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VC's Funding Too Many Bluetooth Chips; Where Are the Applications?

[JERUSALEM] VC's are over-investing in Bluetooth chip technology, while not investing enough in the applications that will create a demand for those chips, according to new research by Daedalus Venture Group.

That could create a glut of Bluetooth chips - DVG expects 986 million devices by 2005 - but a dearth of companies developing applications for them, possibly opening up opportunities for the many Israeli companies competing to get into that space.

Israeli firms such as RegiSoft, which is developing mobile commerce products and solutions, and First Access, a security company, are on the applications side of the business. Israel's Brightcom is on the chip manufacturing side.

"Bluetooth is about personal area networks that seamlessly connect to activate events," said Daedalus principal and director Adam B. Needles. "Bluetooth's potential is higher than next-generation infrared. But you need to have something to do with it."

U.S. VC investments in Bluetooth local wireless network technology comprised less than 1 percent of venture investments between the fourth quarter of 1999 and the third quarter of 2000, DVG said. Of that amount, 74 percent was invested in semiconductor firms, while only 23 percent was invested in applications.

Boston-based DVG blamed unrealistic growth projections for creating an "artificial demand" for Bluetooth chips.

"Irresponsible supply-side projections showing tremendous growth in the number of Bluetooth-enabled devices are driving manufacturer demand for chips," the research and advisory firm said. "However, there is still no widespread demonstrated market demand for the technology at an application level."

VCs investing in the Bluetooth space are focusing on semiconductor technology because of perceived higher margins, DVG said. However, chip prices could plummet "without serious growth in those applications that ultimately will drive longer-term demand for Bluetooth chips."

Chips companies could play a role in accelerating development of applications. Cambridge Silicon Radio, for example, recently announced a $5 Bluetooth chip, much less than the $30 chips that have so far populated the space. That could encourage more manufacturers to include Bluetooth chips in appliances from microwaves to keyboards.

Because VC investment in the space is less than 1 percent of total investments, venture firms don't appear to be setting themselves up for a shakeout similar to the one that hit B2C e-commerce firms this year. That also makes DVG's early warning a timely one.

- Paul Shread of internetvcwatch.com contributed to this article.