Are you experienced?
That used to be the first question buyers asked a potential supplier. But in the brash young RFID technology market, it no longer seems to matter.
These days, it seems there's no tracking problem that RFID can't solve. Need to protect vintage Jimi Hendrix rock 'n roll memorabilia (think the guitar strap immortalized at the 1969 Newport Pop Festival) from theft or counterfeiting? There's an RFID solution for that. Want to keep close tabs on critical airplane parts to shorten service calls and reduce travel delays? There's an RFID solution for that. Looking to track supplies being shipped out to troops in Iraq? There's an RFID solution for that too.
Though it may have gotten off to a bumpy start, the RFID revolution is clearly upon us. In just a few short years, RFID has grown into a multibillion dollar industry. ABI Research projects that spending on RFID software and services alone will hit $3.1 billion this year. But perhaps more astonishing than the growth itself is who's profiting from the boom. It's not always the big, well-established companies that are raking in the RFID revenues. In many cases, it's small venture-funded companies barely out of the startup phase.
In the brash young RFID technology market, it seems the old rules no longer apply. It used to be that when a company opened discussions with a potential new supplier, one of the first questions it asked was how long the vendor had been in business—longevity generally being equated with reliability and fiscal soundness. Nowadays, it doesn't appear to matter. Up-and-coming players— some of which were running their businesses out of a garage just a few years ago—are landing big contracts with the likes of Boeing and the U.S. government.
You don't have to look far for examples of small and nimble RFID startups that have edged out their larger rivals. Last May, Dulles, Va.-based ODIN technologies beat out a roster of veteran players—including IBM—for a $14 million contract to outfit 69 Defense Logistics Agency facilities with RFID readers. A month earlier, in April 2006, San Jose, Calif.-based newcomer Intelleflex inked a multimillion dollar deal with Boeing to supply RFID tags for parts for its 787 Dreamliner jets when they go into production this year. Boeing, which is paying approximately $20 per tag, expects to use more than a million tags annually once production begins.
What sealed the deal in this case was Intelleflex's product—the industry's first fully integrated multi-protocol EPC-compliant RFID single chip IC. In the passive operating mode, tags made with this battery-powered chip offer a read range of more than 300 feet and a full 64 kilobytes of user read/write memory. Though Boeing invited all of the major RFID players to bid on its smart label contract, the Intelleflex tag was the only one able to meet the aircraft maker's memory requirements.
"That shows the value of innovation," says ODIN's president and CEO, Patrick Sweeney, referring to the Intelleflex RFID chip. "Those guys built a better mousetrap."
For Boeing, the chip's technological advantages evidently outweighed Intelleflex's lack of experience—the company received its first venture funding in 2004 and is just ramping up production of its first product. "Boeing is more innovative and venturesome than most big companies," says Bob Pavey, an investor with venture firm Morgenthaler and a recent appointee to the Intelleflex board. "Boeing recognizes more than most companies that much of the technology they will need in the future will not come from the large suppliers."
Magnet for talent
Better mousetraps aside, another factor that sometimes works to the startups' advantage is their willingness to take on the smaller contracts that large corporations might not consider worth their while. That gives them a foot in the door, not to mention a big in with the customer later on if that pilot progresses to a rollout.
"Some of the smaller integrators aren't so averse to take a $200,000 contract when an IBM might be looking for more lucrative, longer-term deals," says Michael Liard, principal analyst for the RFID practice at ABI Research. "But guess what? Those smaller guys taking those little deals have gained a host of experience around RFID deployment, and have gained a competitive advantage in the process."
That's no small consideration. In an industry where expertise is in short supply, experience with RFID deployment can translate directly into more business. Sweeney, for example, credits his company's experience with deployments for its roaring 400-percent annual growth rate. "We're having much better success than I ever thought we would," he says. "I think that's because of the lack of expertise with this technology."
At the moment, the smaller companies have what amounts to a monopoly on RFID talent and expertise, says Daniel Engels, former research director for the Massachusetts Institute of Technology's Auto-ID Center. "All of the innovative work that has come out lately has come from small companies moving into the space," says Engels, who is now an associate professor in the University of Texas's electrical engineering department. Though that's not uncommon in the tech sector, he adds, "I would say the trend is probably extra pronounced for RFID. RFID is unique in that the real expertise exists in all the small companies right now."
Part of the explanation lies in the simple fact that the smaller companies are the ones with the jobs. From the large corporations' point of view, the RFID market is still too small to justify devoting a lot of bodies to it.
And even when large corporations like Texas Instruments do venture into RFID development, there's no guarantee that they'll be able to sustain the momentum once the development process concludes. "When TI was developing its SpeedPass solution, their head count was up," says Engels. "But most of their technical people left after that, during the period when they were not innovating, and went to companies like Matrics [which has since been acquired by Symbol] and other smaller companies that were doing more innovative RFID work."
It's not just technical people who have fled to the smaller companies. Top executives have joined the exodus as well. Take Rich Bravman, the former CEO of Symbol Technologies, who defected to Intelleflex in September 2005. Bravman, who is now CEO of Intelleflex, was Symbol's fifth employee when he joined the firm as a software developer back in 1978, shortly before the company landed a $5 million contract with the Defense Department.
For Bravman, the opportunity to try to repeat that success at Intelleflex proved irresistible. "It was a very comparable situation," he says of his early days at Symbol. "We were a new company at the time and the hand-held laser scanner was a brand new concept and a new technology. The competition included mega companies like NCR and IBM, but we emerged the winners based on having a technology that nobody had figured out how to do. By the time I left, we were a $3.5 billion company. I very much hope we have the same success trajectory here."
Symbol isn't the only company whose management ranks have suffered casualties. In June 2005, RFID hardware specialist Sirit hired Norbert Dawalibi away from Psion Teklogix, where he had been president and CEO, to be its new CEO. In October, Sirit recruited former Texas Instruments RFID guru Tony Sabetti to be vice president of RF solutions.
ODIN, too, has succeeded in luring some top talent away from the competition. Diana Hage, who headed up IBM's RFID and wireless division, defected to ODIN this fall after the company beat out IBM for the government business. "That's been a spectacular hire," says Sweeney. "It has given us a lot more insight into how the bigger companies are addressing the market."
Deal or no deal?
Now that they've been lapped by the competition, can the larger companies ever expect to catch up? Some say the only way for the big guys to make up the lost ground is to acquire those smaller firms that have been landing the fat contracts. Sweeney says he receives buyout overtures frequently.
The market has already seen some mergers and buyouts—like Sirit's purchase of TradeWind Technologies and SAMSys last year, and Symbol's acquisition of Matrics in 2004 (before Symbol itself was bought by Motorola last September). But Sweeney thinks the real action will begin when the market matures, most likely in 2008.
"I think one thing you'll see is a company like Texas Instruments asking 'How is this [startup] company beating us on these deals?'" says Sweeney. "Their mentality will be, 'We'd better buy them before they beat us again.'"
About the Author
John Johnson joined the DC Velocity team in March 2004. A veteran business journalist, John has over a dozen years of experience covering the supply chain field, including time as chief editor of Warehousing Management. In addition, he has covered the venture capital community and previously was a sports reporter covering professional and collegiate sports in the Boston area. John served as senior editor and chief editor of DC Velocity until April 2008.
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