Archive | April 2014

Part II: Enterprise use of rugged mobile devices

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Not all smartphones or tablets are used in nice safe offices: many firms have field forces that go into harsh environments of various severities. Plus having mobile devices that are more rugged reduces cost over the long run, as they don’t need to be replaced as often.

Historically, there were basically two classes of mobile devices: consumer devices that were not really rugged in any way (dust, moisture, or anything else) and rugged devices that were usually both IP67 and MIL-STD-810 compliant, like the one in the photo above. The latter devices (whether smartphones or tablets) tended to cost at least double what the consumer devices did, and specifying them meant enterprises required full business cases, and lots of money…which may have slowed the adoption of mobile devices in field force deployments unless the business case was really obvious.

There are also after-market cases that enterprises could buy to take consumer devices up to (or almost up to) the level of the fully rugged and more expensive devices. Probably the case I see the most often is the OtterBox, which comes in various versions of varying ruggedness. I have friends who swear by them, and they do work, but they cost an extra $50 or so, and they make small sleek devices into bigger and chunkier devices. But the demand for making devices more rugged is obviously big: OtterBox had over $500 million in revenues a year ago, and is probably close to $1 billion in sales run rate by now.

Why can’t someone make a rugged (or at least rugged enough!) mobile device that doesn’t need a case, or at least as big of a case?

Luckily, the trend is our friend: consumer mobile devices have steadily been getting more rugged across some (but not all) of the criteria one would look for in a field force device…and at the usual consumer price. Here is a list of some consumer smartphones that are IP67-68 compliant: some are thousand dollar devices that fit that traditional rugged mold, and others are only a few hundred dollars. The devices have stronger screens, and are also sealed against dirt and moisture. The average consumer device is getting tougher over time, and that trend is almost certain to continue.

I need to be clear that there remain MANY field force deployments that require more than IP67-68, and these new consumer smartphones will not be suitable or safe for those instances.  But for some enterprises, the devices will be rugged enough for some portion of field force uses. This was one of our Deloitte 2014 TMT Predictions. (Paul Lee was lead author on this topic, and I think it is a great Prediction. But we publish 14-16 Predictions most years, and I can’t talk to every single one in a 45 minute presentation. Except in Calgary, the local Deloitte firms didn’t ask me to include the rugged mobile device Prediction as one of the topics to be discussed.)

What about tablets? Well, we are not even four months into 2014, and our TMT Prediction is about the full year. So far, very few tablets that I have seen have shown the same ruggedness ‘feature creep’ that we are seeing in smartphones. The stronger glass has been a bit of an issue, and I suspect that making the larger devices impervious to dust and moisture is trickier than in smartphones. Finally, a larger and heavier device is always going to be more of a mechanical challenge for drop tests: bigger devices are inherently more fragile.

So while I haven’t run into any IP67 consumer tablets in the field yet, I expect more of them by the fall. Based on what we have seen so far in more rugged smartphones, those are likely to be Android devices, but that’s just an educated guess. (I normally never talk about individual operating systems, but the clear trend has been that Android devices seem to be experimenting with ruggedness as a differentiating feature, and other OS have not.) Next, there are a few rugged consumer tablets out there already: this one from France and this Chinese one. Both are out of stock, and they haven’t come up in any of my discussions on this topic, but that may not mean much due to small sample size.

To close this post, it is worth remembering that many enterprises have spec-ed ‘rugged’ devices for all kinds of reasons. Sometimes they assume that any device going into the field needs to be rugged, and that is not true: they only need to resist a bit of water or grit, and they don’t even need full IP67 ruggedness. Next, sometimes they need IP67 and some aspects of MIL-STD-810, but not all. In those instances, they have over-speced for ruggedness, and may move to adopting ‘rugged enough’ consumer devices.

Finally, there are use cases where it isn’t just about water, sand or worrying about dropping the device: MIL-STD-810 Method 511 makes sure that the device is safe to use in an explosive atmosphere. In a dinner with oil company executives in Calgary, this was a key topic. The downside of not being rugged enough is NOT merely a cracked screen or broken phone: the wrong device on an oil rig can emit an explosion-causing spark, which could result in millions of dollars of damage and dozens of lives lost. There will remain many enterprise use applications where the traditional high end rugged device is the only acceptable solution.

As an aside, it is worth noting that it isn’t just smartphones or tablets that pose that kind of risk on an oil-platform. I am a big fan of wearables in the enterprise: I think that market may end up being much more useful and valuable than the consumer market over time. There are various jobs on a rig, but picture a Motorhand or Derrickhand (on the rig floor or up on the platform) having a device that records what they are seeing in real time, presents them with a augmented reality display of the relevant data, and all worn on their heads in a hands-free fashion? Brilliant – but it better pass MIL-STD-810 Method 511 and not blow everyone on the rig to Kingdom Come! 

The question that many of my clients have asked is if new, more-rugged consumer mobile devices will cut into sales of existing rugged devices? Or will they be additive, growing the overall space? My hunch (and our Deloitte prediction) was that they will be additive, but there is no good data so far.

Great: we now have a path to seeing rugged enough consumer devices take off in the enterprise. But just how popular will they be for consumers? Is this something that only 20% of buyers will want, or will it become near ubiquitous?

Next post: Consumer uptake of rugged mobile devices. Is rugged the new black?

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Tough enough: making smartphones and tablets more rugged

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Smartphones and tablets are becoming increasingly rugged. In this three part blog post, I want to 1) describe what we mean by ‘ruggedness’, 2) see how enterprises are buying off-the-shelf consumer mobile devices instead of costly special-purpose smartphones and tablets, and then 3) finish with a Prediction that ruggedness may be the new “killer feature” on mobile devices, and will even become the norm within a few years.

Part I: What does ‘Rugged’ really mean in a mobile device?

A lot of things! Making the screens scratch resistant has already happened: you have to be pretty negligent to scratch a screen these days. Bodies are getting more scratch resistant too, and there is even a phone that has ‘self-healing’ skin that is supposed to automatically repair minor scratches over time, although it is not clear how important consumers have found this feature.

I don’t know about you, but the two most important things I need in a smartphone are being able to use it at the bottom of the Marianas Trench, and fire it out of a cannon. And those are just the starting points!

A number of consumer smartphones (and a possibly a few tablets) are already for sale that say they are IP67 or IP68 compliant. Those standards refer to the IP code, where the first number indicates the degree of dust resistance, the second to water resistance, and with higher numbers being better. An IP68 smartphone is dust tight, and can be immersed in water at least 15 cm deep for up to 30 minutes. That is pretty useful for the classic “I dropped my phone in the toilet” scenario, and no bags of uncooked rice needed. You can’t take the phone scuba diving, but my Marianas Trench scenario was a joke.

I may not need the cannon test either, but dropping a $700 phone onto concrete is no joke at all. Just getting a cracked screen in the happy outcome, as most phones will be totalled by a 1 meter drop, depending on the angle and the surface they hit. Is there a standard for this?

Yup: Military Standard 810 (abbreviated various ways, but most commonly MIL-STD-810.) There are nearly 30 different things this standard can test for: Test Method 508.6 is for resistance to FUNGUS. Which is good – I hear that problem is mushrooming! 🙂 It also includes testing for resistance to high heat and intense vibration – which two aspects have caused the entire suite of testing to be referred to as ‘shake and bake.’

But probably the most important to most people is Test Method 516.6 for shock. There are various sub-tests, but the drop portion (for things like mobile devices, including PCs)  is as follows: “The floor of the drop zone is two inches of plywood over concrete, which was determined to be the most common surface a device was likely to land on. Testers drop the device from a height of 4 feet on each of its six faces, 12 edges and eight corners, for a total of 26 drops. They visually inspect for damage and determine whether it still works after each drop.”

Sounds like a good test! So my IP67 phone can be dropped from over a meter up, and…

No. The MIL-STD-810 is a different set of tests, and IP67 only guarantees that it is dust and water resistant: it might still explode if your drop it onto a pillow from 5 cm up!

But surely a phone that says it is IP67 and MIL-STD-810 compliant can survive the drop test? Not necessarily: since there are various tests under that standard, you don’t know unless it explicitly mentions drop survivability! But wait – it gets worse. MIL-STD-810 is great, but there is no central testing centre to enforce the standard, so various companies may claim that they comply when they don’t. By the way, this can even be true of the IP67 standard: there are debates about whether various devices that claim to be IP67 are truly in compliance, or if they stay compliant over time.

Ruggedness is a complicated topic, and enterprises are learning all about it.

Next post: Enterprise use of rugged mobile devices

There Ain’t No Such Thing As A Free Energy Lunch

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A South Korean research team announced they have developed a technology that converts body heat to energy: “What if you never had to charge your wearable tech — because it was able to harvest your body heat to run?” One of the biggest problems with wearable technology, such as smart watches, is their limited battery power.

But basic analysis shows that the math doesn’t work: when using their own numbers, a standard smartwatch would take almost four months to obtain a full charge!

Credit where credit is due: the team at SKAIT University, led by Professor Byung Jin Cho, has done some very good work. They have developed a thermoelectric (TE) generator that is both flexible and relatively high power: here is their paper. Kudos to them for producing a prototype device with a good bending radius and an ability to produce around 40 milliwatts (mW) of power from a TE patch 10 cm by 10 cm, assuming skin temperature of 31C and room temperature of about 21C. Unfortunately there are several issues that will likely limit the applicability of these technologies

The first problem is that smartwatches are NOT that large – in fact, looking at the photo on the top of this post you can see that the TE patch for a smartwatch is roughly 2.5 cm long and about 0.4 cm wide, giving it a total area of 1 cm2. Since the 10×10 cm patch produces 40 mW from an area of 100 cm2, we can assume that the patch that fits in a smartwatch band would produce about 0.4 mW.

I travel the world talking about wearables, and the smartwatch I most frequently see on people’s wrists is the Samsung Galaxy Gear. The latest version has a battery rated at 300 milliamp hours (mAh) and 3.7 volts (v). Normally, charging a battery requires a higher voltage, but using those numbers we can just use an online calculator to figure out how many milliwatts it would take to fully charge that battery. (Watts = Volts x Amps) = 300mAh x 3.7 = 1110 milliwatts.

Given that our smartwatch sized TE charger is producing 0.4 mW, and assuming  perfect charging conversion, the watch is switched off and using no power, and no self-discharge from the battery over time (which are unrealistic assumptions, but let’s give them the benefit of the doubt) it would take the TE patch 2,775 hours to charge a Samsung Gear2. Or 115.6 days!

This is true of almost every headline you will ever read about energy ‘harvesting.’ There are always those who are interested in getting energy for free; whether through thermoelectric effects, converting motion into electricity through piezoelectric generators, or from ambient RF energy. They all work – there’s no question about that. But the energy generated tends to be very very small: milliwatts to microwatts, sometimes even nanowatts! And the batteries in our smartwatches and smartphones and so on need MUCH more power to be charged. I wrote about this for Deloitte as part of our 2012 TMT Predictions: “Ambient radio frequency power harvesting: a drop in the bucket.”

I had help writing that Prediction from my Deloitte colleague Kelly McDonald and from my friend Brian Piccioni, technology analyst and author of The Geek’s Reading List. Both of them reviewed my thinking on this blog post, and raised some additional points.

The thermoelectric effect for generating electricity has been known since 1821, and is based on taking advantage of temperature differences, known as ∆T (Delta T or DT.) Most TE generators in use today harvest very large ∆Ts, usually 100° C or more. And while that kind of differential is common on a natural gas or oil pipelines, the human wrist is a much less harvestable environment.

Although our body temperature is about 37C, our skin is typically ~31C. Next, we tend to spend most of our time in environments where the air temperature is fairly close to our skin temperature, usually no more than 10C different. Although I guess you could get a much higher ∆T if you wore your TE-charging smartwatch outside in Winnipeg in January when it is -40C, but getting frostbite seems a poor trade-off for a few milliamps of charge! (And if you lived in Singapore, your smartwatch charger would produce no current whatsoever when you were outside.)

Next, our bodies produce a startling amount of heat all the time. So although the bottom of the TE generator resting against your skin would be at 31C and the average room temperature might be 21C (for a ∆T of 10C,) your body heat raises the air temperature above your skin by a few degrees, reducing the ∆T and extending charge time. (Unless you wave your arm around constantly to air cool the top of the TE generator.) To maintain a constant ∆T, TE generators often make use of large heat sinks or radiators, not something you can easily incorporate into a small piece of wearable technology.

Finally…we wear clothes. Whether a jacket when it is cold out, or even a light long-sleeved business shirt, ANY garment that traps warm air between your skin and the upper surface of your smartwatch will reduces the temperature differential to the point where charging would take years, not months.

That creates a further problem. As pointed out above, a TE generator that is small enough to fit on a smartwatch doesn’t produce enough power to charge the battery in a reasonable timeframe. So why not just make the TE patch larger, such as the 10 cm by 10 cm suggested in the article? First, running a wire to the watch would be difficult, but much more importantly there are no large 100 cm2 bits of the human body that are regularly exposed to air temperature! Placing a TE patch on your back does no good if you’re wearing a shirt and narrowing (or eliminating) the ∆T.

Fun headline, nice science, but not a practical solution for charging a smartwatch. And that’s not just for 2014: the laws of physics mean that this technology with its various limitations will NEVER be useful for most wearables. There is such a thing as free energy…just not very much of it.

De-Mystifying Design Wins

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WARNING: this is much longer than a traditional blog post – 3,500 words. Think of it as a primer or reference article, only for those interested in a full discussion of a complicated subject.]

Last week, a publicly listed Canadian semiconductor company released their year-end results. As part of that, they stopped disclosing ‘design wins’, and there ensued a spirited debate in the various Bay Street analyst research reports about the size of the company’s design wins, how fast they were growing and what that all meant for the future of the stock.

My friend Brian Piccioni and I started an email conversation about the analyst reports, and we quickly realised something. At least some of the analysts don’t seem to really understand what a design win is, how it works, and the correlation (if any!) between design wins and future revenues. Even those analysts who do understand the topic weren’t disclosing their knowledge in their morning research notes, nor did the company get into any detail in its press release.

This is a typical structural failure of both Bay Street and Wall Street technology research: not everyone knows as much as they should, and if the analysts and the company were forced to do an in-depth briefing on all possible topics, morning notes wouldn’t get published until next month, and prospectuses would be 3,000 pages long!

So as a public service, I am adapting our email exchange into a question and answer interview format – we hope it proves useful to some of you. If you are wondering why you should read further, don’t think of it as an email exchange between two friends.

Instead, think of being present at a conversation between two people with over 50 years of tech investing experience between them, both with CFA designations, and both having served on the boards of multiple semiconductor and semi equipment companies. One is a former buy-side money manager, responsible for billions of dollars of investments over the years, and former portfolio manager of the Canadian Science and Technology Fund of the Year. The other is a sell side analyst who was the top semiconductor analyst in North America for three years, and the #1 Canadian technology analyst for six straight years. Oh…and he also worked in the tech industry as a designer for 13 years before coming to Bay Street.

Duncan: We need to get started at ground level. When a new technology box is being invented (let’s say it is a smartphone) the designer and manufacturer need to deal with a lot of various components that will go into the finished product…months or even years before production starts! Some of them will be fairly standard: memory chips, maybe the displays, and things like connectors and so on. There will also be a set of chips that do things in very standard ways, and the designers know that they can just go onto the merchant semiconductor market and buy as many of these parts as they need at widely agreed upon specifications and prices.

But then there will be other chips. These are not standard, but in some way are novel. Perhaps they use less power, are smaller, more integrated or do something clever that isn’t available in off-the-shelf chips. They may not even exist yet. The designer (if it is a big enough company) may be working on designing a chip that fills this role, it may decide not to, or it may decide to seek an outside supplier in case its internal design team doesn’t come up with a viable part in time.

Meanwhile, there are potential external companies that could supply the part.  They might be an IDM (integrated device manufacturer such as Intel, Freescale, Samsung, Texas Instruments, etc.) or a ‘fabless’ semiconductor company (they do not own their own fabrication plant, but rely on a 3rd party like TSMC to make the chips for them.) It costs them tens of millions of dollars to do a design these days, but if they build the right part, the smartphone manufacturer might award them a “design win” (also called a socket.)  If ten million phones sell, and it’s a $10 part, that is $100 million in revenues to the company, whether a fabless player or an IDM.

Both IDMs and fabless businesses track design wins. But when analysing a given company, sometimes design wins are the only metric that outside analysts have to assess early stage fabless players. A large IDM or major fabless company has existing revenues and profits, and can usually be valued by traditional metrics such as earnings, cash flows and growth. In contrast, an early stage fabless company (or one transitioning between products or generations) may have minimal revenues, negative earnings and be burning cash. In that situation, the number and dollar value of design wins can often be the two most important numbers discussed!

Although the company may not be profitable yet, a pipeline of design wins could indicate significant potential. The gross margins in the space can be 40-60%, so the fabless semi company can pay for their design costs, cover other expenses, maybe generate a profit, and make their investors’ money. And if they can get other design wins, in other products, then the money can really start rolling in!

Brian: Not so fast! While everything you say above is accurate at a high level, the story is much more complicated. As an overview: 1) design wins are rarely contractual arrangements; 2) the companies developing new products often source competitive chips concurrently; 3) many products are never brought to market; 4) many products which are commercially released do not sell as many units as initially hoped or forecasted; and 5) the companies with the best track records for product introduction rarely design mass market systems solely around the chips of small fabless semiconductor companies.

Duncan: Let’s break that down. You used to design new products for large companies. When someone wanted you (or your company) to give them a design win, how did that work?

Brian: When I was a design engineer we had frequent visits from representatives of various electronic component manufacturers: these were the people who fabless semi companies paid to sell their new products. My favorite rep was a guy called Dave who knew his product line cold. Despite a lack of engineering expertise, Dave could triangulate your requirements and find you a chip which met your needs. Plus, since we were all hobbyists, he had a knack for scoring ‘engineering samples’ (like $400 microprocessors) which eventually ended up in our home-made computers. Not quite bribery, but just part of the selling process.

As good as Dave was, there were a dozen or so manufacturer’s reps who were almost as good and they were all positioning their solutions for our next designs. Sometimes word would come down from management that we were required to use a particular component: a fate we would ascribe to a less benign form of bribery, since many of our managers rarely understood even basic electricity.

Design is a multi-step process: the designer has to understand what the system is expected to do, choose what devices are needed to get it to do that, create a circuit diagram which is hoped will work, have that circuit diagram converted into an actual system, debug it, modify the design to correct any errors, and iterate until there is a salable, manufacturable product that works.

Component selection sounds easy, but it is not. Thanks to Moore’s Law, most of the time you are forced to choose between an existing-but-soon-to-be-obsolete product, and a new product you hope will be available in production volumes around the time your product is expected to enter volume production. Price and availability are always important factors and the vendors are not going to quote on either unless they have a good handle on how many units you want and when you want them. So it was customary for our purchasing department to ask for quotes on tens of thousands, or hundreds of thousands of units…even though, if we were being honest, we really had no idea how many units would actually be needed.

In other words, Dave, and the other reps, would be asked to provide us with all the information we needed, including samples, etc., based on the expectation their device would be selected and, once production began, they would be selling hundreds of thousands of units. Once the engineers decided what components we were going to use and those decisions were accepted by purchasing and management, we would inform the lucky reps their device had made the grade and they had a ‘design win.’

Duncan: Great news for the component maker. They could probably announce that win, and take it to the bank?

Brian: I’m sure guys like Dave were happy to hear about the design win, but I am equally certain neither Dave nor the manufacturer went out and spent the money, or did much else based on that information, aside from adding it to some spreadsheet that tracked design wins. Maybe a press release if it was a public company and the design win was big enough. After all, it would be months or maybe even a year or two before we finished our design, tested the prototypes, corrected the design, and readied it for commercial release.

Not only that, but we undertook no contractual agreement with the manufacturer – we could, and sometimes did, change our minds as the design progressed, requirements changed, or new solutions became available. After all, electronics is not a static environment and everything is changing all the time. So perhaps Dave would have let the factory know he had just scored a $10 million design win, but nobody would have taken that to mean they were going to sell us $10 million in parts.

Duncan: One of the fabless semi companies I was an investor in (and was on the Board) got a design win for a very specialised chip. We were thrilled, but we also knew that the buyer had their own internal design team, plus there was another small fabless company that thought they could make the same chip. We were never sure what percent of the business we would end up getting, if all three teams were successful. As it happened, ours was the only chip that worked to specification, so we got all of the business: about $25 million if I recall. But we could have ended up with only a third of that, or even less if the buyer wanted to keep most of the business in-house. Was that normal?

Brian: Absolutely. One other thing Dave and everybody else in the electronic business understood is that the attrition rate for designs tends to be quite high. Depending on the environment less than half – often much less than half – of designs ever make it to production. In fact, in many companies, multiple ‘competitive’ designs may be underway at the same time with the expectation that only one of those is expected to be released. This hedges the impact of project delays, errors (basing a design on a component which ends up being discontinued), changes in requirements, and so on. In order to confuse the competition, some companies run multiple competitive designs and don’t even let the design teams know they are in competition with each other.

If you think about it, the same day Dave might be informed he had a design win; two or three other competitive reps would also be informed they had design wins, even though it might happen that only one, if any, would ever sell anything, or they might split the order. Did they or their manufacturers each announce an additional $10 million in future revenue? I hope not.

Duncan: I have seen press releases where fabless semi companies not only announce a design win, but that they are ‘sole sourced.’ I assume that lack of competition reduces almost all the uncertainty?

Brian: Not even close. As I’ve already noted, only some designs ever make it to commercial release, but that isn’t the biggest source of uncertainty when it comes to how many devices actually end up being sold. Until a product is actually commercially released you have no idea, just aspirations, as to the number of units which are likely to sell. It is all very well and good to look at a company like Apple and conclude every new high tech product flies off the shelves but it simply isn’t so. The market is harsh, consumers are fickle, distributors can be downright stupid, and marketing can be inept. The numbers that are quoted in the design win are not entirely fiction, but in most cases they are much larger than the eventual sales.

Duncan: Your design engineer days are a while ago now. I know a lot of things have changed in the industry. Back in the 1990s there were a lot of well-funded fabless semi companies, and they might be able to design a hot new chip for $2-5 million dollars. The costs have soared, and it is usually tens or even hundreds of millions of dollars to develop a series of products. Plus the buyers of chips have learned some tough lessons from the bubble, right?

Brian: In the late 1990s when everybody with a website, or an idea, or even an idea for a website, found ready financing, the market was moving very fast. So fast that companies needed the hottest silicon and fabless semiconductor companies were popping up like mushrooms. Large companies, including household names like Cisco, embarked on the design of systems based on these emerging companies. There was just one problem: it takes a lot of time and money to design a chip and, just as with system designs, many innovative chips never make it to market, especially when those devices are being developed by start-ups.

Imagine you’ve spent two years developing a router around a chip only to find that the chip supplier can’t supply the chips you need with the price and functionality you require. Most products have dozens of different chips and if one is not available you have no choice but to cancel the project and write off whatever investment you’ve made in it. This was a harsh lesson for manufacturers and as a result, almost all large companies will not even consider designing devices from small semiconductor companies, regardless of the apparent benefits of those devices. This is particularly true of ODMs (original design manufacturers) like Foxconn who make the vast majority of electronic gadgets and who subsist off negligible margins. It just doesn’t happen. In other words, the companies most likely to buy large volumes of chips are the least likely to buy them from small companies. Further, very small fabless players have less leverage: a larger company might be aiming to have multiple design wins or sockets on a given device, and they can play around with price and so on for individual components that the smaller player cannot.

Duncan: That makes sense. But I know that the big buyers do sometimes give a design win to the ‘little guy’, although that tends to be to de-risk a specific project. And if other, bigger semi suppliers (who already have multiple other parts with the manufacturer and a long commercial relationship) succeed in making the chip, the smaller player gets less than their fair share?

Brian: That happens all the time. But what it means, for our smaller fabless players, is that their most likely customers are the emerging vendors who are themselves financially weak, and are often keen to get a jump on their much larger competition. That means they end up making the mistakes their competitors made in the 1990s by going for the hottest parts out there. Needless to say, this is an approach which often ends in tears: after all, when was the last time you saw a TV or any other high tech product from a new vendor which wasn’t cranked out by an ODM? The companies most likely to award a design win to a small company are those least likely to be around by the time the product hits the shelves, least likely to have a distribution channel, and least like to sell in large volumes. I call these guys Happy Smiling Panda Co.

Duncan: I’ve known you for 20 years, and I think sometimes you can be too sceptical. Let’s talk about Happy Smiling Panda. Yes, maybe they are a small company now, or one with minimal market power in the space they are targeting. But that can change: I remember when a semi company received a design win from Huawei. At the time, no one had heard of Huawei, and they are now the largest telecom manufacturer in the world! Equally, there were chip companies that got designed into the first generation iPhone. Back in 2007, no one imagined how many units that device would sell, and the companies that had those design wins made a lot of money.

Brian: Yep – I’m often too skeptical for my own good, but ask yourself how many profitable fabless semiconductor companies have emerged since the Dot Com meltdown? Off hand, I can’t think of any.

You also need to remember the numbers of “lottery ticket” wins like Huawei or the iPhone are a tiny fraction of 1% of all design wins. Next, there is an asymmetric risk going on for the fabless semi company. If you get a sole-source design win from Happy Smiling Panda worth a nominal $10 million, and the product never launches or doesn’t sell well, you get nothing or not very much. If it does sell $10 million, then you get to book what you hoped for. But if the lottery ticket works and HSPCo needs $100 million worth of your chip? If you’re lucky, they only second source: they have a blockbuster product and they can’t take the risk that you fail to deliver enough product on time, so you will participate in only some of the upside. If you’re less lucky? They decide the chip is now core to their business, reverse engineer your product, and replace you entirely.

Duncan: I have seen that movie and it doesn’t end well. The tiny fabless semi company can sue the manufacturer, but 1) suing your customers seldom enhances your rep with other buyers; and 2) the company doing the suing is running out of money, just lost their main revenue source, and has little ability to fight extended battles, while the manufacturer has teams of lawyers, billions of dollars, and can wait it out.

So let’s try to summarise: if a given fabless semi company announces that it has design wins worth $150 million, what does that likely mean for revenues over time?

Brian: That’s the key question, of course. Design wins aren’t enforceable, and there aren’t even any agreed upon accounting definitions under IFRS. Further, as an outsider, we lack good enough information to properly evaluate a pipeline of design wins. Some wins are sole-sourced and some are shared; some are with better or worse customers, for better or worse products, and in better or worse markets. But looking at history, I would state that I am unaware of a single company that has booked 100% of their design wins as revenues within five years.

That’s just the starting point: I would go further, and say that on average, most companies book less than 50% of design win dollars as revenues. If you wanted my best estimate of the appropriate discount? Perhaps 66%: only a third of design win dollars get converted to revenues, and even less to profits, of course. And that is over time, so the present value of a design win that is a few years out needs to be discounted further. But as a rule of thumb, a small fabless semi company that says it has $150 million of design wins is likely to book only about $50 million of those as revenues.

Duncan: That feels about right to me. When we read about a design win, we need to know that it is NOT the same as ‘backlog.’ Backlog represents firm orders that have not yet shipped, enforced by contract and with cancellation and take-or-pay provisions, and it is a term which does have an accounting definition.

Then again, we need to not be too negative. For any given semiconductor company: 1) getting a design win is always a good thing; 2) having the total dollar value of design wins going up is always a good thing; 3) but there is not a one-to-one relationship between design wins and revenues.

Thanks to Brian for participating, and if you want to hear more of his informed thinking, check out The Geeks Reading List, and then subscribe. Every week he puts together ~20 articles on issues of interest to the tech community, with his own perspectives.

I would also like to thank John La Bouff, a former Deloitte colleague who is a semiconductor industry expert and advisor, and who reviewed this article and made some suggestions. All responsibility for the final content is ours of course. You can find John on LinkedIn.

[Edited to add:] By the way, nothing in this post except the intro is a comment on the Canadian public company that reported. I don’t know them, haven’t met them in years, and have no idea how good or bad their design win pipeline is, or what it means. They were simply the starting point for an in-depth discussion of design wins, and nothing we say should be construed as praise, criticism, endorsement, investment advice or anything.

What does Nike getting out of the FuelBand business mean?

 

Nike + FuelBand

In non-shocking news (at least to those who follow Deloitte Predictions) Nike looks like it is getting out of the fitness band hardware business. That doesn’t matter to Nike of course: fitness bands were always a very small part of their business!

As we said in our 2014 TMT Prediction on wearables, making wrist-mounted connected devices is likely to be the toughest wearable market over time. Fitness bands are the opposite of ‘sticky’ technology: people may use them at first, but they then grow bored rapidly. As I have often said, fitness bands are the high tech equivalent of the January gym membership! Today’s news just confirms how tough this space is.

Another interesting aspect is that predicting the future is not that hard, if you know what to look for. As part of drafting the prediction, lead author Paul Lee and I were trying to figure out how many fitness bands (from all the various manufacturers) had sold in 2012 and 2013. There was some press release talking about Nike FuelBand and it having 18 million users. But we quickly noticed the EXACT language on the press release: across all the various Nike+ fitness tracking services there were 18 million subs, but nowhere did it say how many actual FuelBands had been sold. When companies refuse to disclose how many units have been sold – whether eReaders or fitness bands or ANYTHING – that is almost always a negative indicator! And in this case, it was a useful bellwether on the future of the product.

[Edited to add]

By the way, it now appears that Nike may not quite have killed off the FuelBand yet!

Based on some Twitter conversations, I thought I would add some detail to my thinking on what this means for wearables, specifically fitness bands. Some people had said that just because one manufacturer may be getting out of the wrist-mounted wearables business isn’t a negative indicator for the category as a whole.

Respectfully, I disagree. There are a limited number of consumer devices that have the potential to be the Next Big Thing, and many people think that fitness bands could be one of them. There are industry reports that talk about over 100 million such devices being sold in the near term, as opposed to our much more conservative Deloitte forecast of single digit millions.

If you look at the early days of some consumer categories like smartphones, tablets, and HDTV sets, manufacturers were all trying to grab a piece of the market. When new technologies are in their hypergrowth phase, the manufacturers are all over the market, continuing to invest in the hope of ending up as a significant player.

For one of the top five fitness band manufacturers to look like they are exiting the business tells us that they don’t believe that these devices are a hypergrowth market, at least in terms of the current technology. Nike is a great company, and I have heard nothing but good things about the FuelBand from friends who use them. So I continue to believe that yesterday’s decision to lay off most of the FuelBand employees should not be viewed as anything other than a vote of non-confidence in the pedometer-based fitness wearable industry.

Which doesn’t mean that millions of units will not be sold, or that millions of people won’t happily use the technology to get fit, lose weight and generally quantify themselves. But I think it does mean that it won’t be tens or hundreds of millions of people. As a reminder, this year will see 1.2 billion smartphones sold. 285 million PCs, and another 285 million tablets. Even the 60 year old TV set industry will push nearly 250 million units off the shelves, and video gaming consoles will be close to 50 million units.

In that context (and at a fairly low price point) I am standing by our research that suggests that fitness bands are not going to be the Next Big Thing.

Battery BS Detector: 5 tips to beat the hype

ImageAlmost every media story you read about breakthroughs in battery technology is wrong[i].

Smartphone charger promises to power up batteries in just 30 seconds. From the well-respected Guardian, both the headline and the accompanying story provide a near-perfect case study in how to critically evaluate these articles, and sort out the hype from the reality.

First, the whole article is misleading. The phone being charged in the accompanying video is a Samsung S4, which of course comes with its own standard battery. And if the demo showed that you can take an existing smartphone battery and charge it in 30 seconds, then that would indeed be a ground-breaking advance! But that isn’t what is happening: the company behind the video is an Israeli start-up called StoreDot, and the 30 second charge is only possible with their charger and their proprietary battery.

Leaving that aside, is this a potential disruptive change in battery technologies? No one knows the answer to that yet, but here is a list of some fairly important questions that StoreDot (or any company that wants to gain significant market share in the energy storage market) needs to answer first.

  1. Neither the video nor the company website gives the capacity of the battery being charged. The standard Samsung S4 battery has a 2,800 mAh rating. If the StoreDot battery has the same electrical capacity, then a 30 second charge time is very good. If it is 100 mAh then that is much less impressive! Talking about charging time without indicating equivalent capacity is very misleading.
  2. If you have every taken off the cover of a modern smartphone, you know that there is no extra room inside the case. It is hard to tell from the video, but it looks like the battery for the phone being charged protrudes from the case: it is physically much larger than the battery it is trying to supplant. Once again, this is potentially a deal-breaker. Anyone who claims to have invented a new battery technology MUST be able to make it fit into the existing space envelope of today’s devices. (There is no reason why StoreDot batteries should be any heavier than convention Lithium Ion batteries, but if they were that would be another problem. Battery weight is a critical design factor for smartphones.)
  3. To keep this post as short as possible, I am going to lump a group of other key battery attributes together. It is good that the StoreDot battery can be charged up quickly. But what about letting go of the electrons: can it efficiently put out small amounts of power, or large amounts (at a high rate) when needed? Also, there is something called self-discharge: Li Ion batteries used to be quite bad at this, and even a week or two would see them lose all their charge. Are nanodot batteries better or worse at self-discharge than existing state-of-the art batteries? Do they work well in the usual +30C to -30C temperature range that smartphones need to operate in? Do they have any odd memory effects, and have problems if they are fully discharged, or not fully recharged? Are they as prone to fires as other Li Ion batteries are? Perhaps most importantly, how is their life-cycle? There have been other fast-charge solutions in the past, and even when they worked they tended to make the batteries wear out much sooner than the average consumer would tolerate. And remember that all of these attributes need to be tested over time (not hours, but years) and across multiple manufacturing lots.
  4. Speaking of which: can this new battery be made at commercial scale? All the issues in point 3 are important, but scaling up to industrial production has killed more novel battery technologies than anything else. Let’s say the average smartphone takes a 1,500 mAh battery, and the average tablet is around 3,000 mAh, and the average laptop is around 4,500 mAh. (That’s not even getting into the demand for Lithium Ion batteries for electric cars, which is over half the market going forward.) There will be around 1.25 billion smartphones made in 2014, about 300 million tablets, and 200 million laptops, for an equivalent of 2.5 billion 1,500 mAh batteries. This video is a bit dated, but existing Li Ion batteries are made with some remarkably low tech processes: a lithium salt is extruded, and thinned through rollers, laminated and layered. I am sure the scientists and founders at StoreDot believe that their process can be scaled up, or they wouldn’t have started their company! But until that actually happens, scepticism is necessary.
  5. You probably saw this one coming, but: how much does this cost? I can go online and find a replacement 2,800 mAh battery for C$11.99. That’s not the cost of manufacture, that’s retail! Novel battery technologies, in their early days and before they achieve the economies of scale, tend to be more expensive, often 10-20x as much. Even 2-3x the cost can be a big deal.

Building a better battery for a smartphone is about making choices. Charging time is one of the variables that manufacturers and consumers would like to improve. But it is only one attribute, and in this space  a gain in one characteristic is usually a loss in another, or many others. And if better charge times lead to less capacity, higher price or shorter lifespan, then this technology is unlikely to ever see the light of day.

 

[i]Maybe not every media story, but many of the ones that I see, anyway. I remember when the media started talking about biotech, and they tended to be insufficiently familiar with the challenges of clinical trials, animal models, and so on. They are much better today, and the writers will get better about energy storage too. But for now, every article I have seen is more wrong than right.

Where’s the fire?

Pop quiz for a Monday: What would you call these people? What would you call the vehicles they are standing in front of? And the building behind them? You are doing well so far: firefighters, fire trucks and fire department are all correct!

Q: Now tell me what percent of calls that they go out on are related to fires?

ImageA: 2% (Two percent.)

That’s right, what they are CALLED has almost nothing to do with what they actually do 365 days a year! It used to be, but it isn’t any more. There are important lessons in that stat for technology.

How many voice calls do you still make on your smartphone? How much computing do you do on your computer? And is the stuff you watch on your TV set still TV?

By the way, the original inspiration for this concept is from Paul Kedrosky