Yes, that's a provocative title, and for good reason. No matter how spiffy your technological invention, someone right now is innovating to build a better mousetrap and displace you. And the big folks like Intel (Nasdaq: INTC) often get to choose the winners.
That's been foremost in our minds as we've been knockin' our noggins about various technologies and so-called "tech" companies, about when and if they make appropriate Rule Breaker investments. There's no easy answer, except that an investor considering a company that employs complex technology as its core business needs to understand the technology and the company's sustainable advantage -- how it can extend an initial lead from new technology and fend off competitive threats when someone else invents that better mousetrap. (That's a phrase that should be retired. Hmmm... how about a better Frisbee?) That's one reason we stress the importance of consumer appeal, because it gives us another handle on the potential of a company's complex stuff.
ECD's Ovonic Unified Memory
Take flash memory, the kind of memory used in wireless handsets. Intel is the world's largest producer for the $6-7 billion market. How can a Rule Breaker investor evaluate the potential that Energy Conversion Devices' (Nasdaq: ENER) Ovonic Unified Memory (OUM) might actually upset the established flash order? It takes an understanding of the technology. And that's only the start for those contemplating an investment in ECD, because it has many possible Rule Breaking technologies. Not just OUM, but nickel metal hydride batteries, CD and DVD read/write technology, hydrogen fuel systems, and solar shingles. (Lions and tigers and bears, oh my!)
They do have potential consumer appeal, from rewritable CDs and DVDs, to batteries for hybrid cars, and possible new memory for your cell phone or PDA, but we're a long way from "Ovonics Inside."
OUM's main man, Tyler Lowery
Let's look a little more closely at OUM technology. ECD can license it to anyone, but its main push comes from a non-exclusive license to Ovonyx, a 41.7%-ECD-owned joint venture with CEO Tyler Lowery and Intel to commercialize OUM. I recently interviewed former Micron Technology (NYSE: MU) exec Lowery to learn more about OUM and the obstacles in front of a company that's developing new computer memory.
Lowery stood out from the half-dozen CEOs I've interviewed in the last few months. He answered his own phone, made the appointment with me, and didn't have a media person in the room when we spoke. He was down to earth, unrehearsed, and candid. Definitely fresh air.
Here's an edited transcript of our talk. The complete interview appears on the Rule Breaker strategies discussion board.
Tom9: What's Ovonyx' business plan?
Lowery: We're taking [ECD's] phase-change memory technology, and we're trying to incorporate it into a product that has a competitive advantage in several areas, but mainly the memory marketplace. The area within memories would mostly be the non-volatile flash market segment. [Intel's flash memory page lists some products that contain flash. Wireless phones are a huge market.] We're going after that with what we hope to be a major competitive performance advantage. And also some cost advantage as well. So our business plan is to continue to develop and productize the technology that gives us the advantage with the customer and then work with our licensees to help them bring up the product. In that case, right now, I'm in a conference room here at [part Ovonyx owner] Intel right now, and our project here is just that. To try to get this into a real product, prove it up in terms of yield and reliability and cost, and get it into something that goes to customers.
Tom9: What's the potential market for the flash?
Lowery: Flash last year was $8 billion to $10 billion, but the prices have come down, so it's probably in the $6 billion to $7 billion range. Big, big market. The other part of that is embedding, put the memory on a logic chip, like processors or microcontrollers or ASICs, commercial consumer products that would use memory on the same chip with logic, that's called embedding, and it's a big potential market for us that we would pursue.... [Lowery expands on embedded memory in the complete interview. Embedded memory is the kind of thing that could revolutionize the way computer chipsets function.]
* * *
Tom9: How would an investor, looking at ECD, know that OUM is succeeding? What kind of markers would I look for as an investor? Not asking you to predict the future, but how does a new memory technology get adopted?
Lowery: First of all, any time you talk about new memory technology, it is risky. These are big markets, and when you have huge markets like that you have very serious competitors trying to do other approaches. And also, DRAM, flash, SRAM -- they've been around a long time, they've got a tremendous infrastructure [producing and marketing them that's] way down the learning curve. Any time you've got a new memory, it's risky.
The real proof is in the product. A lot of people talk about different types or approaches to memory out there, and we're one of them. But real proof is when you start to see product announcements out there... when and if you hear from them on announcements on how the program is going and the product schedule.
Tom9: When a company like Intel says we're going to build the Pentium 5 with OUM or something like that?
Lowery: That would be an excellent gauge. (Laughter.) Otherwise it's all talk. Until you actually see it in a product, it's all just speculation.
* * *
Tom9: Do you currently have manufacturing facilities?
Lowery: No, we don't. We've got some facilities to do some processing at our home base, but anything remotely close to a manufacturing capability, no. We're totally tied in with our partners. At least for the foreseeable future the source of our revenue would be a royalty stream from our partners' production.
Tom9: Is all product development going on at Intel facilities currently?
Lowery: Yes, and our other licensees, which is ST Microelectronics in Italy, and it was Lockheed Martin, now it's British Aerospace.
Tom9: When you joined Ovonyx and took an equity stake [Lowery initially was a 50-50 owner with ECD], you had left Micron Technology by then?
Lowery: Yes, I'd left Micron.
Tom9: What attracted you to this endeavor? Presumably you didn't need to work another day in your life.
Lowery: That's right, and some people think I'm kinda crazy for doing this, actually. Actually I had a real good career at Micron. Excellent, loved that place up there. Before I left, while I was at Micron, we ran a 2.5-year program on [ECD's] phase-change memory. So I was very familiar with ECD, with the Detroit people that worked on this, and with the technology.
After I left Micron, I wasn't able to work for anybody for a while because of a severance agreement. During that time, ECD made tremendous progress on the technology, and I kept track of it during the severance agreement period, and it got downright exciting. The day my severance agreement was completed, I flew back to Detroit to get the Ovonyx venture started.
Tom9: The very day?
Lowery: The technology is very interesting. An alternative, new approach to memory certainly has its risks as well. We're going to give it a good run.
Tom9: Are you aware of any other technology or companies out there currently that could give OUM a run for its money?
Lowery: Flash is the one out there and real, but in terms of the others that would be most competitive [to OUM], they would be the magnetic tunneling junction technologies that are being pursued by IBM (NYSE: IBM) and Motorola (NYSE: MOT).
ECD as a Rule Breaker
No doubt about it, using ECD's Ovonics technology to change flash memory and potentially advance embedded memory would change the computing and wireless worlds. Embedded memory might go a long way to displace companies in today's "separated" memory world, where a computer's logic integrated circuit (CPU) makes a request to a separate memory chip. But OUM is still in development, and how many other companies are out there toiling? Intel has investments in many more Ovonyxes, to be sure. How do we even know if OUM is top dog and first mover?
ECD not only has one complex technology waiting to produce products, but six, each with Rule Breaker potential to change the world. Do we need to take six different businesses in one? Isn't life complicated enough? Please respond in this poll.
a) RB Port should consider complex technology companies.
b) RB Port does not need them to do well.
c) A, but ECD is too much work.
d) A, but ECD is worth the effort.
Tom Jacobs' (TMF Tom9) creates a moat around himself with clutter. This is his sustainable advantage -- though his partner might disagree. At press time, he owned shares of Energy Conversion Devices. To see his stock holdings (and chortle), view his profile, and check out The Motley Fool's disclosure policy.