May 26
Ystad, Sweden

The WAVE Report has long been interested in the Anoto pen technology. The use of a dot pattern on paper allows the Anoto pen to determine exactly where it is pointing in a very large address space. This makes each sheet of paper unique and it a major value of the Anoto technology – which they call Anoto Functionality. We learned just before the conference that Anoto and its partners would be talking about the status of digital pen and paper at a level not seen before. With that the WAVE Report was off to Ystad, Sweden.

Anoto Functionality Conference

The conference was located in the small town of Ystad, Sweden about 40 minutes drive from the center of Anoto in Lund, Sweden. These towns are in the far south of Sweden near Denmark. The conference was held at the small sea side resort of Ystads Saltswjobad. There were 110 in attendance, exclusive of Anoto employees.

Anoto defines partners as those who adopt their technology and it is assumed those that sign the license agreement. The words Anoto Functionality were everywhere. One poster said it well:

Anoto Functionality is all about addressing 170,005,193,383,307,227,693,056 dots.

This is an event to allow partners to meet others, to learn more about applications and to understand more about the developments at Anoto. The focus is on what the technology can do in the business market and not about other applications of Anoto technology. Analysts and press participated in a one day program which was part of the overall conference.

Anoto Technology

The heart of the Anoto technology is the imaging engine. As Anoto allows its partners more freedom to create pens, there are now companies 4 making pens, such issues as pen size and even power management are increasingly being done by the partners. However, to date every pen has the Anoto ASIC which is the imaging engine. This may change in the future but for now it is the unique signature of all Anoto pens. It is also the way that Anoto assures reliability and controls the market.

One of the major challenges is to assure that the pen from each company works with all the paper suppliers. As a result they have a specification for the paper properties. In order to enable the broadest possible market it is essential for Anoto to support a wide range of paper types – from simple bond to plastic coated paper, for example. To better understand the implications of this consider the following simple image chain.

Pen Detectors

Pen Optics

Atmosphere

Paper Optical Characteristics

Dot Pattern

The Anoto functionality is the dot pattern as read by the Pen Detectors and ASIC recognition engine. The atmosphere and paper characteristics can each distort the patterns and lower the contrast ratio. Thus, the specification for the paper is very important, given the many types of that can be used. Consider the following: take the dot pattern and do an inverse transform of those patterns back to the detector. In this transformation, the paper specification defines the variability in the pattern which is tolerable and still achieves Anoto functionality. One speaker stated when there is an error in imaging the dot pattern this is like a software bug. Another way to view this process is in a systems context where there is a tradeoff in the dot patterns, the quality of the imaging system, paper specification and performance of the ASIC. It is clear that Anoto, with some 7 years of experience, has done considerable systems engineering to achieve the performance now taken for granted.

Given the role of Anoto paper in imaging it is also a supply chain element. To those buying a digital pen solution the paper should not be an issue – this is just like any other paper. This not quite the case when it was stated the quality requirements are stringent. Another factor is paper availability in a local market. The WAVE spoke with a company seeking to do business in India. They need a paper company in India as imported paper will not be cost effective. Another emerging factor is self generated paper. HP now has a printer will make Anoto paper. In November HP announced its own Anoto Pen.

The desire of Anoto to leverage is technology and force the use of unique paper sheets and unique pens may seem overblown. An analogy might be like building pens which use IPv6, this may be an overkill but even larger if uniqueness is applied to sheets of paper and locations on the paper. Doug Patterson, VP at Standard Register, one of the largest forms companies, described the requirements as:

Ability to write on multiple documents
Ability to write repeatedly on the same document
Ability for multiple pens to write on the same document

This then mandates the need for uniquely patterned paper.

This means not only absolute positioning on a sheet but sheet recognition and stroke recognition by individual pen. When asked is it not possible to have unique areas set aside on the sheets as common areas. The problem of this is that the pen has to “sign in” to the common areas. Thus, from a user perspective it is far better to have on uniform interface, thus, uniqueness everywhere on the sheet.

Anoto Business Model

The Anoto business model is important because it defines the relationship with the partners.

Hardware Role

The company does reference designs. The key to the design is the ASIC imaging chip(s). Currently, in order for the design to work, every supplier has to buy this chip from the company. Each pen has a unique address and can be identified by Anoto. Even if the partner has their own private address space and therefore has the technology to recognize the location of the pen, Anoto ultimately controls the pen.

Anoto sells chips to be used in pens made by others and thus this is one component in the business model.

Anoto License

Anoto gets a monthly revenue stream as a part of the license, when the pen is used as part of a business solution. As a result pen sales are only a means to get pens to generate monthly revenue. The “retail” revenue stream of $29/month was cited on several occasions and it is not clear how much of this goes to Anoto.

In the enterprise or B2B market there are long sales cycles and many pilots. These pilots are bets hoping that the technology is accepted. Anoto does not charge the month royalty stream for these pilots. If the pilot turns into a production process the royalty stream kicks in.

There are close parallels between the Anoto BM and that associated with an embedded OS license. The gain to the OS supplier comes when the OS is used in products that sell millions of units. Thus, many of the pricing models are based on low entry costs and a per unit cost based on volume production.

Another similar business model is RAMBUS. This has its downsides due to the high royalties which RAMBUS extracts. Not to dissimilar from what we heard from the attendees at the conference. The difference is that Anoto has yet to secure the big deal such as what RAMBUS did with Intel.

An indicator of how successful the company has been, is the number of pens sold. There was a lot of buzz at the event about pen sales. It is unlikely that over 100,000 pens have been sold to date. Logitech indicated that it had, until recently, 50%+ market share.

Anoto Solution Selling

In conversations with the attendees the most consistent comment was about Anoto’s high costs. Central to the relevance of this cost is the ROI where it is being used. Thus, if the pen can generate a short term ROI, most examples cited ROIs less than a year, the pen cost is immaterial. B2B is solution selling and if the return is great enough the cost of the royalty stream is just one cost of its deployment and use. But if applications are to scale to millions these costs must come down and Anoto recognizes this. This implies lower cost pens and license fees. However, the market is not there yet, especially when sales of 10,000 units is a large order. And thus the pressure on lower pen costs and even smaller pens is not there.

Anoto Vision

The largest generator of information in the world is paper and pen/pencil.

The vision is to connect the analog paper and pen to the digital world.

This is a very large proposition. It means converting a percentage of the pens being sold to digital ones. Connecting those pens to a digital infrastructure is another challenge. Note that handwriting recognition is needed in only a small part of this roll over based on what the digital pen is used for. The role of the Anoto technology which allows for unique pens and unique paper is to make possible digital identity. A massive market demands it. Another consideration shapes the design, the implementation and the potential for a digital pen market – the ability to scale to billions of items with billions of actions.

Digital Pen Market Realities

The most striking aspect of this conference was the change in focus at Anoto over the last 2 years. The WAVE spoke with Örjan Johansson, President and CEO. He described that the company has always been an IP company whose business model is licensing the technology. Early on they felt that the best way to show the technology was to do an end-to-end product. This is where the Chatpen fit, done with Sony Ericsson. Yet, the phone emerged when the telecom bubble burst and this died as a business.

At the same time others were seeking to apply the technology. They were increasingly pointing to B2B and forms as viable markets. The problem is that these have long sales cycles. There are high stakes bets which have pilots first, evaluations of the pilots and then a go or no go decision. There were numerous presentations in this area.

In the Logitech presentation, they got the message also. Logitech is a pen supplier who identified the personal productivity market but this was a flop. Now they are going into the enterprise market also.

But there is more. Anoto announced a $18M sale in the last 4 months for an application of the Anoto technology. This has not been specified but it includes the pen and paper. However, what the buyer got was an exclusive license for the use of the technology in that application. This is expected to be disclosed in October. When the WAVE spoke with Orjan Johansson, I stated that this is great for cash flow. But more importantly I asked “…is there an intent of the company to stimulate more of this?” He hedged. Cited was an example, I gave of the use of Anoto pens for multiplayer board games. He smiled and knew of the application. Yet, he reiterated that the vision of the company is in digital paper and pen.

The PC is hardly a part of the Anoto pen applications. Certainly Logitech pushed this but the reality was much less that expected. But more important in the B2B space we saw several examples where the cell phone, via Bluetooth, was used for transport. The cell phone was the WLAN interface. This reinforced the point that Anoto’s vision is not dependent on the PC. There is a digital back office but this is a part of the enterprise IT function.

Anoto Overview – Örjan Johansson

Örjan defined the company. His presentation included the following:

Anoto is a patent and technology company. It does not have a direct channel to the market. The company is successful through its partners which use Anoto’s technology. We do not do pens, we do not do paper and we only do SW as components for our partners.

The Anoto Group AB has two business units: Anoto AB and C.Technologies. This latter uses the technology developed for the pen in other applications. The company has 110 employees. There are 400 patent applications and 60 granted patents.

The business streams of the company include:

Anoto Consumer Products for Personal Productivity
Anoto Systems Services for Forms Processing
Anoto Technology and
C Technologies and C-Pen

The conference only addressed the top two.

We think of a spectrum from analog to digital when it comes to paper and individual writing. At the low end of the stack is analog and that is paper, scanned paper and fax. Next up is digital paper but this has not yet been developed as a market. At the top is the Tablet PC which creates direct digital input from the surface. This center area between pen and paper and the table PC is the space for Digital Paper. It is here were Anoto plays and we see a major opportunity.

We see no reason that the world will not move to a digital pen in 5 – 10 years.

Pen and paper is the largest single generator of information in the world.

To grasp the scope of this consider the following:

There are 5b users of pen and paper daily; About 400b forms used each year Paper production is still growing but at a low rate

This creates a big gap to be filled between the paper creation of information and a digital infrastructure.

Why the need for digital pen and paper? The simple fact is that all information is going into data bases. Thus, the need for a digital pen and paper follows.

Anoto has 150 partners and we know of 200 pilot projects on going.

This vision and Anoto’s evolution as a company very much follows the business cycle and Geoffrey Moore’s Crossing the Chasm. In the chart Örjan showed he put Digital Paper in the Hung Over phase of the business cycle. It is at the bottom of the hype cycle and ready to move into realism and hard work.

He then showed a chart of the Gross Margins and OPEX of the company. Interesting but it would have been better to see the cash flow.

The stock ownership included the following:

Ericsson – 17.9%
Capital Group – 11.4%
Logitech – 10.2%

The irony of being a leader was painted in the following way:

No one wants to be first.
If one’s competition enters the market – being second is ok
However, being 3rd is bad and the basis not to enter a market.

Today the market is struggling with those trying to be #1.

In the current phase of the market putting out the word is critical. Tell success stories, give references and help each other. One of the functions of this conference is to do that.

Anoto Roadmap – Anders Tormod

Anders Tormod, COO, went into more details on the company. Some highlights of his presentation included:

Within my responsibility are three functions: Pen Technology, System Solutions and Sales and Marketing.

Pen Technology includes: Pen HW, Pen SW, PC SW and ASIC;
Systems Solution includes: System SW, GPLS, Anoto
Functionality and Paper & Print; and Sales and Marketing
includes: technology licensing and the partner program.

We see the following trends:

Significant momentum for Forms Processing;
Most successful Forms applications are “simple”
Applications for digital pen and paper include:

Mobil
Network Services,
PC Network Services,
Intranet Solutions and
PC Applications

Anoto’s general road map was shown. The third generation of digital pen will come out in 2004. Forms processing and Enterprise solutions will enter the main stream of our applications in 2004 also.

New offering from Anoto, in support of the short term roadmap, includes:

Forms Design Kit (FDK)
Mobil Validation Kit
Upgrades to the Infrastructure – x-PLS

We will be upgrading the architecture. This includes greater flexibility on how a partner can implement a service. Further, we will allow for the differentiation of the infrastructure systems, e.g., PLS’s amd simplify the development and lower the total cost of ownership for Anoto and Partners.

The digital pen road map includes efforts for:

Quality
Size
Cost
Writing time and stand-by time and Functionality

It is expected that a significant part of the Digital Pen R&D will be in software functionality.

There are four pens on the market now. The original ChatPen introduced by Sony Ericsson is not longer being sold. Logitech is selling the Logitech IO, Hitachi-Maxell has a new pen for the Enterprise market and it was released Q4 2003. HP announced their pen on November 2003. This latter product was announced with the Forms Automation System (HP FAS). [At the conference many asked what is HP going to do? HP had one person attending the event but no booth and no presentation.]

Anoto announced a simplified business model for dealing with partners. The details were lacking.

Standard Register – Going into Digital Forms Big Time

Standard Register used the conference to announce ExpeData its offering using the Anoto pen. Standard Register is one of the largest form companies with annual revenues of approximately $1b. Doug Patterson gave an energetic presentation on its offering.

The killer application for digital writing is business documents. Forms drive the flow of information in companies.

A simple but informative estimate of the digital forms was made at $55b. This received great interest.

For digital writing to work it must be:

Simple, Easy and have Natural Input
This drives the need for pattered paper

Reliability
Reliable pens
Reliable wireless network
Perfectly printed unique pattern paper
Software must be open, scalable and have multiple deployment

Options
The software must be able to be integrated into backend applications
The success with digital writing is highly dependent on hHandwriting Interpretation.
Easy to deploy

Standard Register will have pilot programs, begin a channel program and do this internationally.

Destiny Wireless – Selling Door to Door with Pens

Destiny Wireless in the UK has launched a pen service for Cobra, a direct sales company in the UK. Cobra sells door to door and other face to face marketing environments. It has launched a pilot to use the Anoto pen for sales call logging. The stats from the early trial are impressive:

60% cost savings and 15% increase in sales

As a result of this Cobra has committed to a 5,000 pen order.

Malmo University – Pens as HID

Bo Peterson of Malmo University, Malmo, Sweden described the use of the Anoto pen as a HID. This effort was part of the EU funded ATELIER Project. It supports tangible interaction and ubiquitous computing. Examples were shown how pen and paper could be used to create a user interface.

Nokia Picks Up Where Sony Ericsson Dropped the Ball

Paras Chopra, Product Manager, Nokia, came as close as any making critical comments. Some of his points included:

In spite of the growth in the number of applications there are still very limited number of services/applications for a regular user.

Compatibility between different paper products is still a challenge.

There is room for improvement in the out-of-box experience.

The digital pen and paper is still a niche product.

There are complicated and expensive pricing models from different partners for different services.

Dai Nippon Printing – We Print on Anything

Dai Nippon Printing claims it can print on anything. With annual sales of $12b it is a large printing company headquartered in Japan. They have a very broad view of the potential application of Anoto technology. They showed as target markets: education, medical, department stores, transportation, credit, insurance and the public sector.

The application shown was to use the Anoto pen to score achievement tests given to school students in Japan. The value is that scoring and analyzing tests is a major teacher burden. The results of a pilot that had 20,000 subjects taking tests on 4 subjects showed a reduction in cost of 15% and a drop on response from 1 week to a few days. It is estimated that the scoring market is $240m in Japan.

So far DNP has used 1,000 pens and forecasts the usage of 50,000 pens next year.

Fruits – An Anoto Applications Only Company

Fruits was established in the Copenhagen in September 2002. It is focused exclusively on using the Anoto pen solution. Fruits has two solutions in trial.

DHL

The application is for the management of package delivery and reporting. For those that have seen how UPS works in the US, this technique seems obvious. The Anoto pen is used to follow package delivery and obtain signature for confirmed delivery. Reporting from the Anoto pen is via Bluetooth to the cell phone.

The pilot was been with 80 drivers and an ROI of 10 months. This was also done in conjunction with IBM who did the back office work.

DHL is owned by the DP (German Post Office). If this trial is successful an opportunity is seen for 15,000 pens in the DP.

Health Care Delivery for Elderly

In Europe nurses make rounds to elderly individuals in their homes. This is frequently done on bicycles. When a nurse leaves in the morning that person takes a pen with them. The pen is registered with that person with a form at the exit office. When entering the home a simple form on the back of the door is checked. If action is taken during the visit this is recorded on a form in a binder in the home. Each entry is recorded by transmission back on Bluetooth. Exit is also logged on the form on the back of the door in the home.

The concept is amazingly simple but very effective. The integration is very important in making this work so well. The pilot is with 200 care givers and the average savings is 1.5 hours per day of administration overhead. Payback time is 10 months.

Logitech – Using Anoto Pens to Expand the Business

Logitech has as its objectives from the investment in Anoto the following:

Support the success of Anoto technology; Gain market share with Logitech pens; and Realize profits from pen sales.

Logitech has recently set up a stand alone business unit for the Anoto business.

Originally the IO Pen was for the Notes business and this is the basis for the retail product. Now the company is focused on the productivity sector where it ties the Anoto pen to critical business applications. To support this Logitech will have OEM Ready packages. We will announce two partnerships around this package this summer.

Thus, Logitech has a two part strategy: Retail and Vertical Markets.

We see these Vertical Markets being in CRM, ERP, Document Management, Financial and Health Care. Our initial efforts will be in CRM. A illustration of this market are the expensive CRM packages in use in corporations and that many of the sales force will not use them. We see the Anoto pen as providing an opportunity to improve this.

We believe we have the right pen for the market. That is a USB pen linked to the PC. In 2005 we will introduce 2 new pens which combine Bluetooth and USB.

Our CEO believes strongly in the market for digital writing that he is putting money behind our efforts.

To be successful we have to look for the pain points in corporations. Right now we believe that this is in CRM and Legal.

When asked when will we see the <$100 pen a long discussion occurred.

Because the enterprise market is ROI focused solution sales are not pen ASP driven. Thus, there is not driver right now to lower the price. It is more important to find the right applications. It is likely we will see such a pen in 3 years.

Our pen margins have been good at Logitech. However, we have been disappointed that the sales have not been higher. The retail market did not live up to expectations. However, when asked if the lack of Bluetooth was a contributing factor the answer was no. The IO Pen was for the PC and Bluetooth pens are for a different market.

Our sales have been in the range of 10,000s of units. We have not sold 100,000 units. In 2004 we expect to see the growth be at 50% to 75% and then in 2005 it will increase by 2X each year. Before the recent Maxell order for 500,000 units we had a market share of 50% to 75%.

WAVE Comment

Irrespective of the technology used for the digital pen, the market has not shown it is ready to accept it. We have seen this before but the Anoto Functionality Conference made it abundantly clear. Everyone who sees the technology is impressed. It just does not sell. This is a source of great frustration at Anoto. Their future depends on large increases in digital pen volume. Many are working to accomplish this and at the conference some interesting applications were shown.