telephone was in the day of AT&T’s Ma Bell or computer operating systems as with Microsoft,” SJSU’s Jones says. “Some would say Microsoft was engaging in monopolistic practices that kept the competition away, and eBay certainly hasn’t done that yet and there is no reason to think they would.”

But The Auction Guild claims eBay is playing a different monopoly game of mergers and acquisitions, which includes eBay’s $1.5 billion purchase of PayPal, an online payment service. The guild lobbied the federal government unsuccessfully to stop the merger.

“PayPal was a biggie,” says Guild CEO Rosalinda Baldwin. “PayPal is more than just eBay. Some of the Guild’s advertisers pay by PayPal. We’re the industry watchdog and now the company we watch the most has sensitive financial information about us that otherwise would be confidential. Customers at other auctions use PayPal too. eBay knows who’s selling on their competitor sites and how much is being sold. That’s the most amazing monopolistic practice; they got handed the bank.”

With a market capitalization of about $22 billion, eBay is valued twice as much as its closest electronic-commerce competitor, USA lnteractive of New York, which owns the Home Shopping Network, Ticketmaster and Expedia.

Since inception eBay has described itself as a consumer market based on the same principles as a stock market. But to the frustration of eBay’s public relations department, the auction giant is lumped into e-commerce.

“Many people still do not understand what eBay does,” says Kevin Pursglove, eBay’s spokesman. “Many people think we are an online retailer, when we are not. We are a marketplace, more like Nasdaq.”

SJSU’s Jones agrees. eBay is not a principal in sales because it doesn’t sell inventory it owns like retailers Amazon.com or Sears, he says. eBay is more like newspaper classified ads with Nasdaq-style auctions, although he believes eBay is more open than Nasdaq.

“The case could be made that eBay is a better market than Nasdaq,” says Jones. “At eBay, a buyer sees all the offers, but that’s not the case at Nasdaq where buyers don’t see all the bids.”

The difficulty of competing against eBay surprises some. World-known, traditional auction giant Sotheby’s Holdings of New York announced recently that it will close its 2-year-old, online auction because it isn’t profitable. eBay, which ran Sothebys.com for a percentage of sales, says it will publicize Sotheby’s live auctions from the eBay Web site.

“It’s amazing that nobody has successfully stepped in and competed with eBay,” Jones says. “It seems like it would be lots easier to do that than it would have been to develop a new operating system to take on Microsoft.”

Meanwhile, with nearly 62 million registered users, eBay’s market share continues to swell.

Handspring exiting PDA market to stay alive

Bleeding money, Handspring, Inc. is attempting a series of
financial acrobatics to survive.

It recently eliminated 50 jobs, slashed expensive programs and junked plans to move to a new, high-profile Sunnyvale headquarters to give its bet on wireless time to pay off (see related story, page 1).

The company, whose founders pioneered personal digital assistants, will exit the organizer business in the next two months as worldwide demand for handheld computers

BY DAVID SPEAKMAN

Bleeding money, Handspring, Inc. is attempting a series of
financial acrobatics to survive.

It recently eliminated 50 jobs, slashed expensive programs and junked plans to move to a new, high-profile Sunnyvale headquarters to give its bet on wireless time to pay off (see related story, page 1).

The company, whose founders pioneered personal digital assistants, will exit the organizer business in the next two months as worldwide demand for handheld computers slumps.

While reporting a second-quarter loss Jan. 16, the Mountain View-based maker of PDAs and cell phones based on the Palm Inc. operating system, announced it will pay up to $80 million to back out of its $350 million, 12-year lease signed in 2001. Moving to the two new office buildings, built by Mozart Development Co., would have made Handspring the main tenant in Sunnyvale’s redeveloped downtown.

Handspring will pay Mozart $61.2 million in cash and an additional $5 million in various debt payments during the next five years. The company also will issue Mozart warrants to purchase 10 million Handspring shares. Because of the settlement, Handspring says it expects to post a charge of between $75 and $80 million in the current quarter.

“Prior to this, Handspring was paying $2.5 million per quarter to service the lease obligations,” says San Francisco-based analyst Jason Tsai with RTX Securities. “Handspring continues to work through tumultuous times.”

Another tourniquet applied to the cash bleedout is a phasing out of the company’s vanilla organizer business. Handspring will bow out of PDAs and focus solely on selling its Treo Communicator family of Palm-enabled cell phones.

Treos are sold mainly by mobile telephone carriers, such as AT&T Wireless, Cingular and Verizon Wireless. The company said it sold 50,000 Treo Communicators last quarter, priced between $450 and $500, bumping up its total Treo customers to 140,000.

“With its business so focused on its Communicator business, Handspring is at the mercy of its carrier partners and their buying requirements,” Tsai says. “Handspring will need to secure new, strategic carrier relationships in order to have a viable long-term business plan. While we do believe Handspring will be able to secure these relationships, timing is critical.”

Handspring has never made a profit and time may be running out. After the $61.2 million payment to Mozart, Handspring’s non-restricted cash balance will be about $50 million, and restricted monies will amount to $2.3 million.

Bear Stearns analyst Andrew Neff says with Handspring currently burning between $10 million and $12 million a quarter, the company is dangerously close to running out of funds. Neff speculates that Handspring could face bankruptcy unless it turns a profit by year’s end, as Handspring management claims it should.

During the company’s earnings conference call with analysts, Handspring CEO Donna Dubinsky said the $61.2 million price tag to buy out the lease is worth it.

“By significantly reducing our original financial obligation, we lower our break-even point, and we are better positioned to achieve our goal of profit by the end of the calendar year,” she said.

New York-based analyst Charles Wolf of Needham & Co. says the continued viability of Handspring depends on its ability to ramp up sales of Treo Communicators.

“The slope of that ramp remains the wild card,” he says.

Even if Hanspring manages the ramp, analysts and investors are waiting to see if the company can stick its landing.

Multimedia evangelist bets on broadband Net

Best known as a founder of rich-media software innovator Macromedia Inc. of San Francisco, Marc Canter’s reputation is on the line as he bets on a sector that has eluded the promised land of profitability for years: broadband Internet.

Twelve years after leaving Macromedia, interactive multimedia evangelist Canter is creating a new type of digital lifestyle product at Broadband Mechanics Inc., a San Francisco startup he founded and funded

BY DAVID SPEAKMAN

Best known as a founder of rich-media software innovator Macromedia Inc. of San Francisco, Marc Canter’s reputation is on the line as he bets on a sector that has eluded the promised land of profitability for years: broadband Internet.

Twelve years after leaving Macromedia, interactive multimedia evangelist Canter is creating a new type of digital lifestyle product at Broadband Mechanics Inc., a San Francisco startup he founded and funded in 1999.

Canter believes future human communication will involve technology and the Internet on a scale only imagined.

“I’m a creative type of guy. I’ve always focused on enabling people to express themselves creatively,” says Canter , whose first digital forays began in electronic music.

He expects Broadband Mechanics will revolutionize audio-, video- and text-based communications with a range of products from multimedia Web chat and conferencing to shared audio and video entertainment. His company is developing software to bridge gaps and fill niches left by current e-mail, instant messaging, chat, blogging and Web conference software.

Canter’s vision depends on universal adoption of broadband Internet, which he is quick to point out is not there yet.

“What we’re calling broadband today is what I call ‘mid-band,'” he says of digital subscriber line and cable-modem technology, which transfers data between 300 kilobits to 1 megabit a second. “Real broadband is about 5 megabits per second. If we had real broadband, we could then stream DVD-quality movies over the Internet.”

Until then, Broadband Mechanics’ research focuses on home networks, which can work at faster speeds than DSL or cable modems to connect computers, mobile phones, personal digital assistants, personal video recorders, printers and MP3 players. Broadband Mechanics is committed to producing technology based upon open standards.

“The last thing we need is Microsoft to shove another standard down our throat and control everything,” Canter says.

“Marc has the unique ability to identify with the seemingly nascent area of business down the road in the future that can be incredibly lucrative,” says Dave Jacobs, Broadband Mechanics’ acting CEO.

Canter shares his view of the digital future at http://blog.canter.com.

New metro wireless standards set

A new broadband standard has been set that could provide wireless Internet service to laptop computers.

Called 802.16 (similar to 802.11 Wi-Fi technology), the new service will allow broadband wireless metropolitan networks (MANs), which could cover an entire city or metropolitan region.

The standard was approved by the Institute of Electrical and Electronics Engineers (IEEE), the industry governing body responsible for creating Internet standards.

Current Wi-Fi wireless

New metro wireless standards set

A new broadband standard has been set that could provide wireless Internet service to laptop computers.

Called 802.16 (similar to 802.11 Wi-Fi technology), the new service will allow broadband wireless metropolitan networks (MANs), which could cover an entire city or metropolitan region.

The standard was approved by the Institute of Electrical and Electronics Engineers (IEEE), the industry governing body responsible for creating Internet standards.

Current Wi-Fi wireless technology is limited to local area networks and has a reach of about 300 yards. The new standards enables service between two and 30 miles per hub depending on a location’s topography.

Proponents say this new standard could usher in a new era of Internet usage for mobile devices such as laptop computers and wireless telephones.

“It closes the first-mile gap, giving users an easily installable, wire-free method to access core networks for multimedia applications,” says Roger Marks, chairman of Denver-based 802.16 Working Group on Wireless Broadband Access.

Do or die for SGI

Fresh off its 20-year anniversary, money-losing Silicon Graphics Inc. says it knows where the future is. This is another makeover for the Mountain View-based company, which Hoover’s Inc. describes as having had more facelifts than Michael Jackson.

Like IBM, Hewlett-Packard Co., Sun Microsystems Inc. and Apple Computer Inc., SGI hopes for a comeback featuring the market demand for cost efficiency and low-cost Linux

SGI’s latest facelift may be its last

BY DAVID SPEAKMAN

Fresh off its 20-year anniversary, money-losing Silicon Graphics Inc. says it knows where the future is. This is another makeover for the Mountain View-based company, which Hoover’s Inc. describes as having had more facelifts than Michael Jackson.

Like IBM, Hewlett-Packard Co., Sun Microsystems Inc. and Apple Computer Inc., SGI hopes for a comeback featuring the market demand for cost efficiency and low-cost Linux to expand its stronghold of high-margin servers and supercomputer clusters to scientific and engineering research.

“We are 100 percent focused on science and engineering,” says SGI CEO Bob Bishop. “We live or die on what we do in that space. Plan B is Plan A. We have no backup.”

SGI has not earned a quarterly profit since June 1999. Recently, it reported a loss of 8 cents a share for the second quarter ended Dec. 31 on revenue of $263 million, down from a loss of 2 cents a share the previous year. That’s much better than the 13 cent loss the Street had expected, according to Thomson Financial/First Call. Analysts expect the company to lose 10 cents a share in the current quarter.

“With a cash burn rate of $20 million in the [current] quarter, a revenue pickup is clearly needed in 2003,” says Buckingham Research Group analyst Jay Stevens, noting that on the positive side, the company is lean with a gross margin of between 42 and 43 percent.

At LinuxWorld in New York earlier this year, SGI won the “Best of Show” award for its system that pairs Santa Clara-based Intel Corp.’s 64-bit Itanium chips with its Altix 3000 family of servers and superclusters. Altix 3000 machines are set to ship in March and sales may appear in the company’s results in June.

Trim and focused, SGI is hoping its 3-year-old Linux initiative is more successful than past flirtations and failures in high-end personal computers, video game chips, streaming media, 3-D animation software, Hollywood special effects and computer graphics cards.

Under Bishop’s leadership since 1999, SGI has quit its consumer products business, killed off all software operations not linked to its operating system and either sold or closed down its enterprise operations, resulting in pink slips to thousands of employees since 1998.

“We have a tight mission to be the unchallenged supplier of tools to scientists and researchers,” Bishop says, pursuing a market that he estimates is worth $15 billion.

Growth is possible because SGI has only tapped about 10 percent of the higher-margin scientific technology and engineering market. It wants to conquer industries dependent on researchers such as defense, biotechnology and Linux-based computing.

Sales to the defense industry make up about one-third of SGI’s projected fiscal year revenue of $1.3 billion, up from 25 percent in 1989 when many high tech companies abandoned defense for the Internet.

On Jan. 28, SGI unveiled its most recent defense deal with Lockheed Martin Naval Electronics & Surveillance Systems of Akron, Ohio, to double the number of SGI-built F-16 Mission Training centers to 10. Both companies say it is a multi-million dollar deal, but its exact worth won’t be
determined until the custom systems are installed. Each system is expected to exceed $1 million.

SGI’s CEO is content to let bigger fish fight over the consumer market.

“PCs just run out of horsepower,” he says. “Local defense labs waste billions of dollars a year on inefficient computing. We don’t give a damn about the $1 trillion consumer PC market. Let Dell and HP fight it out in that market, which is a commodity anyway.”

Only time will tell if SGI, known for the high-powered computers behind the blockbuster movie “Jurassic Park,” will finally turn a profit or go the way of dinosaurs.