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.

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