Our piece below was read by Bret Hurt, the CEO, and several people around his team last year.  We received numerous favorable comments, including several from Bazaarvoice employees.  We understand that BV has followed some of our guidance.

The ONLY question, at this point, is how will BV position itself in the social media marketplace to the investing public?   We have some ideas, but we will save those thoughts for another article.

Here is last year’s article.

Bazaarvoice is a local Austin TX company (where I live) that has been receiving a lot of kudos from the media and others over the last couple of years as one of Austin’s crown jewel tech companies. Many expect that it will be one of the companies to file for an IPO (initial public offering) in 2010, and that IPO will make its early employees rich, and will make its equity owners, including Austin Ventures, a hefty return on its investment.

We were perplexed with the needless hyperbole of Dell’s CFO Brian Gladden when he commented last week that Dell was “kicking out” Blackberry in favor of Dell’s own Venue Pro smartphone running Windows Phone 7.

A simple announcement indicating the replacement would have been entirely appropriate.  However, the “kicking out” comment was unnecessary.  Those are the kind of comments that come back to “bite” the speaker.

An article published by Infoworld today underlines this point.  According to that note, Windows Phone 7 doesn’t support device encryption.  This means that Dell may not be able to use its own Venue Pro devices with its Exchange Server corporate email system, …..unless, of course, Dell decides that sending unencrypted corporate email around the world is acceptable.

…..We don’t think it will be acceptable either.

In addition, the new Windows Phone 7 OS only supports DHCP, so if the corporate network is set up for static IP (like many corporate networks), then the device won’t be able to connect to the corporate network via wifi.

Therefore, what can a startup learn from this episode.

Marketing announcements are expected.  Hyperbole can come back and bite you.

The bottom line is that Dell is a latecomer to the smart phone party – and being a latecomer is a very bad position to be in.  A company can spend a lot of money in the attempt to buy a “seat at the table”, but Dell has shown no inclination to spend money to create a significant position for itself in the smart phone space.  Moreover, even if Dell spent the money, there is no guarantee of any success in that strategy – ask the Chinese as they as they try to spend their way to the “table” of accessing the world commodity markets.

Therefore, what can a startup learn from Dell’s obvious failure to enter the smart phone market almost four years ago, or shortly after Ron Garriques joined the organization?

Be tactically bold – even though the tactics chosen will be perilous – at best.

A startup typically enters a market sufficiently early such that the strategy (developing a smart phone) and tactics (choosing the OS and the hardware configuration) are more closely integrated and less separable.  For example, when Research In Motion made the strategic decision to build smart phones about 10 years ago, it chose the tactical path of developing its own operating system for its Blackberry phones despite the fact that Microsoft was aggressively marketing its OS.  When RIM introduced its smart phones in 2001, no one really talked about the choice it made of developing its own OS.  Apple made the same choice in 2007 when it developed its own operating system for its iPhone.  These companies chose to be dependent on their own respective organizations for innovations and development, rather than hope that a third party could react urgently to its needs.  Those choices by RIM and Apple were clearly the right thing to do as the market was early.

As time passes and the market develops, the individual choice of tactics become less integrated and more separable.  The tactical choices become even more important.  One must choose the winning path, as there is less time to respond to competitors as they pivot especially those competitors that are willing to spend the money to buy a seat at the table.  In 2007, Google introduced the Android OS, providing hardware vendors with a new tactical choice to incorporate a new and “independent” AndroidOS rather than develop a homegrown OS, or choose Microsoft.  Even Dell announced that it was joining Google’s Open Handset Alliance in December 2008.  The market expected a Dell smart phone running AndroidOS to be introduced “soon”.  For all intents and purposes, that didn’t happen.  Only Dell’s most senior leaders know the truth regarding this unfortunate paralysis.

So what does a large hardware vendor, once known for changing the PC industry, and valiantly attempting to redefine itself to the realities of the current mobile phone market, need to do?  Make a bold tactical announcement such as choosing Microsoft’s Windows 7 as the OS for its new Venue Pro smart phone.  Dell really had no other choice.

The sad reality is that choosing Windows 7 was Dell’s only choice if the company has any hope to differentiate itself in the smart phone market.  Developing its own OS was no longer a relevant or viable option in view of the growing popularity of AndroidOS by numerous other handset vendors.  When there is no market, a startup can spend all the time it wants to develop its own solution.  When the market is well developed, there is no time to stare out a window and be creative.  Furthermore, it couldn’t choose RIM’s BlackberryOS, Apple’s iOS, or Google’s AndroidOS  since it had to choose a path of differentiation.  RIM acquired real-time OS vendor QNX to redevelop and renew the BlackberryOS some time ago.  The only other major real-time operating systems that could have been purchased for a similar overhaul are owned by Intel (VxWorks and pSOS).

What is left?  Microsoft Windows 7 was the only choice left to Dell.

Moreover, how does one emphasize the differentiation?  Perhaps a little outrageous hyperbole – even though everyone understands it to be outrageous hyperbole?  Last week, Dell announced that is replacing 25,000 Blackberry units used by its employees with its own new Venue Pro smart phone running on Microsoft’s Windows 7 operating system.  While the announcement by itself was something that you would expect from a vendor promoting its own device, Dell’s CFO Brian Gladden added, that Dell was “kicking out” Blackberry.

Question: Why is Dell’s CFO making this comment, rather than Dell’s recognized leader of the smart phone/consumer group – Ron Garriques?  Is Dell finally replacing Garriques, as he was noticeable by his absence at the Dell analyst’s meeting last June?

That would be a bold move as well – but Dell has few choices left.  Hopefully, Dell will have better luck in the tablet market using Windows 7 as the OS since this market is still an early stage market – but that is not how the smart money will be betting.   The strategy of choosing Windows 7 as the OS has zero chance of success.  The user experience is not about the OS or the hardware.  It’s about the ecosystem around it.  Try to download an application for Windows 7.  It’s a desert.

UPDATE: DELL announces today (November 18, 2010) that Ron Garriques is resigning effective January 28, 2011, and the consumer group (or Communications Solutions group)  is being re-organized into other units.

We are not surprised.  Anyone in the technology industry from Chicago knows the real story of Garriques and Motorola.

We knew that he had no clue about what he was saying, but that’s what the marketing dept told him to say.

How did we know that he had no clue?  We had been covering the wireless industry for many years, and understood that the term “3G” represented a very specific engineering concept where one could view full motion video (30 frames per second) over the air.  This required a wireless network (GSM or CDMA) and a mobile phone that was capable of a data transfer rate of 1 megabit per second.  KDDI in Japan launched a 3G service in April, 2002.  The service was expensive – even by Japanese standards which resulted in slow subscriber growth in those early days – but it was a network that offered a wireless data throughput rate of 1 megabit per second – and one could see full motion video on your mobile phone.

Fast forward to AT&T in 2008.  Maximum throughput on the upgraded GSM/GPRS/EDGE network was around 500 kilobits per second –downstream, at off peak times, when no one else was on the network.  In other words, the data transfer rate was only about half of what would qualify to be properly called a 3G network.  Therefore, how could AT&T call their network “3G”, and how could Apple call their newest iPhone “3G”?  We tried to explain the engineering concept to this AT&T person.  They smiled and confidently told us that the AT&T network was that fast, and hence, it was legitimately at 3G network.  We told him that showing a video using the built-in WIFI connection didn’t count – it had to be over the AT&T wireless network.  He smiled again, and said that AT&T was doing this.  It was like talking to a brick wall.

In the engineering world, 3G means something.  In the marketing world, 3G means “something/anything faster than the last product”.   In the engineering world, the simple term “fast” means something – a comparison to something else.  In the marketing world, the term “fast” means “super fast”, or venti, or grande, or whatever the marketing team wants people to believe it means.

That is the genius of marketing.

AT&T gobbled up the term 3G because Verizon was close to introducing a data-only service that was truly 3G – 1 megabit per second or more.  It took longer than expected, but Verizon will introduce its LTE network (Long-Term Evolution – another meaningless market term) across 30 cities next month.  AT&T will roll out LTE in 2011.  (The main characteristics of LTE besides 100 megabits per second download speeds will be an all-IP flat networking architecture which will make your mobile device a truly connected and always-on device).  Nevertheless, AT&T played a great defense in 2008 by playing offense.

Here’s one of our favorite examples of marketing playing defense by playing offence.  In 2001, Budweiser introduced its “Born On Date” marketing campaign.  Budweiser knew exactly how quickly its inventory turned, and how many days it took for a retailer to move beer off the shelves.  It also knew that its competition turned its inventory slower.  More importantly, it knew that the rising popularity of micro-brewery beers was slowing Budweiser sales, but that the inventory turns of those microbreweries was much slower that Bud.  Hence, the “born on date” campaign.  Budweiser took data that was used only in the finance dept (inventory turns), and created a marketing campaign that promoted its rapid inventory turns, while mocking the inventory turns of the micro-brewery competition.

From that point forward, microbrewery beers became associated with another less popular marketing term – skanky.

Did anything in Budweiser beer change such as flavor?  Of course not.   But Budweiser made the “inventory turns” terminology its own by renaming it as “Born on”.

Anyone interested in the new iPhone Venti, or will you be having an iPhone Grande?

Two major observations.

Firstly, almost all of the ideas were focused on social media, consumer internet.  This was disturbing.  We heard a lot of ideas that would be considered a feature on an existing product.  In fact, many of the ideas already exist as a product, or a feature. It’s just the entrepreneur didn’t know about it.

Secondly, very few (and I mean one or two out of more than twenty) knew anything about their prospective customer.  It is typical for a would-be entrepreneur to come up with an idea for a business out of their own personal experience.  They typically have an “aha” moment that is characterized by the “there has got to be a better way” insight.

That’s fine, but it’s only half of the equation.  The other half requires the entrepreneur to work through the following: who else has the problem, what does that customer look like, and what would their product need to look like in order to be sold to someone else.

We also heard almost everyone in the room say that they needed some help with market validation.  Market validation occurs when a product is introduced to the market and people buy the product, meaning that they become customers.  A typical angel investor won’t even consider investing in a company unless the company can prove market validation – meaning the company needs to show revenue and customer traction.

As a young analyst on Wall St., we would view a company’s product through our own filters.  We learned that this was a major mistake.   One of our favorite mistakes was when we found a company that had a significant amount of domain knowledge on DSP semiconductors and had a lot of success in selling products based on those DSP chips to the communications industry and the military.  In the course of expanding their business to the consumer market, they developed a PC board with a DSP chip for the fax market.  The PC board would make the fax process faster and more reliable as it would eliminate the processing overhead of faxing software on the CPU – which meant that the occurrence of Microsoft’s blue screen of death would be less.

There was a “small” hurdle.  The user would need to set four “dip switches” in order to install the card in their PC.  We figured it out quickly, and the card worked flawlessly.  We loved the card and the market opportunity.

Other prospective customers?  Not so much.  The card didn’t generate the revenues that were expected.   No one purchased the product because it was too difficult to use for the average person.

We learned the lesson the hard way.  Just because you think it’s a good idea, doesn’t necessarily mean that everyone else will think it’s a good idea as well.  You need to understand your customer, their problem, and what the product needs to look like before they hand over their money.

Robert Kennedy said: “Some men see things as they are and say why.  I dream things that never were and say why not.”

Last June, we organized a series of meetings in Austin that focused on companies and product concepts in the Life Sciences field.  The scientists and companies that participated introduced their concepts to an out of town Venture Capital investment team that was focused on concepts and products in life sciences.

One of the companies that presented to our out of town guests has developed a diagnostic test to quickly determine the existence of Tuberculosis – quickly, as in 30 minutes.  Building upon the science developed at Texas A&M, Global BioDiagnostics Corp., has a global license on a technique to rapidly and easily identify the existence of an enzyme produced by many different pathogenic bacteria.  Tuberculosis is their first focus.

The results of the original research done at Texas A&M and Stanford University has enabled ongoing funding of the research from the Bill and Melinda Gates Foundation.  Despite this success, the Texas angel community has completely ignored Global BioDiagnostics, even though the Company has been gaining traction with investment groups internationally.

How could this be?

We’ve linked this post to the World Health Organization page on Tuberculosis.  TB remains a highly communicable and common worldwide problem, but is most prevalent in third world countries.  TB mixed with HIV is common in those countries, and is a sure-fire killer.  The ability to detect TB easily, quickly, and earlier in the infection cycle means that healthcare practitioners all over the world can realistically see the possibility of curing the disease before the patient becomes contagious and infects co-workers, family members, and friends.  Suffice it to say, that an easy to use test that can rapidly diagnose TB is a billion dollar opportunity.

It will change the world.

We followed up with them last week.

Global BioDiagnostics has the worldwide license on their particular technique which covers many other diseases besides Tuberculosis.  Their technique has the potential to positively identify TB within 30 minutes, versus the current standard of 30 days.  Moreover, their diagnostic test will utilize a small and inexpensive battery operated device (about the size of a netbook) that can be used in the most remote parts of any third world country.  A recent announcement by a prospective competitor was made for a $60,000 system that can be used in a lab.  That system takes a few days to generate a response.

As a doctor in the field, which one do you think you can use?

The key scientists at Texas A&M and Stanford published a paper describing their technique and key findings in a National Academy of Sciences paper in June 2010.  (One has to be a world known scientist to be a member of NAS and publish in that journal).

However, despite the progress, Global BioDiagnostics is still looking for funding.

One friend recently suggested that in Los Angeles or New York, a waiter is likely to be an aspiring actor.  In Austin, your waiter is likely to be an aspiring entrepreneur.  However, the aspiring entrepreneurs in Austin seem to be focused on the current social media bubble, writing some code, and hopefully, making a million dollars when they sell their idea to Google or Facebook.  We think a “few” others in Silicon Valley, Boston, NYC, and a dozen other cities in the USA have the same idea.

We will suggest that the real social progress in this century will be the result of scientific discoveries in the Life Sciences fields, not in developing a new game for Facebook, or developing some method to spam a smartphone with advertising to track my purchasing behavior.

Here is the real crime.  The USA may soon lose any future opportunity to own the applied research if it moves offshore.

Doing things that others don’t is a great way to show leadership.  If an investor wants to truly make a difference on this planet with their wealth, find a Life Sciences company to fund.

We know of a great one.

Why not?

Smartphone demand is on fire.  Demand for low-end handsets is very poor.  Demand for Android-based handsets is exceptionally strong, and was clearly underestimated by numerous hardware vendors.  HTC, in particular, is seeing extremely strong demand for its Android Handsets.  Qualcomm (QCOM) is the baseband supplier here.  End demand is so strong that supply chain is struggling to keep up.  Story in WSJ today (Oct. 7, 2010) finally confirms Verizon iPhone – something that we have known about for several months via our sources in the supply chain).  Techcrunch correctly points out the timely co-ordination of the leaks from Apple to the WSJ.

Many data points show that iPhone unit shipments are far above what were aggressive forecasts for Calendar Q3 and Calendar Q4. (Apple’s fiscal year end is September, so Calendar Q3 corresponds to Fiscal Q4 for Apple).  Sources continue to indicate that AAPL has been taking up forecasts at their suppliers for iPhone for both Calendar Q3 and Q4 – above the previously aggressive forecasts.

Many data points showing Q4 PC demand could be down sequentially vs. consensus of +5% to +7% sequentially.  iPad sales hurting Notebook sales, and will impact semiconductor sales.  PC demand in Q4 looks flat sequentially.  Several data points on this are all the same – flat sequentially.  This is worse than the +5% – +8% that is expected by the Street.

Apple’s iPad is really hurting Notebook demand, and analysts should be looking for notebook unit shipment numbers during confession season to determine impact.  Sources in the supply chain confirm that the impact is significant.

In general, the EMS segment has started to see weakness in September.  Many semi distributors are seeing their Q4 Revenue down 10% to 15% sequentially.  Semiconductor companies have hit a wall in the past 7 days, and general visibility for semis in Q4 is “very limited”, although there are semis that are doing well (QCOM).  The general belief (its really nothing more than hope at this point) is that semis uptick again in Q2 2011.

The semiconductor capital equipment companies are seeing significant order push-outs to Q1 2011 (i.e. they are being told that the orders they have today need to be being pushed out to Q1 for delivery).  TSMC has told their vendors to delay equipment delivery, and is withholding payment to any semi cap equipment company that does not let TSMC delay receipt of their tool. For the past 2 weeks, TSMC has stopped accepting delivery of raw wafers so as to try to keep inventory under control.

There is still too much LCD TV inventory in the channel, and LCD TV end demand is still getting worse.  Recovery does not look like it will happen until Q2 2011.

China demand has been slowing down very recently despite the all of the positive Chinese Macro data points that have surfaced recently.

We have detailed notes on 35 other chip, telecom, and consumer product companies.  We are long AAPL and QCOM.

Did any competitors exist before these applications showed up?

How would a traditional angel/VC compute total available market for any of these applications?

Bottom Line: Be different, not better.

A colleague recently came back from China (visit Sept 27-30, 2010), and learned that the semiconductor space will be experiencing a correction in the next several months.  His comments were very specific regarding positives and negatives for numerous companies.  In other words, the information is very fresh, but gets more staledated every day we get closer to Q3 confessions).  However, this blog has removed all of the specific company information.

If you are looking for specific information, let us know, and we’ll see what we can do.

Incidentally, Eric Savitz published an article in Barron’s this weekend which also suggests some problems in semiconductor land this quarter.  However, his article points to some pretty fuzzy guesses by Wall Street analysts that should know better.  For example, one team point out that they are seeing second-quarter inventory days rising from first-quarter levels—the opposite of the pattern a year earlier – hence, their bearishness.  This is pretty weak if you ask us – but that’s the quality of the research that sell side firms publish and buy side firms buy.