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RFID: The Investment Opportunity

The establishment of open, global standards for RFID will reduce equipment costs, spur adoption and create enormous investment opportunities.
Nov 25, 2002—Nov. 25, 2002 - In 2000, at the peak of the Internet boom, venture capitalists pumped a mind-boggling $102 billion into startups in the United States. Venture capitalists were raising money so fast they literally couldn’t find enough companies to invest in. They were pouring money into Linux companies that admitted they might never make a profit and into startups like Pixelon, which spent $16 million on a Las Vegas launch party. John Doerr, the legendary venture capitalist who backed Amazon.com and Netscape, called the Internet the greatest source of legal wealth creation the world had ever seen.

Times, of course, have changed. In the third quarter of this year, U.S. venture capitalists invested only $4.5 billion into 647 startups -- $25 billion less than they invested in the third quarter of 2000. At a VC conference in San Francisco earlier this year, speaker after speaker lamented that there was no Next Big Thing on the horizon.

This is somewhat astounding, since it’s clear that RFID technology has the potential to solve so many business problems – from supply chain theft to out of stocks. RFID has long been held back by the lack of standards, but progress is now being made on a number of fronts. Which standard becomes dominant is not as important as making sure there is a standard (or several standards for broad industry segments).

That raises some important questions: If all vendors have to make products to a set standard, how will small, venture-backed companies make money? Won’t a few very large, hyper-efficient producers dominate the market? And if that is inevitable, won’t innovation be stifled?

It may be counter-intuitive, but standards create opportunity and spur innovation and competition. There are two complementary reasons for this. First, standards dramatically expand the total size of the market, and second, they prevent any one company or small group of companies from dominating to the detriment of others.

Look at the PC industry. Microsoft used its proprietary technology – the Windows operating system – and the market clout it gave the company to systematically drive competitors out of the market for word processing, spreadsheet and other business productivity software. As a result, even as PC prices fall, end users have to pay high prices for Microsoft Office.

Contrast that with the Internet, which is based on open standards developed originally for the United States military. When the Internet was made available for consumer and commercial use, it unleashed a wave of innovation and opportunity. Cisco Systems may dominate the market for Internet protocol (IP) routers, but no company dominates the Internet. As big as Amazon.com is, there is still plenty of competition among online retailers.

Radio frequency identification is essentially a network technology. It extends the existing interlaced web of public and private computer networks to physical objects. Open standards will prevent large companies from controlling the market and will create opportunities for companies of all sizes – and for the venture capitalists that know which startups to back.
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