Cellular Phones: Medium for Masses
Cellular telephones promise to be the personal communication medium of the 1990s as they move rapidly from business tool to mass consumer product.
Annual sales have increased from 72,000 in 1982 to a projected 1.2 million this year. In 1995, an estimated 3 million cellular phones will be sold and 5 million will be in use.
As have other electronic consumer products, such as hand-held calculators, VCRs, CD players and digital watches, cellular phones will follow the cycle of high prices shortly after introduction and price decreases as their popularity grows.
Cellular phone revenue is expected to decline from $725 million in 1992 to $400 million after 1995. In 1984, the average price of a cellular phone was $1,600. Today it is $550, with some units selling for less than $400. By 2010, cellular phones are expected to go for about $60.
Digital cellular phone shipments are expected to begin next year. By 1995, digital will capture an estimated 40% of the market. In Los Angeles, New York and Chicago, analog cellular networks are near capacity. Because digital allows for three times the number of users per network than does analog, network operators in these areas are expected to use digital technology to expand their subscriber base. In addition, digital voice transmission is preferred over analog because of reduced cross-talk and static.
With economies of volume and technological advances, the value of the semiconductors in telephones will decrease. The value of semiconductors in phones sold in the United States will decline from an estimated $54 million in 1990 to $45 million in 1995. Suppliers of telephone semiconductors will have to decide whether they can compete in the market in the long term. Suppliers that are not--or cannot become--high-volume, low-cost producers should be prepared to leave the market sometime during the next five years.
Bad News for Venture Capitalists
California venture capitalists scrambled for technology start-up opportunities in the mid- and late 1980s. However, the failure rate of the start-up companies, combined with the stock market crash of 1987, means big changes in technology financing.
Today’s venture capitalists face lower returns, fewer public offerings and impatient fund managers looking for better performance. Fewer and fewer tech deals are reaching the financing stage. Venture capitalists must also cope with an extended time frame--years, usually--between start-up financing and public offering.
In other words, the news for venture capitalists is mostly bad.
A survey by Investor Dealer Digest shows that the number of public offerings in technology companies declined to 25 last year from a high of 178 seven years ago. Twenty-seven offerings are expected this year.
Such numbers clearly will not support the more than 650 U.S. venture capital firms. Unless dramatic changes occur in the fields of technology offerings or mergers and acquisitions, it’s conceivable that 30% to 40% of venture firms will vanish within four years.
As venture firms have raised their standards, alternative funding sources have emerged.
Fueled by a cheap dollar, foreign investors are acquiring technology to fill gaps in their home countries. They often find hungry U.S. entrepreneurs eager to bypass traditional venture capital channels. In 1989, Japan invested more than $300 million in 50 American technology companies.
In many cases, a technology-start-up entrepreneur finds a foreign investor more patient, more supportive and less distracting than an American investor. As the market becomes more global, the entrepreneur finds the foreign investor even more attractive.
A consequence of this financial market shift is that more equity will pass to foreign companies. In some cases, foreign investors will end up owning a good chunk of critical new U.S. technology. Many argue that because the technology industry is rapidly becoming global, the transfer is inevitable.
Another consequence of current trends is that strong U.S. venture capital firms will get stronger. In spite of the somewhat gloomy environment, many larger private firms are reporting solid earnings and returns on investments.
