Wow.  It’s easy to see that the Facebook app usage on the iPhone platform trumps all the others.  From what I’ve gathered talking to other cross-platform mobile developers, these results are generally in line (at least for free applications):  Blackberry generally has half the install base of iPhone, and Android and all the others continue to lag far behind. Let’s look at another free app: Foursquare, which shared their platform breakdown via a tweet.

Android has an impressive showing, which could make sense given the application’s early adoption by techie types. Unlike Facebook, it hasn’t (yet) gained mainstream adoption. The differences across platforms become even more stark when we focus on paid apps. Here’s what the breakdown looks like for Exit Strategy NYC:

So those you have it — a few potential reasons for the differences.  At the end of the day I believe small developers are best advised to put their energy into developing for the Apple platform. Building products for the other platforms probably doesn’t make sense at present time unless you have a game-changing mobile vision for a product that’ll take years to complete and needs the openness that Android provides.  Or if you’re a startup showing traction that relies on a strong network effect to take over the world (ie Foursquare). Or if you’re a big company with tons of cash to build out your branded app — like Facebook, which tries to have versions available for every phone possible!  But gosh, I’d hate to be that engineer locked in a basement building for all six users of the Sony q7d3m1p$9!&9b7u64gph model phone.

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But let’s look at the numbers to make sure we’ve got the basic facts right:  there are more iPhones sold everyday than Android phones. How do I conclude this?  In Google’s Q1 2010 Earnings Call, Jeff Huber reported 60,000 new Android activations per day. Sounds impressive.  But consider that Apple reported 8.75M iPhones sold this past quarter.  A quarter is three months long or ~87 days which means Apple is moving 100,000 iPhones a day.

So Apple continues to sell nearly twice as many phones as Android. Now add in the fact that Apple sold close to 11M iPods too (unclear what % are the iPod Touch, but it’s safe to assume a majority) and it’s clear that Apple continues to be the big winner in terms of mobile OSes. In fact, to date apple has sold 85M iPhones and iPod Touches. Android is nowhere close: even if we generously annualize the current sales figures and add a year, android’s user base would still only be at 21M.

So how the heck did Techcrunch just run a headline reading “AdMob: Android Passes iPhone Web Traffic In U.S.”?

Simple answer: the methodology itself has a major flaw.  AdMob is simply reporting the ad request that runs through their advertising network.  These figures heavily depend on the adoption of Admob’s services — i.e. the relationships they’ve formed with app publishers and websites.  And the adoption of Admob’s services across platforms varies widely.  Also, Android apps are twice as likely as iPhone apps to be free (which generally correlates with ad supported).  So Admob’s ad impressions are simply NOT a good proxy for the overall state of the market.  Especially seeing as Comscore pegs Apple’s share of the smartphone market as 25.4% vs Android’s 9%.

For now the underdog hasn’t won.  They haven’t even come close.  And everyday Apple continues to add more users than Google.  Until that changes, the real usage figures won’t be anywhere near each other.

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• Part 2: Do The Numbers Work? The $100/day Business
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• Think Palm and iPhone ‘Spyware’ is Scary? Try Google Android

Embrace Google Maps/Transit

Google transit gives point-to-point directions using public transportation for over 400 cities.  The service especially shines on a mobile device.  Google maps on my iPhone was an indispensable part of navigating the city, helping me figure out exactly where and when to catch the buses.  I’m amazed by the number of people who don’t know their iPhone (and Android and some Blackberry phones) can do point-to-point train/subway/bus directions while incorporating the schedules too!

Get a Bike

Public transportation is great, but renting/borrowing a bike is a must.  Yes, it takes cajones to hop on and conquer the streets of a foreign city, but biking is without a doubt the best way to learn a new city.  You’ll cover much more ground than walking and avoid the headache of parking a car or waiting for public transportation.  Basically, you’ll get more done with your limited time.  And since bikes have zero variable cost, they strongly encourage exploration.  So go get lost on a bike! (but bring along your phone with Google Maps of course)

Connect with the Local Community

A few days before embarking, I asked the Austin Yelp community for suggestions of places to see and things to do.  “NYC Eliter Comin’ to Austin” garnered over 70 super helpful tips like: “6:30pm tuesday is the start of hippy hour at the continental club with the lovely miss toni price.”  Several of Austin’s fantastic Yelp members even sent me personal notes welcoming to the city.  If you weren’t already aware, I’m a big fan of Yelp and find it far and away the best source of hyperlocal information.

See the Heart of a Neighborhood

So you’ve picked a neighborhood to explore.  Great, but where exactly should you start?  Use Yelp to figure out the main commercial streets in a neighborhood!  From the homepage just click ‘search’ (leave the search box blank).  Then filter the list by “Most Reviewed” and maneuver the interactive map around your destination neighborhood.  Red pins will help call out the main streets!  Around the UT Austin campus, Guadalupe Street stood out as the clear winner (see picture on left).  This feature also works really well from Yelp’s fantastic iPhone app.

Find Must-See Popular Hotspots

Again, click ‘search’ on Yelp.com and leave the search box blank.  Setup the filters to sort by “Most Reviewed.”  This will show all Yelp listings in that city ranked by popularity.  For Austin, that includes Home Slice, Uchi, Guero’s, Polvo’s, and the flagship Whole Foods Market store.  In NYC, this list features Shake Shack, Magnolia Bakery, Ippudo, Pommes Frites, Katz’s Delicatessen, Grimaldi’s, Lombardi’s, and the Chicken & Rice Halal Cart at 53rd/6th.  You could certainly do worse as a tourist…

Find Weird Local Stuff

Most people know Yelp for its restaurant and bar listings.  But their ‘Local Flavor’ category has some seriously cool stuff.  Austin’s Local Flavor included the Cathedral of Junk, a massive three story structure created from decades of junk.  And my insider knowledge of the Bats Under the Congress Avenue Bridge seriously impressed the locals.  In San Francisco, this category led me to the Clarion Alley Murals and also the Seward Street Slides which turned out to be tremendously fun.

Bookmark Now, Retrieve Later

Bookmark places on Yelp.com that look interesting (you’ll need a yelp.com account to do so).  Then, from the Yelp iPhone App you can view those bookmarks on the go.  Best of all, the app shows your bookmarks ranked by proximity to your current location!  This is phenomenally helpful.

Log your Trip and Get Local Recommendations

I checked in on Foursquare at every place I went, despite having no Austin friends using the service.  Why?  Because afterwards I can view a minute by minute log of my trip on the history section of the Foursquare website! Equally cool, foursquare provided me great local recommendations.  Checking in at a random grocery prompted “Go to Green Mesquite and eat BBQ with friends!”  The tip was left by fellow NYC Foursquare user and friend Lee Semel and Green Mesquite was right down the block.  His trip to Austin occurred eight months prior but the virtual breadcrumbs remained!

Keep the Community Involved

Each night I updated the Yelp Forum with my accomplishments.  I also laid out my plan for the following day.  This united the Yelp community around my adventures and was really fun.  “You’re doing more things than most Austinites do in a year” wrote one Yelper. Seeing my plans even spurred Riki M., a former Brooklynite herself, to join me at the Cathedral of Junk.  The kindness of a tight-knit online community like Yelp is amazing.  Riki brought with her the Austin essentials: beer and bug spray.  And our mini picnic was fantastic — albeit buggy.

More Tips?

Since my trip, I’ve discovered plancast, which may prove very useful.  Readers: are there other tech tools I should be taking advantage of? Leave your thoughts and suggestions in the comments.  Thanks!

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The most basic principle of business is that profit is revenue minus costs.  Try considering all fixed costs as a rate — especially a daily or hourly rate — and then look around you.  You’ll find you have more insight into existing businesses or the potential of new ventures to succeed. 

And you’ll find that some business ideas simply don’t make sense.

Don’t plan on building a business by selling a product for $2 that takes an hour of time to produce unless you’re superhuman and don’t need sleep.

Don’t franchise a mobile RV arcade for “between $89,000 and $200,000″ a year which can fetch “$300 to $350 for a two-hour party appearance” without carefully considering the math — that you’ll need to book somewhere between 250 to 650 clients just to break even on your initial upfront investment.  I don’t know too many kids who have birthday parties on Monday nights..and there’s only so many hours in a weekend and only 52 weekends in a year.  You’re might be paying off these costs for eternity…and the high tech games will certainly have become stale by then.

And please don’t build an SMS mobile coupon company on an assumption that you’ll get a salesperson to hit up every local business selling your $10 service (so cheap that nobody will say no!).  As mentioned in my article about SMS coupons, an entry level salesperson earning $50,000 a year is a cost of $1000 a week or $200 a day or $25 an hour.  Make sure a sales person would earn more than they would cost.  If the numbers don’t work, your business won’t work.

But wait!  It’s not all gloom and doom. Thinking in terms of daily sales can actually be really inspiring for a first time entrepreneur:

If you’re quitting a job to start your own company, consider what it will take in daily earnings to replace your salary.  Better yet, consider how much you honestly need to be ramen profitable.

Most recent college graduates in NYC working a full time job are probably earning somewhere between $35,000 – $80,000 depending on industry and skill set.  Consider that $100/day for 365 days is $36,500 annually.  This is a livable wage for most scrappy 20-somethings (assuming you don’t have a family to support and you’re not drowning in school debt).  Consider that $200/day is a rather comfortable annual salary of $73,000.  (And yes, these numbers are based on working 7 days a week.  And they don’t take into account the unpaid time you’ll put into an initial product launch.)

If you need inspiration to get started, never forget just how ‘small’ a start can be: just get to $100 a day.  Consider it milestone number one for your first entrepreneurial venture.  Let’s say you have a product idea that you think would sell for $20 with a 50% margin.  Ask yourself: “Can I sell 10 per day?”  Consider that again: 10 per day.  Consider that there’s six billion people in the world,  is it really so hard to find 10 customers each day?  Or if you’re working with a partner, 20 customers?

So consider David Heinemeier Hansson’s amazing advice (that I have echoed above) and stop thinking about your next billion dollar startup.  I believe first time entrepreneurs (of which I am one myself) should start small.  Go for the lowest bar of success: the $100/day idea.  Once you’ve conquered that, go for the $100,000 idea, then the million dollar idea, then the billion dollar idea.  Along the way you’ll meet fantastic people, gain skills and confidence, and maybe even have some fun.

Now if only my 2c could be put towards rent…

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Apple’s app store taught me that living in New York City is expensive.  How expensive? $1.25 an hour.

Consider that the rent for my (rather modest) Brooklyn apartment is roughly $900 a month including utilities.  There are roughly 30 days in each month, so $900 / 30 days means I’m paying $30 a day and $30 spread across 24 hours in each day means I pay $1.25 an hour.  Ouch.  Suddenly $2.25 per subway ride doesn’t seem all that bad…

Most people I tell about Exit Strategy NYC ask “How much did it sell?”  They phrase the question in past tense.  This is fine for fad-like novelty apps.  But for utility apps like Exit Strategy NYC the question is best phrased in the present tense: “How much does your app sell?” (Marco Arment refers to these types as two different app stores).  Selling apps in the app store is an on-going business.

Apple’s app store has changed the way I look at the world. iPhone app sales figures are available each morning for the prior day.  As a result, I’ve gotten in the habit of checking app sales first thing each day.  But more importantly, I now view the world around me differently: it’s all about rates.

In the manufacturing world, the question is whether a product can be sold at a price and volume high enough to cover production costs.  But many businesses sell products which are almost pure profit.  I’m not just talking about software or service businesses.  Consider your local coffee shop, bar, or video rental shop.  The items they sell are almost entirely profit.  In these cases, the more useful question to ask is can they sell *fast enough*?

The phrase ‘Burn Rate’ is typically applied to pre-revenue startups calculating how long the business can survive (ie their ‘runway’).  But the concept is applicable to all businesses and individuals: Is money coming in faster than it’s draining?  Simply put, is the bathtub filling? Or draining? (the photo is a metaphor by the way…not a picture of my $1.25/hour apartment)

Is that cool new coffee shop in your neighborhood going to succeed?  Consider all the costs as rates.  If their rent is approximately $3000 a month, that’s $100/day.  If they have two full time employees, tack on another $100/day for each.  The owner should make at least $100/day to make the business worth running. So that’s an on-going cost of $400/day.

If the main product being sold is a $2 cup of tea, unless 200 people pass through the doors each day, don’t count on that business staying around too long.

Let’s break that down further.  If the shop is open 10 hours each day, that’s 20 customers an hour.  Or one purchase every three minutes. They better start upselling those croissants real fast..

There are a number of businesses in my neighborhood (specifically places on Atlantic Avenue in Boerum Hill) that I’m afraid won’t exist much longer.  Consider the perpetually empty video store.  If rentals are $4 and it’s a one man business, he’s going to have to cover $200/day to stay afloat assuming he’s willing to work 7 days/week.  Is he doing 50 video rentals a day? It certainly doesn’t look like it.

Businesses aren’t the only thing that should be analyzed this way.  Break anything down into a micro-rate and it really makes you think about ‘value’. I pay roughly $90/month for my AT&T iPhone service, which comes to $3 a day.  Do I get more than $3 of value and enjoyment out of my iPhone each day?  Absolutely. Similarly, my gym costs about $75 each month.  Does considering my gym subscription as a $2.50 daily expense motivate me to get my money’s worth (almost) every day?  Absolutely.

[Continue to part 2]

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Mobile spyware is the focus of the tech media’s latest frenzy. It started when a hacker discovered that the Pre sends back location data about users to Palm.  Next, a blogger ‘discovered’ that certain iPhone apps also phone home.  The frenzy came to a head when ReadWriteWeb published Dear iPhone Users: Your Apps are Spying on You.

(from www.flickr.com/photos/gerlos/3119891607/)

This article focused on the NYC-based iPhone Analytics company Pinch Media. The issue? Pinch Media’s software allows developers to learn a lot about their users: Apps with geolocation features can return information about the location of their users. Apps using Facebook Connect can even return demographic information (gender and age) about their users.

Of course, there’s no personally identifiable information here. It’s all aggregate anonymous information — and this has been Pinch Media’s response to the issue. Tracking anonymous information for benign purposes is analytics — not spyware. At the end of the day, developers simply don’t know all that much about their individual users. It’s not like they can identify them by name, right? RIGHT?

Well, um, on that note… we know the full name and location of each and every Android user with our app.

How?!  Did we build in some sneaky spyware into Exit Strategy NYC?

Nope.  Google tells us. This information is part of the Google checkout process behind android app purchases.  Each app download contains the full name of the user:

Clicking on the order number reveals a more detailed page containing the billing city and zip code of the user:

Creepy?  Absolutely.  A google/facebook/linkedin search can reveal incredibly detailed information about every android user with our app. Furthermore, this information is pushed on us — I certainly didn’t choose to see this detail about our users!

Seeing this level of user information displayed was extremely alarming at first. But when you think about it, it’s really not that surprising. Google Android purchases are processed through Google Checkout — the same system that applies to e-commerce transactions.  Certainly I would need to know my customers’ personal information if I were shipping a physical product.  Should digital purchases be any different?

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(this piece also appeared on Silicon Alley Insider)

As a number obsessed techie and ex-management consultant, market sizing and research were a big part of my launch preparations for Exit Strategy NYC. Since launch, I’ve received many questions from people struggling to estimate the market for their iPhone app ideas.

I’ve put together this document as a guide for entrepreneurs considering developing an app. Below, I’ve compiled some up-to-date numbers about Apple devices. I’ve also laid out a framework for estimating what kind of sales can be expected from a paid app.

The Basic Facts

• 45 million iPhone and iPod Touch devices [Apple Earnings Announcement]
• 54% of iPhone and iPod Touch users are in the US as of June 2009 [Admob Mobile Metrics Report]
• The iPhone comprises 68% of worldwide iPhone OS devices and the iPod Touch makes up the other 32% [Admob Mobile Metrics Report]
• Only 75% of users actually download apps [Pinch Media]
  • The most frequently downloaded free apps reach approximately 30% of devices [comScore]
  • The most frequently downloaded paid apps reach approximately 3% of devices [My calculations - explained later]

Right off the bat, there’s a few back of the envelope calculations to make: 54% of the 45M devices are in the US which means ~ 25M devices. The US has about 300M people.  That means about 8% of the general American population has one of these devices.

How To Use These Numbers

Combine this data with your own numbers about how large of a market your product is addressing. For Exit Strategy NYC, our addressable market consists of all subway riding New Yorkers. In 2008, there were about 5M weekday riders and about 3M Saturday riders [MTA's ridership numbers]. The Saturday number is the more relevant one as it better captures subway usage by NYC residents rather than regional commuters. Neither number counts unique riders though, and given that there are 8M residents of NYC our addressable market size is probably somewhere in between these numbers. Let’s say 6M subway riders.

New Yorkers probably skew more techie than average, so let’s assume 10% (rather than 8%) have an Apple device. Also, Exit Strategy NYC works on both iPhone and iPod Touch devices. If your app requires phone/gps/camera/internet to work well, exclude iPod Touch users from your calculations.

How many Apple device toting subway riding New Yorkers are there?  Well 6M subway riders with 10% penetration = 600,000 potential users.

“But How Many People Will Actually Buy My App!?”

Entrepreneurs are optimists by nature, and it’s tempting to think that 100% of people will buy your product. After all, your product is awesome, right? But reality is a quite different story. In fact, only about 3% of users have purchased the most popular paid apps. To determine that number, I used sales figures from one of the all time best selling paid apps, Firemint’s Flight Control game. According to Firemint’s Alexandra Peters, sales to date have been 1.4 million. As a percentage of the 45M Apple devices, this is ~ 3%.

You should expect a similar upper bound of 3% to apply to whatever market vertical you’re addressing. Of course it’s possible that your app meets some crucial compelling need and therefore achieves a higher penetration rate in your vertical. But don’t count on it — it’s equally possible that your app gets lost in the noise and can’t get traction. Flight control has held a constant spot on the top paid app list for months now. Few others have this advantage.

Realistic Unit Sales Calculations

Returning to the Exit Strategy NYC figures, we knew that if we had an effective marketing and press strategy, we could probably achieve something close to this 3% penetration figure — perhaps higher as many New Yorkers are very passionate about the subway (see? there’s that ever-present entrepreneurial optimism!). 3% of the 600,000 subway riding devices would mean 18,000 unit sales. Does this translate to $18,000 total sales? Our maximum penetration figure was based on a 99c app, but what effect would Exit Strategy NYC’s $1.99 or $2.99 price point have on total sales figures?

Factoring in price into market sizing is difficult. Based on our own informal market surveying, we estimated that the most profitable price point would be $2.99 or $1.99. Around 75% of people willing to pay 99c would also pay $1.99 or $2.99. So 75% of 18,000 units at those prices works out to an ballpark range of around $27k – $40k. Like all software, the app’s unit costs are zero, it’s important to focus on maximizing dollar sales rather than unit sales.

A Growing Platform

One thing to remember is that the user base for apps is growing by leaps and bounds. In their latest quarter, Apple sold 5 million iPhones and 3 million iPod Touches. This means that the potential market for an app grew by more than 20% in only 3 months!

Non-Apple Platforms

One last thing to note: The iPhone certainly dominates headlines, but it’s not the only game in town. In fact, Blackberry outsells the iPhone every day. And in a town dominated by Wall Street, it seems like everyone and their mother owns a Blackberry. Realizing this, we carefully designed Exit Strategy NYC to be easily portable across different mobile platforms. Our app is available for iPhone, iPod Touch, Blackberry Bold, Curve, and Storm, Android Phones, and even as an e-book on Amazon Kindle.  Combined, the Exit Strategy App reaches a significant portion of New Yorkers.

But are device sales a good indicator of a platform’s expected app sales?

Stay tuned to Back of the Envelope to find out.

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To understand why naive first-time developers have this mindset, you only have to turn to the figures being tossed out by the major iPhone ad networks.  Last summer, Admob was talking about $30 CPM brand ads and calling that “low end.”  Similarly, Medialets talks about their Dockers ads which paid in the $20-30 CPM range.  Even in today’s tough advertising market, Admob company continues to cite rather high “$12 to $14 average CPM” figures.

Ready for the brutal truth?  Most iPhone ads networks today pay around $0.50 CPM. In case you don’t know how to digest that statement, I’ve rewritten here in plain english: 1000 people have to look at your application’s ad just to earn you a measly 50 cents.  What about those $30 CPM figures?  They’re just marketing fluff.

If you want the truth, ask the folks on the front line: actual developers.  Bo Wang’s Galaxy Impact, an ad supported app with over 160,000 downloads, showed an eCPM (effective CPM) of $0.23.  App developer John Kelsey says he sees about $0.50 CPM. Pinch Media CEO Greg Yardley’s “appstore secrets” presentation reports a typical CPM range of 50c – $2 CPM (slide 24) and then in the comments section, Greg quotes developers saying ad rates had dropped to $0.38 CPM. Another developer running CPC ads says he sees $0.01-$0.03c / click.  The truth is that “Most Ad-Funded iPhone Apps Don’t Earn Enough To Buy A Sandwich”

Why the discrepancy?  Fill rate is partially responsible.  Even if a $30 CPM premium ad does exist, it’s not going to run in your app 100% of the time.  In fact, most of the time apps displays remnant (ie NOT premium) ad inventory.  As one developer says “NO ONE can maintain the fill rate at decent cpm”.

Additionally, every ad network wants to attract app developers bad.  Really bad.  So they pitch journalists with juicy stories of high CPMs and ‘case studies’ on developers making sick amounts of money.  Greystripe gets a press piece penned about an “iPhone Beer Pong App Making $7,000 A Month From Ads.”  Adwhirl gets Techcrunch to write “Just How Much Money Can Free iPhone Apps Make? Quite A Bit” which claims apps can make $5000 a day.  And Medialets highlights their $20-30 CPM Dockers ad.  These are the exceptions rather than the rules.  It’s marketing as usual.

The purpose of this post isn’t to point fingers at the ad networks or accuse anyone of lying.  I love ads and I love free apps.  And I love the entrepreneurial spirit in these impressive iPhone ad network companies.  But there’s an important message here for first-time app developers: if you’re considering quitting your cushy job to make $5,000 a day with a fart app, don’t do it.  Always run your back of the envelope calculations first, and don’t assume your app will get anything higher than a $0.50 CPM. Basing your assumptions on $30 CPMs will leave you high and dry.

As usual, readers, I love hearing your comments and questions.  So don’t be shy!

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(This is the second of a two part post.   The first part can be found here)

The ubiquitous iPhone/iPod Touch devices are stealing Bug Labs’s thunder.  To understand why, realize that the iPod/iPhone are no longer mere personal music devices carried around in a pocket.  Instead, they’re increasingly purchased as stand-alone devices that serve a specific purpose.  For example, my brother in law’s restaurant (No 7 in Brooklyn) uses a dedicated iPod Touch with the Pandora app to play streaming music all night long.  Previously they would have needed XM Radio or a full computer to serve this same purpose.  Was the iPod Touch intended to be mounted on the wall of a restaurant (like a thermostat) and stream music for eternity?  Certainly not.  But at $200, it’s a great investment for this purpose.

Back to Bug Labs for a moment.  A classic product example the company has used: you want to build an alarm clock with GPS that wakes you up as you reach your destination on the train.  Great idea.  So you start with the base module (Bugbase, $249).  Then you add a GPS module (BUGlocate, $99).  And a speaker (BUGsound, $99).  Cost: about $450.  Can you do this with an Apple device?  Yes.  How?  Well folks, you probably guessed it — “There’s An App For That!” iNap costs 99c.

And if iNap didn’t exist, you could easily create it.  Most people associate Apple’s App Store with cheap games, free communication apps, and simple utilities.  But there’s an entire half of the App Store that the mainstream media has overlooked: high end apps. There are dozens of $200+ medical apps (Lexi-Comp), $450 salesforce software apps (MyAccountsToGo), and $900 camera surveillance apps (iRa Pro).

But wait, there’s more!  In addition to high end apps, there’s a whole other section of apps that will never see the light of day on the app store: enterprise apps. These Apps aren’t designed to be sold publicly — they’re proprietary in-house applications designed by companies and deployed for internal use under Apple’s enterprise distribution program.  The point is that the Apple devices are powerful and versatile enough to fit almost any need.

Consider the minimalist design of the iPod Touch and the iPhone and you start to realize they’re the ultimate hardware devices. A single large touchscreen. The screen is the primary input and output method.  It can be used to display a single large button.  Or a thousand small buttons.  Or just enough buttons to represent an on-screen keyboard.  Or to represent an on-screen piano keyboard.  The user interface is infinitely configurable.

Additionally, these devices have accelerometers, location awareness, audio inputs and outputs, memory storage, internet access.  To top it all off, there is a well documented and robust SDK (software development kit) and a very active community of developers.  And the devices are cheap.  An iPod touch retails for around $200.

Bug Labs’ saving grace right now is that their hardware itself is open-source, modular,  and infinitely configurable.  Can you add a temperature sensor to an iPod touch?  No.  But it’s coming. When Apple announced their iPhone/iPod 3.0 OS due out this summer, the addition of ‘Copy/Paste’ stole the headlines.  But tucked quietly into the announcement was the fact that these devices will soon be able to interact freely with the outside world through bluetooth and via the devices’ 30 pin dock connector.  That opens an entirely new marketplace: companies creating custom accessories or interfaces for talking to existing devices.  This is a game changer.

Previously, the iPod Touch and the iPhone devices could only interact with external speaker docks.  But now, the consumer, business, and scientific applications are endless. Expect the generic devices to come first: input devices (external keyboards, game controllers), output devices (monitors, LCD display boards), readers (bar codes, RFID, infrared), sensors (temperature, water, heat, weight, chemical).  Soon, more specialized accessories serving different market verticals will follow: medical equipment, sound mixing boards, lighting control, video production equipment etc.

Are you starting to see why I’m worried for Bug Labs? There are 37 million iPod Touch and iPhones in the wild and most people are very comfortable using the devices.  They’re extremely powerful hardware devices.  They’re cheap and readily available.  The user interface is infinitely configurable.  They support powerful custom software development and in house application deployment.  There’s already a thriving high end market for software on apple devices.  With the advent of custom hardware accessories and interfaces, Apple devices will become the dominant platform for interacting and controlling all sorts of equipment across many verticals.  Bug Labs’ is going to have to change strategy quickly.  They’ll need to shift their goal from creating the dominant open source hardware platform and start focusing on building around the Apple devices.  A recent article suggests that this is already happening.

Still need convincing about Apple’s upcoming dominance?  Check the latest edition of Newsweek:  The Military is using the iPod Touch as a handheld field device.  Amazing.

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Bug Labs is a fascinating NYC startup that builds a “modular, open source system for building devices.” Basically, they have a collection of programmable hardware modules that snap together to make custom devices.

I have to admit: the idea baffled me at first.  It seemed like Bug Labs makes a really cool device for technology hobbyists and students — similar to the Arduino or my friend Michael’s company Nerdkits. Bug Labs also focuses heavily on developing a passionate community of users.  But isn’t the product basically a toy aimed at a very narrow niche?!  Why was the company worthy of investment from one of New York’s top VC firms, Union Square Ventures?

Things became clearer when I had a chance to sit down with Matt Cholerton at the Bug Labs offices this past winter.  He demoed the device for me and explained the real uses for the company’s product: rapid prototyping, market testing, and serving the long tail of manufacturing.

BUG is intended less for individual hobbyists and more for companies that can use BUG to rapidly make prototypes of new electronic devices (think handheld electronics: digital cameras, alarm clocks, location based devices).  BUG allows companies to market-test new device concepts before beginning a expensive round of mass production.

Additionally, BUG is perfect when there simply isn’t a big enough market to mass produce a device — this is what Bug Labs calls the “long tail of gadgets.” For example, perhaps some utility company needs twenty very specific custom device for their field technicians?  Enter Bug Labs.

Bug Labs has a really cool thing going and I love the idea of capturing the long tail of device manufacturing.  It’s an incredibly non-traditional idea for a startup and innovative hardware companies are rare these days.

Bug Labs is certainly our most “out there” investment.
-Fred Wilson, Union Square Ventures

BUG’s configurability is based on its modular design.  Modules are added to the base unit ($249) and each adds specific device functionality:  a motion detector/accelerometer ($59), a GPS receiver ($99), a full-color, hi-res, touch-sensitive LCD screen ($119), an audio module with a speaker/microphone/mini-stereo jacks ($99), and a 2gb extendable memory chip ($10).

And here’s where I start to worry.  Can you think of any other devices that have ALL of these features and more?  Oh right, the iPhone/iPod Touch. These two ubiquitous little devices might just pull out the rug from under Bug Labs…

(Continue reading part two of this blog post)

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