Mar 23, 2003March 24, 2003 - When it was reported that The Gillette Co. had placed an order for 500 million RFID tags from a little startup in Morgan Hill, Calif., called Alien Technology, the news sent shock waves through the RFID industry. For companies supporting the Auto-ID Center and its vision of a global network to track products carrying Electronic Product Codes (EPCs), it was vindication. To some conventional RFID vendors, it was a PR stunt.
Alien has been controversial from the beginning because the Auto-ID Center's controversial plan to create a 5-cent RFID tag rested heavily on Alien's tiny shoulders. That's because the company had developed something called Fluidic Self-Assembly (FSA), a unique process for placing ultra-small microchips into "straps" that could be connected to antennas and turned into RFID labels. The process involves flowing microchips with beveled edges (see photo on home page) into a substrate with holes to match the shape of the chip.
The company has received a great deal of press attention and helped to generate much of the buzz around RFID today. But Alien is now at a critical juncture. Having innovative technology is an advantage, but the company has to deliver on the promise of low-cost tags. RFID Journal recently visited Alien's headquarters to talk with senior executives about their strategy going forward and to get answers to many of the questions that surround the company, including whether it can deliver 500 million tags (see An Interview with Stav Prodromou).
Alien traces its roots back to UC Berkeley, where a student of a professor there named Steve Smith was trying to figure out how to create light-emitting microchips. Smith started a company to commercialize the student's idea (for the full story, see Alien NanoBlocks Will Reshape RFID). Millions of dollars from venture capitalists have been spent refining the FSA process and developing a chip based on the Auto-ID Center spec.
Six months ago, Alien's board of directors brought in a new CEO. Members of the board say it wasn't because Alien was going in the wrong direction. It was simply part of the evolution that startups go through. Alien was moving from being an R&D company to one that is able to fulfill massive orders for Fortune 500 companies like Gillette. The board chose as the new CEO Stavro Prodromou, a warm, burly man who had run Peregrine Semiconductor, a company that designs and fabricates high-performance radio frequency integrated circuits and Integrated Circuit Systems, another company that makes radio frequency ICs.
Prodromou's mission was simple: commercialize Alien's FSA technology. "We are moving from an R&D phase to the commercialization phase," Prodromou says. "So we now have to be concerned about ramping up manufacturing, building a sales and marketing organization, initiating customer engagements. It's the go to market phase now. And that's what we've been focused on for the last six months."
"There's a feeling in young startup companies that if you build a better mousetrap, the world will beat a path to your door," he says. "But is a Gillette or a P&G or a Wal-Mart really going to build its entire supply chain strategy on a little 100-person company in Morgan Hill, Calif.? The answer is, they are very nervous about that. Just ask them."
To reassure these big companies that there will be an adequate supply of Class 1 EPC tags, Alien is building supplier relationships with very large partners. In November, Alien announced that it was teaming up with Geneva-based STMicroelectronics, the world's third largest semiconductor company by revenue, after Intel and Samsung. STMicro will soon begin selling its own version of Alien's Class 1 chip.
Prodromou says that Alien is talking to other large semiconductor companies and other partnerships are in the works. "We need to create security of supply," he says. "Everyone understands that RFID chips will eat a lot of capacity up. Where will it come from? You need to have the big chipmakers committed to supporting the Auto-ID Center's technology."
Isn't he concerned about competing with these giants? "We really believe in this open standard thing," he says. "It sounds kind of hokey. But I would rather have a fractional market share of a 100 billion-tag business than 100 percent market share of a 100 million units-a-year business."
Prodromou is also building up sales channels for Alien's products. The company just entered into an exclusive distribution agreement with Toray of Japan, the world's largest film manufacturing company. Toray makes the films that many RFID label makers put antennas on. It recently showed off the 2.45 GHz version of Alien's class 1 tags and readers at a local trade show.
Accelerating adoption is a more difficult challenge, since it depends on customers. The problem for Alien is that it's competitive edge is in providing billions of very low-cost tags, but the market isn't ready to purchase that many tags yet. Arno Penzias, a venture partner at New Enterprise Associates and a member of Alien's board, describes the situation this way: "This is one hell of a big market. It's like mountain climbing. The thing that makes you elated is being on top of this huge mountain. And the thing that scares you is that you are on top of this huge mountain."
So Alien has created a flip-chip version of the Class 1 microchip (which is larger and thus a little more expensive). This chip, which will be available in the second quarter, can be sold to the many existing label converters in the market. "By allowing people to do flip-chip with the same chip, we are promoting adoption of the Class 1 specification," Prodromou says.
Much has been made of claims that Alien can produce only 40,000 tags per month. Critics point out that at that rate, it would take more than 1,000 years to fill the Gillette order for 500 million tags. Prodromou says Alien's second-generation FSA line, which is ready to go into full-scale production whenever the market demand is there, can produce 100 million straps per month. The company already has a prototype for a third-generation machine, which can produce 10 billion straps a year. That line, due to come online in 2005, can be expanded in increments of 10 billion units.
Prodromou says that Alien has been investing in label production to make sure it can meet the needs of customers. Last month, Alien began assembling RFID tags in Asia (Prodromou declined to say which company it is working with). Alien has also designed and purchased some label-making equipment that can attach antennas to its straps. Prodromou says he sees no problem meeting market demand for finished labels for the foreseeable future.
"The issue is not capacity constraint," he says. "The issue is the adoption cycle. Anyone who is smart will go through a step-by-step adoption process. That means doing an initial implementation, validating the results, tying it into your systems, modifying your business processes and so on. That's what is going to take some time. We have capacity in place to support those kinds of programs."
One issue is whether Alien has the financial resources to stick around until the market for billions of tags develops. The company has, after all, invested millions of dollars to develop its Class 1 chip. It has also invested heavily in developing an RFID reader and more recently in producing labels. And although the company has raised tens of millions of dollars in venture capital, there are rumors in the marketplace that Alien could run out of money if it doesn't sign a couple of big customers fast.
Nonsense says Prodromou. His venture backers confirm that the company is financially sound. "It's a small one-hundred person company and the cost of the machinery is quite modest," says NEA's Penzias. "If adoption occurs sooner, the return on investment is better. But if takes longer, we'll be patient. We're not going to give this up and go invest in some Internet company."
Initially, the market was restricted to end-users sponsors of the Auto-ID Center, many of which have placed small orders for tags and readers so they can being their own trials. Now, the market has expanded to companies outside the center who are looking to learn more about RFID. Alien is handling many requests for small orders. It must bring these customers along and establish long-term relationships with them.
The venture capitalists backing Alien seem pleased with the company's progress under Prodromou. "He's very strong and disciplined," says Charles Phipps, a partner at Sevin Rosen Funds. "The pace of execution has stepped up considerably. He's made a difference already."
Tom Pounds, Alien's VP of marketing and business development, says Alien is not necessarily dependent on the consumer packaged goods companies and discount retailers who are supporting the Auto-ID Center. "There are several verticals where RFID makes a lot of sense and could happen quicker," he says. "Apparel is an obvious one, and the other is pharmaceutical brand protection."
Since RFID chips are difficult to clone, pharmaceutical companies are looking to use them to verify the authenticity of drugs and reduce counterfeiting. Many drugs can cost hundreds of dollars, so the price of the RFID tag is not a huge consideration.
There have been rumors swirling in the market that an order for 2.5 billion tags is in the works. Pounds declined to comment. Clearly if there is a big order, it will not only reassure potential customers that Alien is financially sound; it would do more than anything else to accelerate adoption. But Prodromou doesn't seem obsessed with scoring another headline-grabbing order. He's focused on building a sales force, developing sales channels and preparing Alien for the future.
"Alien was either smart enough or stupid enough to develop a hardware product before the Auto-ID Center specification was finalized," he says. "It turns out that because we were whichever -- smart enough or dumb enough -- when the spec was approved, we had working product. From that point of view, we have first-mover advantage."
Related story: An Interview with Stav Prodromou