NeoMedia Technologies, Inc (NEOM)

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DD An older article regarding Action Engine

http://seattlepi.nwsource.com/venture/112448_vc14.shtml

Friday, March 14, 2003

Venture Capital: Hold the phone, cash propels Action Engine 'smart' wares

By JOHN COOK
SEATTLE POST-INTELLIGENCER REPORTER

Action Engine Corp. has landed $15.5 million in venture capital financing, a major boost as the 3-year-old start-up attempts to transform the way people access information on next-generation cell phones.

The cash infusion -- one of the largest in the state this year -- could not have come at a better time. The Redmond company is ramping up marketing efforts for a software platform that allows consumers to access flight schedules, driving directions, movie listings and other information on cell phones without using a clunky Internet browser.

Two European wireless carriers -- Orange and mmo2 -- have already purchased the company's technology and deployed it on so-called smart phones. These powerful devices have a built-in computer processor, color screen and a relatively fast Internet connection. The pricey phones, from companies such as Handspring, Samsung and Kyocera, have only begun to appear in the United States in the past six months.

New York-based Baker Capital led the round, which also included investments from Intel Capital, Northwest Venture Associates, OVP Venture Partners, Cascadia Capital and Spangler Ventures. Total financing now stands at $35 million.

Craig Eisler, a former Microsoft general manager who founded Action Engine in 2000, plans to carefully spend the money as he targets wireless carriers in the United States. After hiring about 20 to 30 sales and marketing professionals this year, Eisler expects to reach positive cash flow by the end of 2004.

The $15.5 million financing will give Action Engine a nice cushion as it attempts to land five new customers this year.

"If there is a dramatic downturn in the carriers' desire to roll out smart devices -- and certainly there is nothing in the market to indicate that -- we have sufficient money to weather that," Eisler said. "You have to plan for the worst even though the market tells us that smart devices are happening now."

While the 47-person company has received enough money to last at least two years, competition is looming.

Openwave Systems, a publicly-traded Redwood City, Calif. company, which operates a wireless software division in Bellevue, last month announced a new graphics engine that makes it easier for consumers to access games, photo messages and location-based information on cell phones.

Other companies that have traditionally focused on developing browsers for cell phones, such as Opera Software, have begun targeting the more advanced smart phones. Last month, Opera introduced new technology for the Sony Ericsson P800 phone that reformats Web pages for small screens.

Microsoft also has begun stomping around the market announcing recent partnerships with T-Mobile and Orange.

In addition to those competitors, the rapid roll out of Wi-Fi, a technology that allows mobile computer users to log onto the Internet at coffee shops, airports and hotels, could limit the amount of time people spend using cell phones for Internet applications.

Wireless carriers also are developing advanced networks, known as 3G, that will bring greater transmission speeds to cellular phones.

"We think that 3G and Wi-Fi separately and together are going to change the way people access the Web outside their homes and work," said Andrew Roscoe, a partner with the Washington D.C. telecommunications research firm ForceNine Consulting. "And that is going to be increasingly true as these technologies diffuse over the next five years."

A company such as Action Engine could carve out a niche before the faster wireless networks get off the ground, Roscoe said. But after those networks are launched, he questions what role the company's software would play.

Eisler admits that new technologies are being introduced and larger competitors are eyeing the market. But he said Action Engine, which received multiple financing offers during its six-month fund-raising trek, is far ahead in the smart device category. Because the company's technology eliminates the need for a browser, Eisler said he could pursue partnership deals with companies such as Openwave that have historically focused on browsers for cell phones.

"Why beat each other over the head? Why not have a seamless end-to-end solution where Openwave has the browser and we have the smarter stuff?" he said. "They are radically different kinds of investments. To do a browser for a low-end phone is a different kind of team, a different R&D investment and different marketing investment. And so there could be some strong synergies."

Executives at Openwave could not be reached for comment. Action Engine has already signed partnerships with Handspring, maker of the Treo smart phone, and Symbian, whose operating system is used in 80 percent of advanced mobile phones.

Due in part to cell phones' small screens and limited bandwidth, consumers have been slow to embrace the idea of accessing information on mobile devices. J. Gerry Purdy, an analyst with MobileTrax, said this continues to be a problem facing many of the wireless software developers. It also has led to consolidation in the past year. But he said it won't be long before larger screens, higher-resolution displays and increased bandwidth open the door on wireless data services.

"The question is not if, but when and how soon," Purdy said.

In meetings with about 50 venture capital firms, Eisler ran into the timeline question a lot. He said investors were concerned whether smart phones would take off.

Eisler obviously alleviated those fears for a group of investors, promoting the idea that Americans are finally ready to use their cell phones for more than conver- sation.

"We are going to see some amazing stuff in the next 12 to 24 months," Eisler said. "We are going to be holding phones that could blow away any computer that you could have owned three years ago."

P-I reporter John Cook can be reached at 206-448-8075 or [e-mail]. For more information on Seattle-area start-ups or venture capital firms, visit www.seattlepi.com/venture

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