Thursday, February 22, 2007

The Shadow of Consumer Electronics

What kind of estimated returns on investment will pull major venture capital into a nanoscale technology? High gross margins will be crucial since investors have high expectations based on the overall Internet economy, and will chase returns in more conventional sectors if nano can't match those.

Case in point: yesterday, a Wall Street Journal article on Apple's future pricing of iPhones cited estimates that the iPhone's gross margins will be as high as 49%, "well ahead of the recent company average of 31%." Remember that gross margin is normally defined as revenue minus the cost of the goods sold, so that a gross margin of nearly 50% means that Apple plans to sell the iPhone for twice the product cost (the $499 phone allegedly costs Apple $245.93 based on an analysis of its expected components). This is an enormous return: can we model the overall high-tech and nanotech economies on that kind of revenue expectation?

I have been unable to get a clear answer from the sources of these component analyses as to whether they have included estimates of per-unit R&D costs. I don't think they have. No nanotechnology will generate these kinds of margins unless R&D costs are at least partially off the books. That is one function of current industry-university relations, which creates public subsidies for basic research. But that is only a partial solution. It will never look good compared to the high points of consumer electronics like the iPod and maybe the iPhone, where brilliant design is coupled with incrementally better and not-too-expensive R&D to make new product categories. When those future 3rd and 4th generations of nanoproducts do create whole new product categories, as most of us expect, their true R&D costs may be so high that accurate accounting will keep their ROIs low for many years.

Nanotechnology may need a new investment system. Would we call it post-Venture Capitalism? Post-biotech?

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