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Danger's wireless device a risky strategy

By Sam Diaz
Knight Ridder Newspapers

EUGENE H. LOUIE / KNIGHT RIDDER NEWSPAPERS A Palo Alto, Calif., startup developed the technology behind Sidekick II, a handheld wireless device that is popular among young actors in Hollywood.

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While the Hollywood buzz is exciting for Danger, the Palo Alto, Calif., startup that developed the technology behind the wireless device, the champagne isn't flowing at its offices just yet.

The 4-year-old privately held company is heading into unknown territory by pursuing a business model that leaves its fate in someone else's hands — notably wireless carriers — and targeting a slice of the consumer market that has yet to show its love for a device that doubles as a cellphone and Internet machine.

Danger created its device, calling it the "hiptop," to appeal to a younger crowd. Its primary partner in the United States, T-Mobile, popularized the gadget under the name Sidekick when it introduced it two years ago. A sleeker, upgraded version, Sidekick II, debuts in stores this fall.

There has been plenty of growth among all-in-one mobile devices, starting with the BlackBerry and expanding to the Treo600 and others. But those devices are meant for on-the-go corporate professionals who will pay $400 or more to check the office e-mail or stock quotes.

"The people in our demographic want something utilitarian but also want to have some fun with it," said Danger Chief Executive Hank Nothhaft.

Net attractions

The cellphone element of the Sidekick is still attractive to young buyers but it's the Internet functions — specifically, the ability to send and receive instant messages — that will bring a new, hipper and stylish dimension to what Nothhaft likes to call the "mobile Internet."

The idea of carving out a following among young people is an intriguing strategy, says John Jackson, a Yankee Group analyst who tracks mobile and wireless devices.

But such a tight focus has its limitations. "It has potential for growth, in a niche sort of way," Jackson said. "You see manufacturers maneuvering now to address specific segments in the market."

It's not the growth of the overall market for all-in-one devices that has him wondering about the future. It's Danger's strategy that's keeping him from making any predictions.
 
Ironically, Danger, which created the operating system and the applications that run the Sidekick, doesn't see itself as a device company. Nothhaft said his company wants to concentrate on the technology and leave the design, manufacturing, sales and marketing to someone else. In the case of Sidekick II, it's partnered with Sharp Electronics for manufacturing and T-Mobile USA for marketing, distribution and service.

Danger designed the original device and outsourced the manufacturing to Flextronics just so it would have something to demonstrate to deeper-pocketed companies, with hopes that they would embrace the concept and take over manufacturing and sales.

"The idea was to do it, make it a success, attract the OEMs and get out of the business quickly," he said. "We're a software company. We have no manufacturing skills."

At the cutting edge

The company's founders have a history of developing cutting-edge products.

Andy Rubin, Joe Britt and Matt Hershenson have longstanding roots in Silicon Valley, coming from companies such as Apple Computer and WebTV Networks. Rubin, the only founder who no longer works for Danger, led an engineering team at WebTV Networks. Britt was a key architect of the software inside WebTV set-top boxes and Hershenson played a key role in the design and development of the Apple Powerbook 150.

The Powerbook has evolved into one of the most popular notebook computers today and even WebTV, which promised to bring the Internet to a television set but eventually failed, was a financial success for the Danger founders. Microsoft acquired WebTV Networks for $425 million in 1997 before it killed the idea.

"They all have an entrepreneurial fever about them," Nothhaft said of the three founders. "They were looking at the wireless market at the highest levels," he said, setting their sights on coming up with technology for faster downloads onto a mobile device.

In the case of the Sidekick, that means compressing applications that use a lot of processing power — such as Web browsers — before sending data over the wireless network to reach the handheld device. That allows for speedier Web surfing.

The idea had enough appeal to secure significant venture funding — $114 million since its founding in January 2000. That includes the $37 million Danger landed last month from Mobius Venture Capital, Redpoint Ventures, Softbank Capital Partners and T-Mobile Venture Fund. That round also included two new investors: Institutional Venture Partners and Adams Street Partners.

Today, the company, which says it hopes to become profitable by the end of 2005, has 140 employees and is concentrating on upgrades to its technology instead of how to launch a hardware product.

Revenue plan

The company's revenue plan for the Sidekick is three-pronged. It gets money from a one-time activation fee of each Sidekick product, recurring licensing fees on its software and a cut of e-commerce transactions — such as sales of ringer downloads — that are performed through the gadgets.

It's now partnered with T-Mobile and two small regional wireless carriers, as well as four other carriers overseas.

The real growth for Danger, it appears, will be in Europe, where the GSM cellphone technology that Sidekick operates on is widespread. In the United States, only a few wireless-phone companies use the GSM standard.

"They're smart guys with great ideas and the software proves it," Todd Achilles, director of Handset Product Management for T-Mobile USA, said of Danger.

Danger's technology could set the pace for the future of the mobile Internet, not only through faster downloading times for Web pages and content on the devices but also by lowering costs for the carriers and ultimately the consumers, said Achilles.

"That allows us to go after a segment that wants a tech device but doesn't have $400 or $500 for it," he said. "It opens a whole new category for us."

It also opens the door for others.

If Danger can create a loyal following among 20-something gadget lovers, it could become ripe for acquisition by a deep-pocketed company that wants a piece of youth spending power, said Rob Enderle, principal analyst with the Enderle Group in San Jose.

Or Danger could get trampled by a company with a bigger budget and a product that's even more trendy, he said.

"Danger's next trick is going to be very, very important for the long-term viability of the company," said Jackson, the Yankee Group analyst. "The question I have for them is 'What comes next?' "