itvt

Gary Lauder is managing partner of venture capital firm, Lauder Partners, and chairman of interactive TV company, ICTV. A long-time investor in the cable technology and interactive TV spaces (companies in which he has invested included AgileTV/Promptu, BigBand Networks, Everstream, ICTV, Integra5, Navic Networks, Terayon, and WebTV), Lauder was the recipient of a 2006 [itvt] Award for Leadership in Interactive Television.

 

He recently spoke to [itvt]’s Tracy Swedlow about the history of his involvement with ICTV, about the philosophy that guides his investments, about the kinds of companies and technologies he is interested in investing in today, about his view of the future of the interactive TV industry in the US, and more.

[itvt]: Would you describe yourself as a venture capitalist or as an angel investor?

Lauder: I’d describe myself as a venture capitalist. Some people call me an angel investor, because I’m investing personal funds rather than other people’s money. But angel investors are typically very different. They typically make very small investments, and invest a lot of time in very early-stage seed-type ventures. That’s not what I do. I typically invest in the preferred stock of series A, B or C. And in many cases, I don’t take a board seat. It’s very much like being a normal venture capitalist–with the exception that a lot of VC’s have a bad rep for being arrogant, and bad listeners, and for pushing companies to do the wrong thing. I try to do what I can to improve the reputation of venture capitalists.

[itvt]: How did you become interested in investing in high tech?

Lauder: From when I was very little, I have always been into science and technology. But when I was growing up, I just assumed that it would have to be a hobby, because I didn’t really have any role models in my life for how one could have a profession that would involve that. Then, when I was in my senior year of college at Penn, I took a course called "Technological Innovation and Entrepreneurship," in which I learned about venture capital. I determined that this was the ideal thing for me, because it allowed me to use my interest in technology to make business decisions, which is what I felt competent in. I was fortunate to get a job straight out of college doing venture capital, and I’ve been doing it ever since.

[itvt]: How did you get into interactive TV specifically?

Lauder: Around 1986, I became very interested in online services. I invested in a search company, believe it or not, in 1987. Its name was Telebase Systems. It was a search company, but not of the Internet: it allowed searches of online databases. Basically, it was tied into Dialog and various other online databases, and allowed users to avoid paying a monthly subscription to Dialog and those databases: it let them search multiple databases simultaneously, using fairly simple commands, and without having to know the arcane language that each database used.

[itvt]: And how did this lead you to interactive TV?

Lauder: Well, I now had an interest in online and interactive services. Several years and deals later, along came this company called Inteletext Systems, Inc. They had a sort of a souped-up version of that kind of search technology: they added multimedia and delivered stuff over cable. I invested in it, and then I became actively involved in its management. The company eventually became ICTV. Through that company, I developed expertise in cable. Then, after hiring a CEO to run it, I invested in other cable-related companies, once I knew who all the cable players were. I invested in two out of the three independent cable modem companies that went public: Hybrid Networks and Terayon.

[itvt]: Terayon, at least, did very well for itself.

Lauder: Hybrid did too, for a time. At one point, Hybrid had about 90% market share in the wireless data arena. They actually developed the first asymmetrical cable modem. Much of DOCSIS is probably based on their patents, which may wind up costing the cable industry some money over the next few years, as those patents are starting to be resurrected by one of those firms that buys up patents and extracts money from poor, unsuspecting cable operators.

[itvt]: Back to Inteletext. What exactly were they offering when you first invested in them?

Lauder: The very first incarnation of it–which is when it was a business plan and two founders but not really a company–was a multimedia set-top box. After meeting and talking with some folks involved in the cable industry, we quickly realized that a much more viable opportunity could be realized by removing the expensive stuff from the box and doing it further upstream in the cable system. One could achieve greater things at a lower cost, through an architectural innovation.

I was already somewhat familiar with cable TV architecture and its potential, due to a book that I had purchased in 1986 from the IEEE, called "Getting the Picture," which was about cable TV and the associated technologies. When you compared the various infrastructures for delivering cool new services, cable seemed ideally positioned because of the opportunity to cellularize cable systems.

Cable systems were, at that time, mostly broadcast systems. One of ICTV’s revolutions was the idea of taking a cable system and segmenting it to deliver different things–just as a cellular phone system segments the spectrum for phone calls. They recognized that there was an opportunity to do that for cable. Today we know this as hybrid fiber coax–or HFC–but at the time, the notion of subdividing a cable system to achieve bandwidth re-use was a strange and foreign idea to most cable operators.

[itvt]: So you invested in them, and you’re now, of course, chairman of the board. But what has been the arc of your involvement with ICTV? I understand that your involvement with the company has changed over the years.

Lauder: Yes, quite a lot. Initially, I was actively involved in their day-to-day business. Then, after hiring a CEO, the company got investment from Cox and IBM, and at that point I became very uninvolved. Then, when that CEO seemed to not be what the company needed, and the money from Cox and IBM ran out, I became a lot more involved again.

[itvt]: What year was that?

Lauder: That was 1995. We brought in a different CEO. Since then, my involvement has remained month-to-month rather than day-to-day. You see, my main role as a venture capitalist–or, rather, my main role as a director of a company–is to make sure that the company’s management is the right management for that company, and that the company is doing what it should be doing. When it becomes apparent that that isn’t the case, properly run organizations need to make the appropriate changes. That’s the most valuable role a venture capitalist can play: to change leadership when there is not the right kind of leadership.

[itvt]: You recently won an Award for Leadership in Interactive Television. I think that may have been because people recognized that, while you have been sometimes more and sometimes less involved in the day-to-day running of the company, you have been far more committed to ICTV than VC’s usually are to their investments. Why are you so committed to that company?

Lauder: Simply because the basic premise which makes the company’s technology valuable has continued to become stronger and stronger over time. Not weaker and weaker. That’s the basic reason.

[itvt]: What is that "basic premise?"

Lauder: There are actually several. The first is that Moore’s law has progressed to the point that interactive services can be offered via TV that would be valuable to the users and not cost the operators much to offer, so there is high potential profitability. That point was passed many years ago. Another premise is that service providers will always have a diversity of platforms with varying capabilities, so attempting to run multimedia software in the set-top will either doom the higher-end boxes to not exploit their capability, since software will be written only for the lowest common denominator, or the lower-end boxes will be orphaned, as the software is written for higher-end. This phenomenon was vividly demonstrated by TV Guide: the old version of TV Guide had lousy resolution and color palette in order to remain compatible with the Motorola DCT1000. The newer iGuide abandoned that box and freed itself of its constraints, but operators that are stuck with the orphaned boxes are not pleased. If interactive services are delivered via an ICTV architecture–in real-time from the headend like a VOD channel–then all boxes can get identical services, and the services can be better than those that could have been run on the box in the first place. There are more "basic premises," but those early principles have remained true since the early days.

My perspective is that the ICTV way of doing interactive services is inevitable. The only question is whether we will be able to effectively defend it from others who will realize that and attempt to encroach.

[itvt]: ICTV recently underwent a significant strategic shift, which included the acquisition of Switched Media and the launch of a product called ActiveVideo. Could you talk about the reasons behind the acquisition, and describe your own involvement–in your role as chairman and a VC–in all this?

Lauder: Switched Media was created mostly by ex-ICTV employees pursuing some technologies, products and services that were related to what ICTV was doing; however, the company did not compete with ICTV. Over time, it became more apparent that the two companies’ offerings were synergistic. It was also the case that the management of Switched Media would nicely fill vacancies in ICTV’s management. I led ICTV’s negotiation on behalf of the company’s board. ICTV added the capabilities of Switched Media to its existing portfolio of capabilities, without dropping any of the old ones. The level of operator interest in the new capabilities has caused ICTV to shift its marketing efforts towards these new capabilities.

[itvt]: Do you see any companies already encroaching on ICTV’s space?

Lauder: No, not materially. So far, all of the subsequent entrants that tried to do this have exited within a few years, whether due to patent lawsuits from ICTV or other reasons. For example, there was a company that did, named Peach Networks. Microsoft bought them circa 2000, and attempted to rewrite their product. But then they gave up on the product and threw it out. Basically, I don’t think it ever worked right, since doing what ICTV does is much harder than it looks.

But the reason why I think it’s inevitable that other companies will try to encroach on ICTV’s space is this: when someone decides to make an interactive application available to the general public, it’s a challenge: there’s the question of what platform it will run on, and how many different versions of that platform must it run on. In other words, the question of how many different ports they need to do, in order to address their market.

The problem is that there are so many different brands of set-tops, and within any given brand, there are so many different capabilities and so many different model numbers. Within each model number, there are many different versions of the firmware in the field. Within any given version of the firmware, there are many different middleware platforms layered on top.

With IPTV, the problem is even more dramatic than with cable. Because with IPTV being this brave new world that everyone feels they can get into, suddenly there are over 50 manufacturers. Whereas in the cable and satellite set-top world, there are many fewer.

But at any rate, you’ve got a gazillion manufacturers with set-tops in the field in multiple different flavors. So if you’re trying to create an interactive service, you’re faced with too many different permutations to create an optimized version for each one. And, because of this, as I just mentioned, what you will inevitably have to do is write for the lowest common denominator–which, of course, is very limiting. By the way, we’ve found that applications that run from the headend can often be faster than apps running on a set-top. You can get faster response time from a key-click. It can be faster going up to the headend and back than executing applications locally on the box. Not always, but sometimes.

[itvt]: Yet over the years, most of the effort in the industry has been spent on set-top box applications. What gave–or still gives–you the confidence that the industry will eventually adopt ICTV’s headend-driven model?

Lauder: In part it was because I always felt that until operators had actually tried to run a whole bunch of applications locally, and had seen the downside of that model, they wouldn’t appreciate the value of doing it our way.

Unfortunately, it’s taking longer for this to occur. In this country, it hasn’t really occurred very much at all. Overseas, however, there are operators who have been there and done that. And a number of those parties are at this point strong ICTV fans.

[itvt]: What about OCAP, though? Won’t the availability of a common standard solve some of the problems you’ve described and that ICTV’s headend-driven model is designed to address?

Lauder: OCAP could considerably ease that burden. ICTV will support OCAP from the start, and we do actually believe that there will be many apps that will make more sense to run locally on the set-top box. On the other hand, depending on how standard the OCAP standard remains, running OCAP applications at the headend could still wind up being a less arduous task than running them locally. You know the old saw that "the nice thing about standards is that there are so many to choose from." As there become variants of OCAP, and as people deviate from it in order to get some kind of functionality or capability out of a particular box, that somehow was not encompassed in the OCAP standard, then the problem that I alluded to before may occur again. Though I should stress that that is not in any way what ICTV’s premise is based on.

OCAP is a great standard for doing a lot of things, but it’s not there to do everything. There are many things that are better done from the headend than locally. Where is the best place, for example, to render a Web page: on the box or at the headend? I’d answer that it makes a lot more sense to render it at the headend than locally–because you don’t really want to have to have every version of all the different plug-ins on the box, and you don’t want to have to be constantly updating them on the box, and so on and so forth. Of course, Web pages today are not an important part of interactive TV, and–to the extent that they are–it’s very circumscribed in terms of what features or plug-ins are run. But, as the market matures, it will be a limiting factor. Another example of a service that is best done from the headend is personalized mosaics. To do those in the set-top box would require a tuner for each tile. ICTV’s approach delivers those as a VOD stream in a very scaleable way.

[itvt]: Speaking of rendering Web content on the TV: I presume ICTV is very excited by the broadband TV phenomenon…

Lauder: Right. Broadband TV is actually a great application for ICTV, in that ICTV’s technology can basically take content created for broadband TV and make it available to any set-top-connected TV. So Microsoft Media Center applications, for example, can be run on ICTV, and they look great. There are many long-tail video type of things that are very well and easily delivered by ICTV. This is another very natural application for the company’s technology.

[itvt]: Let’s move away from ICTV for a second, because you are also an investor in several other interactive TV companies. I’m curious how you select these companies. Let’s take, for example, AgileTV, or Promptu as it’s now called, which provides voice-enabled search and EPG technology. Could you talk about how you decided to invest in that company in particular, and also explain how you go about looking at companies to invest in in general?

Lauder: Promptu is a company that’s doing things from the headend that are the kinds of things that are best done from the headend. So philosophically, it’s aligned with ICTV–or rather, both companies are aligned with my personal view of how interactive TV should be done.

My perspective is that TV can be a tremendous gateway to a gazillion new services. In light of all the things that one will want to do with it, I believe that one should only put on the set-top that which one must. Everything else you can, you should do from the headend. There are so many things that you must do on the set-top; therefore, you don’t want to burden the set-top with all the things that are optional.

So, voice-recognition is a great example of services that are best done from the headend. Digeo, for example, is doing voice-recognition locally on the set-top. Their box costs on the order of $600. But much of what Digeo’s box does can actually be done at the headend. If one reduced the functionality in that box to just the PVR functions, and removed the complicated stuff to the headend, I allege roughly half the cost of the box could be removed.

Digeo has beautiful stuff, but the cost is a bit of an obstacle. And, as the multichannel world moves from charging for PVR boxes to eventually providing them for free, I think it’s self-evident that it will be hard to sustain an $600 box.

Now, I think that Digeo would say, "Look, it won’t always cost $600. The cost will come down." And there’s no question that they’d be right: if you hold constant what you’re trying to accomplish with the box, and Moore’s Law continues to apply, the price will inevitably come down. But it’s a fact of human behavior that they won’t hold constant what they’re trying to accomplish in the box. Over time, they’re only going to try to increase what the box can do. And, of course, as they keep adding more and more functionality to do in the box, the costs are not going to come down by that much.

So voice-recognition is one of those things that can be done very effectively in the headend. Using Promptu’s headend-based model, the hardware cost to voice-enable a DCT2000 is on the order of $40. Which is, as they say, "Bupkis." But the value delivered–i.e. the value that users perceive in having that functionality–is a great deal more than $40.

[itvt]: Presumably, though, in the case of AgileTV/Promptu, you were also sold on the idea of voice-recognition itself, right?

Lauder: Exactly, it wasn’t just that the company’s technology reduced the cost of doing voice-controlled searches, it was that that voice-control is actually very, very compelling–depending, of course, on the application. Now, using voice-control to change channels up or down a channel would obviously be the lowest-value thing you could possibly do with that technology, but using voice control to allow people to conduct searches by saying, for example, "Show me what VOD movies are available starring George Clooney"–that would be much more valuable.

As it is right now, VOD interfaces are horrific. The genesis of Promptu was that Paul Cook, who was involved in the creation of Nuance, a voice-recognition company, and in the creation of DIVA, a VOD company, recognized that there was a need in VOD menuing for voice-recognition. It was then a natural evolution to apply that to the electronic program guide as well. As the number of channels available to people grows, flipping through the electronic program guide becomes prohibitively time-consuming. So voice-controlled search and navigation makes a lot of sense.

[itvt]: What kinds of technologies are you interested in investing in today?

Lauder: Let me step back and give you more of a big-picture perspective. If you look at the history of computing, initially, most of the value was in the hardware, and very little in the software. Over time, however, that has shifted the other way. The cable TV industry has followed a similar trajectory: initially, most of the expense was in the creation and maintenance of the plant, and very little went to programming. But over time, it’s shifted: most of the money is now going to programming, which is just another form of software. The software is what will make the hardware valuable. The cable infrastructure that has been created–not just the physical plant out in the street and in the headend, but the installed base of set-top boxes and so forth–has really not yet been put to its ultimate and most valuable uses. There are a great, great deal of services that can be layered on top of that infrastructure that will make it a lot more valuable. So, while in the mid-90’s I tended to invest in telecommunications equipment companies–hardware-infrastructure-oriented companies, such as Hybrid Networks, Terayon, Imedia, Vivid, which got bought by Concurrent, and so forth–today, most of my investments are in software that can be run on top of existing hardware, and that will thus make the cable plants more valuable.

[itvt]: Why do you focus your investments on cable technologies in particular?

Lauder: A lot of the reason for that is just that I understand the space. But part of it also is my appreciation for the enormous potential ahead of cable. My only concern is that cable might be so slow off the mark that it may lose a lot of its market share to satellite, before achieving that potential.

One of my main concerns about the cable market is that it is so slothful in its adoption of new technologies. Satellite operators tend to be somewhat more innovative. Cable could wind up losing much of its market share before it ends up adopting the kinds of platforms that I think could really ensure its advantage over satellite.

On the whole, I’d say that cable has been very, very good to me. Many of my investments in cable have done very well. Others of my investments will just have to hang on and wait around with the expectation that cable operators will ultimately do the right thing, after they’ve exhausted all their other alternatives.

[itvt]: Are you interested in investing in tools companies and in content companies?

Lauder: I’m not very interested in tools, simply because of inadequate market size. I mean, a tools company could have a fine business, but it’s just not a business that is big enough to attract me. And I’m not interested in investing in content, either. Simply because content is mostly a people-business. There’s not really much in the way of technology. You don’t have a sustainable competitive advantage intrinsic to the company: it’s more a matter of the specific talents you have, and of your managing to keep and to continue to motivate those people. Not that content is a bad business: it’s just that I consider myself insufficiently qualified to judge which content companies will succeed or not succeed. I’m not able to tell the difference between a good one and a bad one.

[itvt]: Now, as you know, a lot of interactive TV companies are repositioning themselves as multiplatform companies…

Lauder: Actually, AgileTV/Promptu is a good example of what you’re talking about. As you probably know, they are now also pursuing the cellular phone market. It’s quite logical that they would do that, because the cellular phone market has the same problem that the set-top box market has in spades: an excessive diversity of platforms–no common platform on which to offer all these different services. And there are also navigational challenges on those platforms, which make it very hard to find, say, a ringtone, or an application, or a wallpaper, or whatever. Even after you’ve gotten into the menu to get ringtones, for example, it’s still hard to find the specific ringtone you might be looking for. The application of voice-recognition technology to that problem is very appropriate. Plus, I think their approach to doing voice-recognition should dramatically improve recognition rates, compared to what has historically been available on cellular phones. So I think that expanding their offering into cellular phones is a very logical extension of their business.

It will be interesting to see how they balance their pursuit of the cable market against their pursuit of the cellular phone market, because, while their cable product is more mature and complete, the cellular phone market is much larger, and there are many more players. It’s very possible that market factors might pull them towards one or the other. It will be quite a balancing act to decide how to allocate scarce resources between the two markets.

[itvt]: Are you interested in investing in companies in the multiplatform TV space?

Lauder: Yes. In fact, ICTV is actually a multiplatform TV company: it has already been deployed by an IPTV operator that will be announced by the end of this month. Another of my portfolio companies, Integra5, is also doing some work in the multiplatform space.

[itvt]: You have the reputation of being very closely involved in the companies you invest in–not just ICTV. In general, why are you so closely involved?

Lauder: It’s often the case when I’m serving as a director of one of the companies I invest in. Though I don’t always serve as a director–with Navic, for example, I’m not a director. But when I do happen to be a director, and when I happen to have a lot of expertise or capability in a particular area, I might sometimes become a hyperactive director–or at least more active than directors generally tend to be. So I try to advise within the areas of my expertise, but the most important role that I play is to help a company make sure that it has the best possible management running it. Of course, you can try to come up with better strategies, vent and do all kinds of things, but ultimately the most valuable role a VC or a director of a company can play is not giving advice: it’s recognizing when management is not the best management that the company could have, and fixing that. Now, I do a lot of other things in addition to that, but that is what I see as my primary role. And, naturally, it’s a role that a standing management team is unlikely to appreciate, because sometimes it causes their replacement. But obviously it’s something that shareholders ultimately appreciate.

However, I do believe that VC’s should be very cautious in replacing existing management teams, particularly with start-ups. It’s very easy to say, "The situation’s broken, so let’s fire everybody and start over." Many VC’s have this kind of knee-jerk reaction, and it has given the VC field a bad name. In my opinion, it is best if the founders of a company can be kept, because they usually have a unique blend of skills and capabilities to contribute to the company. If they can be kept, then it’s generally much more healthy. But personalities being what they are, that can’t always occur.

[itvt]: What do you think needs to happen before we see more VC investment in the interactive TV industry?

Lauder: I would say that it ain’t gonna happen any time soon. We’re not going to attract more VC’s into this industry until there are more successes. By that, I mean companies that wind up having a very nice exit, where the investors make a lot of money and say to themselves, "Hey–let’s do that again!" I think this will be many years in the future, if it ever happens at all in the US.

[itvt]: Yet you yourself are perhaps the longest-term investor in this space…

Lauder: Yes. Well, I may get an award for perseverance, but assuming that my perseverance is ultimately rewarded, I’m still probably not going to have a great IRR.

[itvt]: Could you explain that concept?

Lauder: IRR–which stands for "Internal Rate of Return"–is basically a time-weighted rate of return for one’s investment. It’s essentially the best metric for the performance of an investment over time. Another name for it could be "Compounded Annual Rate of Return." Return on investment–or ROI–is an important metric, but it matters over what time frame the return occurred. If you double your money in a year, that’s a 100% IRR. Over five years, that’s about a 15% annualized return or IRR.

[itvt]: Over the long term, do you think that interactive TV will be a big industry?

Lauder: Yes, I do. Let’s put it this way: in the UK, it seems to be doing very well. I consider it inevitable that what works in one country will ultimately wind up working in another country. But what’s shocking is the incredibly low speed with which that’s occurring in the US. As I mentioned at the [itvt] Leadership Awards event, a Comcast executive once said to me, "We won’t do interactive TV until Rupert makes us."

But a more fundamental issue is that the industry itself may wind up getting in its own way. Just as an example: one of the things that caused ICTV to be set back by a great many years is that it had an investment from Cox Cable, and did a trial with Cox in Santa Barbara. That trial was so successful, it blew away everybody’s expectations. We had double the revenue per sub, double the penetration and half the bandwidth usage than had been expected pre-trial. The key metric of revenue-per-channel was about eight times what had been anticipated. They promised to deploy us and promised to deploy us and promised to deploy us–and then ultimately didn’t. The reason for their not deploying was that, basically, their strategy had changed. Instead of using ICTV, they decided they wanted to use the DCT5000, running Liberate or Microsoft middleware. Their strategy was basically to follow what the rest of the cable industry was doing, despite the fact that our trial with them had been so successful. You see, the cable companies have a weekly CTO conference call–which I call the "Groupthink Hotline"–and, as a result, they can collectively decide to go in any given direction or pick any given vendor, and end up making a bad choice. Because there has been so much consolidation in the cable space, all the companies can go in one direction, and that direction can end up being a bad one. Because of this, I’m not as interested in investing in new companies in this field as I used to be. That’s not to say, "I’m throwing in the towel and that’s it. Forget it!" But I will say that the bar for what would motivate me to invest in this space is higher than it used to be.

[itvt]: When a company pitches you, what kinds of things are you looking for?

Lauder: There isn’t a strict set of criteria. I’m simply looking for really compelling products or services that I think will make customers happy, that will strongly differentiate the company from the alternatives, and that are protectable and sustainable. So the things that any VC is looking for.

The good news is that I will typically not waste people’s time. I will make 95% of my rejection decisions in the first five minutes of phone conversations.

[itvt]: And what kinds of materials should a company pitching you be armed with?

Lauder: Typically, there’s a PowerPoint and an executive summary. One or other of those is usually the minimum for consideration. Once I have the chance to look at those, then I can make an initial decision. I reject 95% of the things I get presented with instantly–simply because they’re outside of what I consider myself comfortable with investing in. If I don’t have expertise in a company’s field, I’m not going to invest in it: if someone were to pitch me on an enterprise software company, for example, I’d reject it based on my lack of expertise. More money has been made in enterprise software than interactive TV, so it’s not a bad field. It’s just that it’s a field where I’m not qualified to make difficult decisions. I used to be more of a generalist. But, over time, as I became a specialist, I realized how little I knew in all those areas where I was not within my specialty. It’s only when you have a lot of expertise in one area that you come to understand how little you know in other areas. To paraphrase Confucius, "The more you know, the more you know you don’t know."

URL: http://www.lauderpartners.com

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