RFID News: Radio Frequency Identification Starting to Deliver Real Value

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- November 13, 2007 -

RFID News: Radio Frequency Identification Starting to Deliver Real Value – Outside of Wal-Mart

Wall Street Journal Article Says after “Overhyping,” RFID Becoming Mainstream in Applications where it Adds Real Value; VCs Made Huge Bets on RFID Start-Ups, but Growth Didn’t Happen

SCDigest Editorial Staff

SCDigest Says:

These other RFID applications are growing, but not at the “gold rush” levels many had hoped early, visions fueled by Wal-Mart fever.

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Seven months after a highly negative article in which it reported that Wal-Mart’s RFID program was struggling amid difficulty in delivering value for consumer goods companies, the Wall Street Journal last week wrote a very positive article on the spread of the technology in other applications.

“Despite its initial promise to revolutionize the supply chain, radio-frequency identification technology never took off in line with the wild projections made by many analysts and venture capitalists,” the WSJ noted. “But the technology has begun to make a slow resurgence with wireless devices that track the physical location of assets, such as expensive manufacturing equipment or hospital beds, within a company or hospital.”

Optimistic about the possibilities and with a relative lack of other investment opportunities in the supply chain, venture capitalists have poured money into RFID-related start-ups. From just 2002-2005, venture capitalists invested $658 million into 70 RFID deals, according to VentureOne, a research company.

That’s a lot of money, and it’s unlikely that many of these investments will pay off well for VC’s, given the slowness with which the market has developed. But, industry observers believe the investments did dramatically accelerate the development of reader and tag technology.

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Much of the VC investment was made with visions of dramatic growth in the roll-out of consumer goods to retail programs such as Wal-Mart’s RFID initiative, which was expected to be emulated by many other retailers within a few years. That expected market explosion in the “Electronic Product Code”, or EPC market, hasn’t played out. Wal-Mart’s program has evolved slowly, and is being revamped now with a new strategy that is more likely to succeed but is resetting the clock in terms of rapid rollout across its suppliers. The US Department of Defense’s EPC-based RFID program has also moved much slower than many expected when it was announced in 2003.

For example, research firm Frost & Sullivan estimated in 2002 that the market for RFID would reach $7.25 billion in sales worldwide by 2008; it will turn out to be maybe a third of that.

The slowness in the roll-out of the Wal-Mart and related programs “has forced most RFID start-ups to look in other places for revenue,” the WSJ story noted. “Tagsys RFID and Impinj Inc., which together have raised $180 million in venture capital, have put more emphasis on applications such as tracking high-end items in the supply chain to help prevent theft and counterfeiting. Both companies have been forced to re-evaluate their initial product offering plans.”

"One thing that Wal-Mart did for the industry was to put it on the map, but the great expectations of rapid growth didn't take place," Ronny Haraldsvik, vice president of marketing for Alien Technology, told the Wall Street Journal.

Others companies are moving away from RFID more dramatically. For example, software provider TrueDemand, which less than two years ago described itself as "a pioneer in the development of RFID-enabled enterprise applications," has removed all mention of RFID from its web site. The company now focuses on using information from bar codes to help customers improve supply-chain efficiency.

Dan Gilmore, editor of Supply Chain Digest, said that “It was a matter of survival for many of these companies. The initial bet was that they could leverage a huge Wal-Mart-driven RFID ecosystem. That hasn’t happened. But it turns out the basic value proposition from some of these software providers in terms of analytics can be delivered just fine with existing data.”

Beyond Wal-Mart and DoD

RFID is now finding its way into a large number of other types of applications, which is driving a new, if more modest, level of VC funding activity.

"The fact that there is an RFID tag on a box of diapers doesn't really add any value because they already know how to receive diapers [from a supplier] in a Wal-Mart,” the Wall Street Journal story quotes Doug Carlisle, a managing director at VC firm Menlo Ventures. “As we looked further we started to see tremendous demand to use RFID for finding stuff," he added.

Menlo and another VC firm recently made a $21 million investment in AeroScout Inc., a seven-year-old company that makes real-time location RFID tags and software. This investment was a so-called “C” round – meaning it’s the third round of investment the company has received. AeroScout's software allows its active (self-powered) RFID tags to operate within existing Wi-Fi networks, rather than a separate RFID reader network.

The WSJ article notes other RFID companies solving non-retail related problems are also receiving funding. That includes PINC Solutions, whose main product, Yard Hound, uses RFID and a hosted Web service to track the real-time locations of trailers in yards of distribution centers, and Reva Systems, a maker of network-management devices for RFID networks.

These other RFID applications are growing, but not at the “gold rush” levels many had hoped early, visions fueled by Wal-Mart fever.

“The market is taking off, but it is not going to take off at a 50% clip," said Louis Bianchin, an analyst with Venture Development Corp. "You should count yourself lucky if it grows 15% annually."