Today’s activity is just the tip of the RealVR iceberg, as Kris and I have noted in our Research 2.0 reports. There’s much more work to be done before 3-D and other immersive technologies become as commonplace as color is on your TV and computer screen.  Avatar creator and director James Cameron echoed our 2009 GigaOM Pro research report on Mobile 3-D when he recently predicted that in the next five years, 3-D technology will move from the big screen and TVs to laptops and smartphones with autostereoscopic (glasses-free) technology. Cameron noted that this is where the big breakthrough in 3-D is going to come.

We would note that it is just a matter of time before iPad and competing tablet technologies feature 3-D capability. We would also add that another big breakthrough will come via the web, as it becomes a 3-D technology through WebGL, X3D, O3D and other programming languages and standards. The web promises to bring 3-D to the masses – and not just through your computer or mobile smart device. More and more TVs will be connected to the internet in coming months and years and 3-D applications will be increasingly be available via the cloud. It is any wonder there is growing interest in OTOY?

All the 3-D activity in the real economy is beginning to feed back into financial markets. Last week, RealD , which licenses 3-D technology to movie theaters and other venues, announced a $200 million IPO. The company’s 3-D technology is currently in use at more than 5,300 theaters in 51 countries.  Since its inception in 2003, the company has never made money. For the nine months ended Dec. 25 2009, RealD took in net revenue of $96 million, but lost $28.8 million. RealD sees growing opportunity for its 3-D technology, not only in entertainment, but also consumer electronics, education, aerospace, defense and health care.

It remains to be seen if the RealD IPO will be a success. Some industry insiders we have spoken with think the IPO could do well out of the gate and then fall back to earth. RealD’s older contracts are coming up for renewal in the near future and the newer contracts the company has been signing are not as attractive or lucrative as past contracts. Competition is likely to heat up for RealD in the months ahead as XpanD, which is a market leader in Europe and Asia, comes west.

There are a couple of worrisome signs on the 3-D front in Hollywood. One is associated with rising ticket prices for 3-D films. We’ve seen an 8.3% average increase in 3-D ticket prices at box offices nationwide over the past month as cinema owners seek to capitalize on surging demand for 3-D movies. Ticket prices for IMAX 3-D movies are expected to rise 10%. Another concern is movie studios turning out low-quality 3-D films in attempt to hop on the 3-D bandwagon and generate a quick buck. DreamWorks Animation CEO Jeffrey Katzenberg warned recently that if a number of low-quality converted 3-D movies hit theaters, the movie-going public will eventually be turned off by terrible 3-D experiences — especially given the higher ticket prices.

Whether higher 3-D ticket prices and low-quality 3-D movies eventually drives the public’s pocket books elsewhere remains to be seen. For now, 3-D is on a roll in Hollywood and is gather momentum elsewhere in the global economy.

The RealVR tech pulse is rising. Indeed, the San Francisco Federal Reserve’s “Tech Pulse” index, which is a measure of technology-centered economic activity, is increasing sharply.  As our friend Jeb Terry at Aberdeen Investment Mgmt. points out, the last time the San Francisco Fed’s Tech Pulse index was recovering so strongly was in 1995 – the beginning of the Internet boom.

Given the sharp rise in the tech pulse, one could intelligently ask if 3-D and other RealVR technologies could produce a financial frenzy like we saw in the 1990s with the commercialization of the Internet. If the IPO market takes off, and there are signs that tech IPOs are coming back to life, we could see another burst of technological innovation that feeds through into the financial markets and pushes the NASDAQ back toward the 5000 level.

As the great economist Joseph Schumpeter observed, technological possibilities are an unchartered sea. It will be interesting to watch how high the tech tide rises as RealVR gains momentum in coming months.  We’ll be keeping a close eye on all things 3-D at Research 2.0. We’re all in on RealVR.

Scanning my Twitter page last week, a tweet caught my eye: “Cash Crisis: EMI Needs $183 Million By Mid-June.”

I couldn’t say I was surprised by the headline. EMI – a former crown jewel of the music business – has been floundering for years. The company has been unable to adapt to an evolving digital technology landscape.

I vividly recall a time back in 1998 when I met privately with the CEO of EMI.  I was running a lot of money back then and had a position in EMI’s stock and was keen to find out how they planned to transition to digital music. I saw a lot of opportunity in the music business associated with the Internet.

After spending about an hour listening to the CEO’s collection of blues music (at extremely high volumes I might add), we got down to business. My first question was: “What is your company’s digital music strategy?” He looked at me in the eyes and said matter of factly, “We don’t have one.”  Oh, oh, I thought. This isn’t good.

Twelve years after my meeting, EMI is facing a cash crisis that is threatening its very livelihood. One can hear the words of great economist Schumpeter echoing in the halls of EMI headquarters:  “competition from new technology, which strikes existing firm at their foundations…”

EMI is literally and figuratively being blown to bits. The once proud home of such stellar music acts as the Beatles, Pink Floyd and Cold Play is on life support. The company has been struggling to stay afloat since it was acquired by Terra Firma Capital Partners for 4.2 billion pounds just prior to the sub-prime mortgage credit crunch in 2007. Not long after EMI went private, several big-name bands like the Rolling Stones and Radiohead decided to pack their bags and leave the label. Ouch!

Earlier this year, EMI put its famed Abbey Road studios up for sale after reporting a gigantic pretax loss of nearly 2 billion pounds.  That plan was later shelved amid a public backlash. After all, Abbey Road studio is sacred ground.  To compound matters, the company also was successfully sued by Pink Floyd for selling individual tracks digitally.  Amid all the woes at the company, CEO Elio Leoni-Sceti threw his hands up resigned after just 18 months on being on the job.

It appears as though the company that didn’t have a digital strategy back in 1998 will be dust and ashes soon. All that will be left are the vultures (bankers, in this case) to sift over the dead carcass for any remaining scraps of what was once a premier music company and home of the Beatles and many other great artists.

EMI may soon be dead and gone, but digital music is likely to thrive in coming years as the global broadband communications build-out continues amid a proliferation of ever more powerful quantum-based computing devices. Who knows? Someday in the not-too-distant-future, music lovers might even be able to download the Beatles songs on iTunes and other popular digital music distribution platforms.

EMI has become a poster child for Schumpeter’s creative destruction process.  Let it be.

In the interview, we discuss some key issues including:

• China’s policies toward the Internet and how it may impact foreign media companies like Google.
• The state of the country’s venture capital business and prospects for banking reform and capital markets development.
• Prospects for emerging energy, transportation and communications technologies.
• China’s relationship with Taiwan and its impact on technological innovation.
• Prospects for the Chinese economy and financial markets and a discussion of a major demographic transition that lies ahead.

During the interview, we asked Arthur about what’s going on in China with Google and censorship. He told us:

“Control of the media is one of the Communist Party’s two indispensable levers of power, along with control of the financial system. It was naïve of Google to imagine, as it did when it came to China four years ago, that the transformative power of the internet would be greater than the Party’s ability to control the internet. The Party will continue to censor the internet and Google’s domestic search engine will be forced to close. The Chinese internet will continue to grow rapidly but the gains will mainly be captured by local firms.

Two broader points are worth making. First, much has been made of the business Google stands to lose by closing its China search engine. People who make that claim don’t understand Google, China or the internet. Two-thirds of Google’s business in China comes from advertising by Chinese firms who want to gain access to global markets. This business will continue to grow rapidly regardless of whether Google has a domestic Chinese search engine or not. The only thing that having a domestic Chinese search business does for Google is to expose it to reputational risk because of the compromises it must make to keep that business running. And that reputational risk could be absolutely deadly for Google’s global business.  Google’s ambition is to become the preferred gatekeeper for all information flows in an open global network. To achieve that ambition it must retain a platinum-plated reputation for trustworthiness. Once it loses that reputation its business could be destroyed. So maintaining a compromised business model in China generates little financial benefit for Google, while posing a potential threat to its entire global business.

Second, Google is arguably the world’s most innovative company today. They have said, in effect, that it is impossible for them to do business in China. What does that tell us about innovation in China? I think it tells us that innovation will always be constrained there as long as the government refuses to recognize that open networks and free flows of information are the central engine of growth in a post-industrial economy.”

To read the full interview, you can sign up for a free membership at the R2.0 website here.

• All the major consumer electronics manufacturers – LG, Panasonic, Sony, Toshiba and Visio – will be releasing 3D TVs to the market this year. 3D-enabled Blu-ray players will be available as well later this year.
• Broadcasters are launching TV channels with 3-D content. BSkyB was the first to televise a sporting event in 3D. Disney’s ESPN will soon follow. Sony is partnering with Discovery and IMAX to launch a 3D channel next year. We expect many more such announcements in the months ahead.
• A majority of PC games are currently available in 3D. Computer games are a big driver of 3D content and will continue to be as games migrate to the cloud.

As we can see, 3D is gaining momentum inside and outside the home.  One of the big opportunities for 3D is associated with the web. This topic is currently not receiving much attention today, but we believe 3D is on track to become a web technology. The web has been migrating away from text toward 3D since its birth.  Video is a natural evolution on the web (hello YouTube!) and we believe 3D represents the next transformation (in case you didn’t know, YouTube is migrating toward 3D).  Programming languages such as  WebGL and X3D are, and will continue to, transform 3D into a web technology. 

For programmers, entrepreneurs, and companies these are exciting and challenging times. We see a landscape ripe with creative destruction as capital increasingly flows toward 3D innovators.  As 3D becomes a web technology, we envision more applications migrating into the cloud.  As the web evolves, we will see a cornucopia of new 3D applications that have the potential to fundamentally transform the way we live, work and play. The 2D, asynchronous social networking environments of today will evolve into real-time, immersive environments as 3D becomes a web technology.  The Singularity is indeed near.

We foresee a huge leap in the number of interactions on the 3D web. Companies will be able to engage their customers in new and creative ways.  New businesses will be created that will generate billions of dollars of new wealth.  We will see new a new generation of social networking sites that will make today’s sites look pre-historic (no offense Facebook, Twitter, Linkedin and MySpace).

Importantly, as 3D becomes a web technology, the line between the real and virtual – what we call RealVR – will blur.  For a glimpse of the future we are describing, check out what Katalabs and Unity Technologies are doing.  As the 3D Web Cloud evolves, one wonders what will become of Second Life and other such software programs.  That is a questions we will be pondering in the months ahead. The 3D future will indeed be one of  augmentation and immersion, although the promise of a post browser internet seems like more of a wish among Second Lifers than reality today.

We are planning on exploring this topic in more detail in a forthcoming Research 2.0 report.  It is early days, to be sure, but we see a tidal wave of creative destruction associated with 3D becoming a web technology.

Upon speaking with my contacts in the fuel cell business, it would appear there is nothing special about the Bloom Box. As one expert I spoke with noted, the materials, the approach, the geometry, the efficiencies, and the economics are very similar to what other companies in the space are doing or have done.  The current economics of $8,000 per kilowatt are still – even after $400 MM of investment in large scale production – an order of magnitude too high.

The economics, combined with the unaddressed questions regarding the cyclability of the system (i.e., how many times can a Bloom Box be turned on and off before degrading), the long term reliability, and the sensitivity to fuel contaminants such as sulfur (which exists in many hydrocarbons) have been issues for other SOFC companies in the past. The issues have prevented broad-scale adoption of the technology as an alternative to the grid.

One has to question the veracity and integrity of Bloom’s CEO when he describes his material as beach sand. That is pure PR and quite disingenuous. Anybody in the solid oxide fuel cell business knows full well that the material is a highly refined, chemically synthesized doped ceramic powder. It doesn’t even come close to the cost of beach sand, even if the underlying major compound is the same.

Furthermore, the company’s comment that its SOFC can be fueled by solar is just plain silly. Solar panels produce electricity. Electricity runs a hydrolyzer to produce hydrogen. Hydrogen, in turn, powers the fuel cell. Not exactly running on sunshine!

One thing is very clear about Bloom Energy. They invested a great deal of money in a terrific PR firm. But, as we all know, PR can only take a company so far. If the product(s) don’t stack up in the market, it’s just a matter of time before reality sets in.

One of my friends summed up Bloom Energy’s Box beautifully when he said “it’s big hat, no cattle.”  If we were asked to make a recommendation, we would be long Bloom’s PR firm and short Bloom Energy.

Speaking of Smartphones, Texas Instruments made an announcement at the Mobile World Congress last week that caught our eye. The company announced a technology called OMAP™ 4.  TI’s OMAP 4 platform includes applications processors, a comprehensive software suite and power management technology to bring next-generation Smartphones and Mobile Internet Devices (MIDs) to market. TI believes the technology will fundamentally change the way consumers watch and interact with mobile devices.

TI’s OMAP 4 enables a set of applications classified as Human Device Interactions (HDI).  One of the interesting things about the technology is that it enables touch-less gesture recognition, something we’ve been anticipating as the conventional computer interface seems antiquated and beyond tired. TI’s object-recognition software allows users to control mobile devices with their hands without touching the screen.

With OMAP 4-enabled mobile devices, users can point, click, drag, scroll, zoom and rotate images without touching the screen, thus taking the interface beyond conventional touch displays. TI’s technology reminds us of Microsoft’s Natal technology. It’s clear to us that the future of computer interfaces is touch-less and far more friendly in terms of human interaction.

The other interesting feature of TI’s OMAP 4 technology is that it enables 3D-HD viewing on mobile devices. According to the company, the OMAP 4 platform is the only mobile applications processor that can deliver stereoscopic 720p at 30 frames per second per channel or enable true 3D image capture today. The advanced display controller from TI supports auto-stereoscopic displays, creating a 3D image without the need for special headgear or glasses, as well as providing support for external 3D monitors.

TI’s technology fits nicely with the view Kris and I laid out in our GigaOM Pro report titled, “3D Untethered: A Look at Mobile 3D technology.” The company expects devices with its OMAP 4 technology to debut in the market later this year. TI is part of Research 2.0’s RealVR ecosystem. We’ll be taking a closer look at the stock in the days ahead for consideration into the Research 2.0 Technology Model Portfolio.

(Disclosure: Research’s 2.0 Technology Model Portfolio currently has positions in Apple, Research in Motion, Google and Motorola)

In the conclusion, Reinhart and Rogoff echo some thoughts we’ve made in previous posts. The authors note:

“The lessons of history, then is, that even as institutions and policy makers improve, there will always be a temptation to stretch the limits. Just as an individual can go bankrupt no matter how rich she starts out, a financial system can collapse under the pressure of greed, politics and profits no matter how well regulated it seems to be.”

Indeed, there is an arrogance among regulators that says, “If we only had a little more regulation, we could rid the financial system of crisis and collapse.” The problem with regulation is that it has a tendency to lay the seeds for the next financial crisis, which then begets more regulation, ad nauseam. As history clearly demonstrates, more regulation is not the answer.

Reinhart and Rogoff go on to state:

“Technology has changed, the height of humans has changed, and fashions have changed. Yet the ability of governments and investors to delude themselves, giving rise to periodic bouts of euphoria that usually end in tears, seems to have remained a constant. No careful reader of Friedman and Schwartz will be surprised by this lesson about the ability of governments to mismanage financial markets, a key theme of their analysis. As for financial markets, Kindleberger wisely titled the first chapter of his class book “Financial Crisis: A Hardy Perennial.”

It is hard to disagree with this statement. Delusion is one of the hallmarks of human nature, as all the great Avatars – Christ Jesus, Krishna, Buddha, – have observed. And government’s ability to mismanage financial markets seems to know no bounds.

The authors conclude their book with this gem:

“We have come full circle to the concept of financial fragility in economics with massive indebtedness. All too often, periods of heavy borrowing can take place in a bubble and last for a surprisingly long time. But highly leveraged economies, particularly those in which continual rollover of short-term debt is sustained only by confidence in relatively illiquid underlying assets, seldom survive forever, particularly if leverage continues to grow unchecked. This time may seem different, but all too often a deeper look shows it is ot. Encouragingly, history does point to warning sign that policy makers can look at to assess risk – if only they do not become too drunk with their credit-fueled success and say, as their predecessors have for centuries, “This time is different.”

Reinhart and Rogoff’s book is not an easy read, but it is worthy addition to an investor’s library. There is much insight to be gained from studying the dynamics of financial crises through history. If nothing else, after reading the book, one will be hesitant in ever uttering the words “this time is different.”

I’ve seen a few stories come through my email inbox recently about US Treasuries becoming junk bonds.  These stories have got me thinking about the implications of U.S. government debt getting downgraded to junk status. Needless to say, having U.S. treasuries become junk bonds would unleash a tremendous amount of creative destruction in the global economy.

I’ve been reaching out to several of my well informed and plugged-in friends on Wall Street to start a discussion on this topic. Michael Mauboussin, Chief Investment Strategist at Legg Mason Capital Management, passed along an article that appeared in the Financial Times earlier this week written by Niall Ferguson titled, “A Greek crisis is coming to America.”  Despite the scary title (typical of mainstream journalism), Ferguson argues that we are a long way from U.S. treasuries becoming junk bonds. As he puts it, “in the U.S., the day of reckoning still seems reassuringly remote.”

Ferguson may be correct, but it would be foolish – perhaps beyond foolish – to become complacent about the U.S. fiscal position. The long-run projections of the Congressional Budget Office, as Ferguson notes in his FT article, suggest today that the U.S. federal government will never again run a balanced budget. That’s right, never. The latest CBO projections of U.S. federal government outlays and revenues are shown in the graph below.

I can hear America’s founding fathers groaning and asking: “What has happened to our beloved United States of America? How in the world could the fiscal position of the federal government have deteriorated to the point where the country will never again run a balanced budget? Oh, my! The good Lord help us all.”

It may well take an act of God to get America – and the world – out of the fiscal mess it is in today. I suspect what is going on in Greece and Europe today is a wake-up call to us all. Apparently the collapse of the Soviet Union was not a big enough wake-up call. Let us hope U.S. policymakers are paying close attention. Winston Churchill was right on the money.

U.S. treasuries aren’t junk bonds today. That said, one can easily see the federal government’s credit rating is on a slippery slope.

To be continued…

Garmin was launched in 1989 after a brainstorming session. It has a number of successful stand-alone GPS units for various markets, including auto, motorcycle, and sports. The company is currently generating around $2 billion of revenue, $400 million of net income, and has over 7,000 employees worldwide.   The company has a market capitalization of $6.4 billion currently.

Garmin’s success has been impressive to date, but one wonders if the company has a future. Like pagers during the proliferation of cell phones, Garmin’s core product faces intense growing competition from smartphones.

GPS works only on devices with an embedded GPS chip. In 2008, one out of every three smartphones shipped with GPS embedded. Obviously, smart phones were not much of a competitive threat two years ago. However, the competitive landscape is shifting amid rapid growth in GPS-enabled smart phones. According to the folks at ABI Research, within the next 4 years nearly all new smartphones will ship with GPS embedded.  Put differently, by 2014 GPS will be a standard feature of nearly all new smartphones.

Nokia announced recently that it will offer a new version of Ovi maps for Nokia smartphones, which includes free turn-by-turn navigation and traffic information. The new Ovi maps are available for immediate download for 10 Nokia handsets and will be pre-loaded on all new Nokia GPS-enabled smartphones starting next month. We expect similar announcements from other smartphone manufacturers in the months ahead.

As we can see from the chart nearby, Garmin’s stock has been a big-time underperformer versus the NASDAQ index. Over the past two years, the stock price has fallen by 50%. Many analysts on Wall Street have grown increasingly bearish. Goldman Sachs’ analyst currently has Garmin on his focused sell list. If we were advising Garmin’s management, we’d be encouraging them to look for new markets and opportunities (e.g., Indepth Navigation’s unique GPS product). It would appear as if the writing is on the wall for the future of their core product.

One thing is for sure: It’s going to take some visionary thinking to navigate through the coming competitive challenges and keep Garmin growing and thriving in the years ahead.

We’ll see if the management team is up to the task.

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Happy total returns!

Steve