VCs bet on OS war for phones

Google got the lion’s share of attention in cell phone circles last week, with the introduction of the first handset incorporating its Android operating system.

The next few months, however, are expected to be a busy period for smart phone purveyors and service providers of all stripes. High-flying handset sales forecasts, combined with accelerating adoption of data services, are prompting a wave of rollouts of new phones and mobile applications such as gaming, social networking and document sharing.

Venture investors are claiming a piece of the action. In the last several weeks, firms have funded more than a dozen entrepreneurial companies providing applications and services to advanced phones. They include Trilibis Mobile, a publisher of interactive content and applications for mobile phones, Aicent, a developer of mobile data services that link the Internet Protocol and wireless worlds, and JumpTap, a provider of ad-supported mobile search.

Collectively, these companies have raised about $34 million since late August.

But while VCs continue to scout mobile applications startups, entrepreneurs say investors are cautious about committing large sums.

“There are those who are once bitten, twice shy. They’ve been told how great the mobile sector is going be for a couple of cycles,” says Alex Panelli, CEO of San Mateo, Calif.-based Trilibis. The company raised $5.3 million in venture funding this month, according to a regulatory filing, with backing from Altos Ventures and ATA Ventures.

Another complicating factor for investors is that the smart phone market is fragmented among several operating systems, each backed by different technology industry heavyweights. There’s Apple’s iPhone OS, Google’s Android, Research in Motion’s BlackBerry OS, Microsoft’s Windows Mobile, and Symbian, co-founded by Ericsson, Nokia and Motorola. Betting on a single player is a risky move.

Panelli says investors’ concerns about OS wars and slow exits are balanced by evidence of strong growth in demand for mobile Internet and related applications. Additionally, he says, given the size of the sector, there’s “plenty of room” for three or four operating system platforms to co-exist and each to have a respectable market share.

Certainly the market itself has gotten much larger. In North America, smart phone sales increased 79% in the second quarter over the same period year ago, making it among the fastest-growing markets, according to research firm Gartner. Worldwide, smart phone sales totaled 32.2 million units in the second quarter, a 15.7% increase from a year ago.

While the numbers sound impressive, sales were actually depressed by the sluggish economic climate in many countries with high smart phone penetration rates. Sales also slowed as a result of new compelling technology available on enhanced handsets rather than smart phones, noted Roberta Cozza, principal analyst at Gartner, in a report published earlier this month.

Looking ahead, smart phone sales appear to be picking up. Cozza wrote that wider availability of new touch smart phone models, coupled with the iPhone 3G, will help sales of smart phones return to stronger growth in the third quarter of 2008.

Fourth quarter sales may also get a boost with the first Android phone.

Last week, T-Mobile announced the international launch of the first Android-powered mobile phone in partnership with Google. The device will become available in the United States in October, in the United Kingdom in November, and in much of Europe early next year.

Meanwhile, developers of iPhone apps are also attracting VCs’ attention.

Kleiner Perkins Caufield & Byers
Matt Murphy says that he’s received 2,500 business plans for potential iPhone application startups as part of the firm’s recently launched iFund. He has $100 million to allocate as part of a joint effort by Apple and Kleiner Perkins to invest in early stage companies developing software and services for the iPhone, and has funded five startups to date.

Kleiner Perkins’ investments include GOGII, a text message networking and marketing platform; iControl, a tool for remote home monitoring; ng:moco, a game publisher; and Pelago, developer of a location-aware social networking app called Whrrl.