2008 predictions from a VC: Android will succeed…

[Editor's note: This is an Op-Ed piece from Baris Karadogan, a venture capitalist with ComVentures]

It’s becoming customary among VC bloggers to make predictions for 2008. At the risk of educating my competitors, here are my technology predictions for 2008.

1) Google’s Android and the Open Handset Alliance will succeed. By this, I mean handsets will become more like PC’s and wireless carriers will become more like landline DSL providers. This is a bold statement because both handset makers (like Nokia) and carriers (like Vodafone) don’t want this to happen. So why do I predict a change in an industry where dinosaurs were surviving for such a long time?

Because a meteor the size of Texas hit the wireless industry in 2007 and it was called the iPhone. For the first time in the wireless industry, the handset chose the carrier as opposed to the carrier choosing the handset. The product was so impactful and well designed that some carriers agreed to share 30-40% of their data revenues with Apple in order to have the device on their network. That could be a very meaningful $200 dollars to Apple (rough math, based reports of 40 percent of a $30 data bill every month over two years). Why did carriers agree to that? Because the carriers did the math and the revenue share probably was equivalent to the customer acquisition cost they’d otherwise have to pay which, in the US at least, is about $200.In return for that bargain, the carriers gave up ALL revenue from applications, ringtones etc. The consumers wanted it, they gave it, and doing so opened up the market.

In doing so, they catalyzed the next innovation from Google. Android and the Open Handset Alliance enable other people to quickly create new iPhones. It creates an environment that lets developers focus on what they do best, which is writing innovative applications. So somebody can come up with a device so compelling that it too will be able to chose their carrier (if carriers need a nudge, Google can share search revenues; if carriers need a punch, Google will fund an open carrier). Once that happens, the carriers become a dumb pipe, but a dumb pipe with similar economics as before, because they won’t have as large customer acquisition costs.

The second reason carriers may embrace Android is so they don’t have to be held hostage by Nokia, the world’s largest phone maker which is exerting increasing pressure on carriers. Nokia is even building an ad network and making carriers pay them a piece of their ad revenues. Carriers, especially the European ones, are so dependent on Nokia that they may welcome a cheap Android phone that has a few killer apps built by young application developers.

Which brings me to my third and final reason why Android will succeed:the developers. They’re frustrated. It is frustrating to write mobile apps if you have to test them with 100s of handset each running a slightly different operating system, in slightly different carrier networks. Getting apps and phones certified is a big daunting, time-consuming and frustrating task. Palm will attest to that, having lost 25% of its market cap because it missed certification. Android sets these developers free.

So, between independently innovative products, a tough supplier to the market, frustrated developers and a tough carrier business model, this industry is ripe for big changes, and I predict it will start happening in 2008.

2) Gaming takes off. I think people will realize that they were all gamers all along. Three things will make the non-gamer realize his or her true forgotten self:

2a) Casual games become social. When you play chess or any casual game on Yahoo, you are playing a stranger, all you know is his overall score. You don’t know your record against him, you don’t know if he lives nearby, and more importantly you don’t know if you know him. In contrast, if you play Attack! on Facebook, you know a lot more about that person, you can play against your friends, and you know your overall score and your score among your friends. Playing against a stranger is one thing, playing against an old high school buddy is another. This is a big deal which makes games a lot more addictive, and it is happening full speed in 2008.

2b) MMO’s become casual. MMO’s will extend their experience beyond the main game. You will be able to play a small version of WoW on your cell to win a small number of experience points. The game will be different but it will be the extension of the overall experience. So when you have three hours free, you’ll play the real thing, when you have 30 minutes free you’ll play a small casual game on your PC that counts towards your experience in the big game and when you have 5 minutes free you’ll play the mobile handset version. A lot has been written about this and the best can be found here.

2c) Hardcore games become immersive. Playstation 3 has incredible graphics, at times I can’t tell what’s real video and what’s computer generated, but you still have to use a very complicated controller. The Wii on the other hand has unrealistic graphics but every body who gets within 5 meters of the box wants to play (I am serious). Put the two and two together. Superbly realistic graphics combined with immersive controls will make hardcore games a generalized form of entertainment. What do I mean by that? I mean, why would you watch an action movie passively, when you can be in it with your friends? Hard core games with easy immersive controls can let anybody play and why would you give up interactive entertainment for passive entertainment. Watching a game will be almost as satisfying as watching a movie and you’ll have the option to interact with it if you want to. It’s hard to see why you wouldn’t.

3) Success of the TJ Watson Portfolio. Five computing clouds are poised to deliver what most of us need. I wrote about this for GigaOm last month. Google and Amazon give us consumer apps and infrastructure, Salesforce.com and VMWare give us enterprise apps and infrastructure and Akamai brings them all together. I predict a basket of these stocks will weather any downturn much better than others simply because of their unique position in the industry. I’ve put my money where my mouth is, you can follow the returns of this portfolio here.

4) At least one creative solution to the music industry woes will emerge in 2008. This is where I risk educating my competition, but I will say this: 2008 won’t be as bad for the music labels as people think. And it won’t be because of their embrace of MP3, though that will help. There are enough creative people in the industry, and by now enough people who understand digital, that somebody will think outside the box. That’s all I’ll say for this one.

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