CES-Show me the money!

There has been lots of buzz at CES this past week. Trust me, I am a huge fan of all of the new consumer gadgets that are coming out in the market this year. I still, however, ask the question, “where is the money for the tech industry.” From a profit perspective, should we be getting excited about selling commodity products in markets characterized by heavy competition? According to Barron’s, Rick Sherlund from Goldman Sachs issued a report last week saying that “he doesn’t expect Microsoft to see any profit from consumer electronics over the next several years.” So if Microsoft, known for its high gross margins from software, cannot even generate a profit how are other technology companies selling Plasma TVs and other consumer electronics going to make money? Yes, I know I may be oversimplifying, but the point I want to make is that revenue does not equal profit, especially when many of the new growth areas that technology companies are pursuing have single digit margins as a starting point. In the same Barron’s article, Pip Coburn goes on to say, “There’s tremendous hype. The IT companies, with no growth in their current market, are pretending there’s a digital consumer revolution. But it’s very early, and a small part of the whole pie.” In my opinion, there is a digital consumer revolution-just look at the falling prices of plasma tvs and wireless networking gear to figure out who the beneficiaries are.

One further thought to add is that Intel Capital announced it was setting aside $200mm for funding new digital home companies. I certainly applaud Intel for its efforts and am a big believer in the digital home. From a strategic investor perspective this makes a ton of sense-more Intel chips in the home. So no matter what Intel Capital invests in, it is hard to go wrong if at the end of the day more Intel chips are sold. The digital home already has and will continue to be an area where VCs invest. That being said, we must go in with our eyes wide open as it is extremely difficult to make money selling consumer-oriented products. Sure, there will be lots of great innovation from new startup companies in home networking, but it will be difficult for these companies to truly scale as they will be entering markets traditionally dominated by large, global companies with established brands, channels, and cost advantages. Tivo is a great example-it is a great product with cult-like customer appreciation, yet it is still not profitable after raising about $200mm from its first round of capital in late 1997 to its IPO in late 1999.