It wasn’t so much the predictions as the discussion that was most interesting at last night’s annual predictions dinner, organized by the Washington Technology Industry Association. Will Twitter be acquired in 2010, and why? Who will have the dominant cloud computing platform in the next couple of years? What kind of startup are you looking to build or finance, and which areas are you staying away from?

A panel of Seattle-area tech entrepreneurs and investors gamely took the bait and had some lively exchanges over the course of an hour. OK, these guys all know each other, and we’ll take what they say with a grain of salt since it’s a public forum—but here were some of the most interesting points they made. (You can read more comprehensive recaps of the panel on Brier Dudley’s blog at the Seattle Times, and soon on TechFlash by moderator John Cook.)

The panel was split 3 to 2, with the narrow majority guessing Twitter will get bought next year. Andy Sack of seed-stage fund Founder’s Co-op predicted Twitter will make more money than Facebook in 2010 (surprising, given the current disparity in the other direction). Glenn Kelman, the CEO of Redfin, an online real estate firm, said Twitter should charge for search (as it has begun to do in partnerships with Google and Bing). Kelly Smith from Curious Office and the startup Pressplane argued that Twitter could be “absorbed by a big company,” but “it’s going to go nowhere.” By the end of the evening, Sack was predicting that Microsoft would buy Twitter next year.

There was a consensus that 2010 could be a big year for acquisitions. Bill Bryant of Draper Fisher Jurvetson boldly predicted that Amazon will buy Netflix, Blockbuster, and Hulu, while opening brick and mortar “Amazon media stores.” Greg Gottesman from Madrona Venture Group said Cisco might buy EMC (for VMware) and Seattle-based F5 Networks, while Microsoft might buy Research In Motion, the maker of the BlackBerry smartphone. Sack predicted Adobe would pick up Seattle photo-editing startup Picnik. Rupert Murdoch (News Corp.) would buy Seattle’s Cheezburger Network, and someone would buy Redfin.

Looking back on 2009 for a minute, the big deals that were questioned by the panel included Adobe’s acquisition of Omniture (Gottesman said it just didn’t make sense strategically) and …Next Page »

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Seattle-based RealNetworks is cutting 4 percent of its worldwide staff today, about 70 out of 1,700 jobs, according to All Things Digital. The report cites the economic downturn and cost-cutting as reasons for the move. Last week, RealNetworks (NASDAQ: RNWK) reported a small profit for the third quarter, the company’s first profitable quarter since the first three months of 2008.

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Somebody forgot to tell John Chuang that it’s impossible to create a new kind of home computer these days.

Either that, or he didn’t listen. Because Chuang, a serial entrepreneur who made his first fortune in the staffing industry with Boston-based Aquent, has built a gadget that looks deceptively like a laptop but works nothing like any computer you’ve ever used. From the hardware to the user interface to the activities it supports, the new machine created by Chuang’s Boston-based startup, Litl, rejects three decades of convention and makes the Web, not the computer and all its software and operating-system encrustations, into the real show.

Litl took the lid off its so-called “Webbook” computer today after more than two years of top-secret development work. The device’s purpose, Chuang says, is to take advantage of the Web’s newfound maturity as a medium for digital entertainment and productivity and make it far simpler for people at home to access all those goodies—including photos, videos, news and weather, and Web apps—without having to manage files or desktop applications.

“We didn’t want to build anything that already existed, or something with just marginal improvements,” Chuang says. “PCs have served a great purpose, but we wanted to take a crack at a different type of computer that would be for and of the Net.”

I visited Litl’s offices yesterday and had a chance to try out the Webbook, which goes on sale today at Amazon and at Litl’s website. (The price is $699, and Litl expects to ship the first units to consumers next week.) Beyond its laptop-like appearance, there isn’t much that veteran computer users like me will find familiar about the device. There’s no desktop, no windows or menus or files or folders, no multitasking, no long lists of third-party software applications to buy. There isn’t even a hard drive or a CD/DVD drive.

While the Webbook is definitely a computer—with a 1.6-gigahertz Intel Atom processor, a gigabyte of RAM, a Wi-Fi card, a Webcam, and a nice graphics chip inside—it’s also got a good dose of TV mixed into its genome. It has a separate remote control, its display can be folded almost all the way back so that it stands up on a table or countertop like an easel, and it has a cord that connects it with no fuss to your flat-screen TV, so you can see what you’re doing on a really big screen.

In other words, the Webbook breaks all the rules of personal computing. And while it may be the perfect machine for consumers who just want to get on the Internet and have no use for all of a traditional PC’s bells and whistles, Chuang is likely to face an initial wave of skepticism from heavy computer users and technology industry insiders. They probably won’t grok how a machine that doesn’t even have software, the way we’re used to thinking of software, could still be useful.

But Chuang doesn’t seem to care much about what the digerati think; his device isn’t designed for them. Or to put it more accurately, it’s designed for their coffee tables and kitchen counters, rather than their offices or their backpacks. “We’re about shared processing, not local processing,” he explains. For tasks that require lots of local processing power, like video editing, power users are still going to want and need a traditional multipurpose computer. But if they just want to …Next Page »

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[This post also appears on OVP's blog---Eds.] The University of Washington’s Computer Science and Engineering (CSE) department’s Affiliates day is one of the most fun and rewarding days of the year for me as venture investor and geek. It involves a showcase of projects and research areas by professors and students and is a festival of creativity, new ideas, and engaged smart people. It is a day my colleagues and I look forward to every year.

Last Thursday’s meeting ended with a panel on “The Changing Face of Venture Capital” moderated by UW’s Ed Lazowska, who prompted us with a series of provocative questions. On the panel with me were Greg Gottesman of Madrona Venture Group, Ron Howell of WRF Capital, Bill McAleer of Voyager Capital, and Cam Myhrvold of Ignition Partners.

One of the first topics was the impact of the recession on startups and venture capital. Most VCs expressed the opinion that money was harder to find but that if you could get funded, it was a great time to start a company because skilled people were available, cloud computing providers such as Amazon have made it possible to do with less capital, and there were fewer competitors being funded. There was recognition that it has to be done with less, given the exit markets. But if anything, Greg Gottesman said Madrona is sticking to its model and not changing given a one-year blip.

Cam Myhrvold made the point that there were a lot of entrepreneurs using Amazon Web Services and open source to quickly bootstrap companies with much less capital than prior years. My comment was that if you play at the application layer using open source and AWS, you better think hard about marketing and customer knowledge since there are few technical barriers to entry.

One topic that was raised was why should entrepreneurs go for VCs over angels, money aside. I disagreed that money could be ignored and said that the quality of money was critical in these times. The recession has meant that almost all companies have needed more cash and, given that outside funding is tough, insiders had to step up. Many investors have not stepped up, which has made all VCs more conscious of the quality of their co-investors.

Ed asked what areas were particularly attractive for Seattle, and we got a consistent set of answers. Digital media, gaming, software, and the emerging areas of IT applied to green tech and IT applied to biology are core areas of interest. Each firm had its own areas of interest—for instance, Bill McAleer liked mobile apps and the application of social networks to the enterprise as one of his areas. Bill related a story from a recent trip to NYC where the cab driver was touting his favorite iPhone app—a map of all the public bathrooms. When asked about really innovative new ideas, Greg Gottesman mentioned 3-D printers and how his son was willing to empty his bank account to get one.

At OVP, we like the investment thesis that green tech and biology are becoming more compute-intensive, and that companies that can bring a view of IT applied to these areas are particularly attractive.

My conclusion from the evening is that Seattle is a great place for innovation and has a set of dedicated VCs who want to see a vibrant, risk-taking community. Each firm had its own areas of focus, some overlapping, but all were focused on creating great companies and skilled entrepreneurs here in Seattle. I left feeling that we were lucky to have UW CSE, a great research department generating innovative ideas, and a VC community very committed to fostering growth.

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Well, we can’t all be Amazon. While the Seattle-based e-commerce giant (NASDAQ: AMZN) raked in a $199 million profit for the third quarter of 2009—a 68 percent increase in net income over the same period last year—Microsoft (NASDAQ: MSFT) posted an 18 percent decline in its profits (still $3.57 billion, better than analysts expected).

But beyond these giants of the global tech scene, Seattle has some mid-market public tech companies that we’ve been paying closer attention to lately. That’s because they provide a much more complete picture of what’s going on in the public markets, as well as the mood across different industries like digital media, data storage, and high-performance computing.

Of these local bellwethers, two companies announced modest quarterly profits this week, and two others posted losses but are on the long-term comeback trail. It’s clearly still tough times out there, but here are the highlights:

—RealNetworks (NASDAQ: RNWK), the Seattle digital media and entertainment company, managed to post a surprising profit of $1.5 million for the third quarter of 2009, its first profitable quarter since the first three months of 2008. That’s despite posting quarterly revenue of $140.3 million, a decrease of 8 percent from $152 million in the same period last year (when the company posted a net loss of $4.5 million). RealNetworks reduced its operating costs and formed partnerships with Facebook and Apple over the past few months.

—Cray (NASDAQ: CRAY), the Seattle-based supercomputing company, reported a net loss of $2.1 million for the third quarter. But its revenue was $58.6 million, a 7 percent increase over the same period in 2008. In the second quarter of this year, Cray posted a surprise profit of $3.4 million on the strength of large government contracts and a broader customer base.

—InfoSpace (NASDAQ: INSP), the meta-search company based in Bellevue, WA, posted a profit for the second straight quarter (following three consecutive quarterly losses). Its net income for the third quarter was $1.8 million, based on revenue of $54.4 million, an increase of 38 percent over its revenue from the same period a year ago.

—Isilon Systems (NASDAQ: ISLN), the Seattle-based data storage firm, reported a net loss of $4.9 million for the quarter. The company’s quarterly revenue was $30.5 million, up 1 percent over the same period a year ago, but its net loss increased from $3.7 million in the previous quarter this year. I wrote about nine-year-old Isilon’s efforts to bounce back from some tough times in a profile last week.

On October’s last trading day, the stock market plunged. As Scott E. Marcouiller, a senior equity market strategist at Wells Fargo Advisors in St. Louis, told the New York Times today, “The market is focusing on the glass is half empty…We just needed to let some of the air out of the balloon.”

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Seattle-based Big Fish Games announced today it has hired Michael Vernon as chief financial officer and Ian Hurlock-Jones as chief technology officer. Vernon is a veteran of Seattle-area firms aQuantive and Zumobi, while Hurlock-Jones comes from Fox Interactive Media and Buy.com. Big Fish, a leading developer and distributor of casual games, announced it was opening its European headquarters in Cork, Ireland, in April. The company also has a small office in Vancouver, BC, which former CFO Glenn Walcott told me about last year. Big Fish raised $83.3 million back in September 2008.

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In case you missed it yesterday, the New York Times ran a sweeping review of Microsoft’s position in the tech world on the eve of its Windows 7 rollout this week. That’s the latest version of Microsoft’s iconic operating system for personal computers. But the article smartly goes beyond the company’s strategy for PCs, and examines its near-term prospects in areas like search, mobile, entertainment, and cloud computing.

It’s arguably the most challenging time in Microsoft’s 34-year history. The Times piece points out the company’s revenue declined for the first time ever in its 2009 fiscal year, and it faces increasing competition from the likes of Apple, Google, Amazon, and Salesforce.com. Nevertheless, top Microsoft execs like CEO Steve Ballmer and chief software architect Ray Ozzie continue to defend the company’s position in the market, reiterating its focus on phones, PCs, and TVs—the idea of “three screens and a cloud” that Ozzie talked about back in May. Microsoft also has earmarked nearly $10 billion for R&D spending over the next year, according to the piece.

The conclusion? The Times calls the overall forecast for Microsoft “partly cloudy.” It’s a bit of a letdown, but the story does cover a lot of ground in terms of different technology areas, and competitors coming from different angles.

The story also includes critical comments from a couple of former Microsoft veterans who have strong ties to the Seattle tech scene. Bruce Chizen, the former CEO of Adobe Systems—and now a venture partner with Seattle-based Voyager Capital—is quoted as saying about Microsoft, “They are not the company they once were in terms of market position…They no longer have a monopoly that is critical to the future of computing.”

And Bryan Trussel, the former head of Xbox Live Arcade and now CEO of Glympse, a Seattle-area mobile startup focused on location sharing, is quoted in the context of Microsoft’s recent efforts to work with developers, students, and cloud-computing startups— crucial audiences that company execs have worried about losing touch with. “They got scared,” Trussel says in the piece. “I think they get it now, but the question is how far behind they are.”

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It’s one of the great mysteries of the modern Internet. How can Web publishers make more money from their content? For everything from blogs and journalism to games and entertainment, publishers and software companies alike have been trying to solve this problem for many years.

Now BigDoor Media, a six-person startup in Bellevue, WA, thinks it has found the right approach, at least for a certain market. Its basic idea is to provide a revenue stream for entertainment publishers that bridges the gap between traditional advertising and subscription models. BigDoor, which is emerging from stealth mode today with a beta version of its software, provides an “offer platform” that acts as a gateway to a website’s premium content. Instead of paying for a game by credit card, say, a consumer can opt to fill out a survey, sign up for a newsletter, or buy an advertiser’s product (like Fiji Water, for instance).

This is not an entirely new idea. And in fact, BigDoor operates in a similar space as many other Seattle-area startups we’ve reported on, including AppBank (for social entertainment applications), DevHub (for creating and hosting websites), Mpire (for online-ad optimization), Wetpaint (for social publishing), and Others Online (for behavioral profiling of audiences), which was acquired this summer by the Rubicon Project. These companies have different customers and revenue models, but they are all fundamentally trying to help Web publishers make more money from their content.

What seems to set BigDoor apart is the experience of its founders. Keith Smith and Jeff Malek spent about 10 years in the online advertising world with Bellevue-based Zango, the controversial “adware” company that closed down earlier this year. Smith was CEO and co-founder of Zango, while Malek was vice president of engineering and products. Zango had success but eventually ran into problems, in part because adware in general—software that tracks which sites you visit and delivers targeted ads—became widely reviled by people who felt it violated their privacy or was just plain annoying.

The key is that Smith and Malek seem to have learned from their mistakes as well as …Next Page »

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Microsoft’s latest reorganization, which involves labs in both the Seattle and Boston areas, has a new face. It’s Lili Cheng, a 14-year Microsoftie with experience in both research (social computing) and products (Windows Vista user experience). Cheng now officially leads three separate groups that are being rolled into one: her Creative Systems Group within Microsoft Research in Redmond, WA; Rich Media Lab led by Kostas Mallios, also in Redmond; and Startup Labs in Cambridge, MA, led by Reed Sturtevant.

Yesterday, chief software architect Ray Ozzie announced the creation of the new entity, called FUSE (Future Social Experience) Labs, which will focus on social computing as applied to Microsoft products in entertainment and business. Sturtevant, the founding managing director of Startup Labs, is leaving the company, while Mallios will continue to report to Ozzie and is taking on business development duties involved with technology incubation.

But back to the lab’s new head, who spoke with me from Cambridge yesterday. Cheng, after inheriting about 70 staff members from Startup Labs and Rich Media Lab, now manages about 80 people in FUSE Labs, and says she will be splitting her time between the Seattle and Boston areas. She said the employees of Startup Labs (there are 30-some staff members) will be staying in Cambridge.

As Cheng explains, the goal of FUSE Labs is to “bridge the gap” between research and products—an oft-heard refrain at Microsoft (and most big companies)—by working on projects that are two to five years away from commercialization, and interacting closely with product teams.

The specific focus of the lab is social computing—applying social media (things like Twitter, Facebook, and other social-network technologies) to problems in business collaboration and entertainment. The high-level strategy here is to “embed social activity into business scenarios” for Microsoft, Cheng says. She didn’t say anything more specific about Microsoft’s plans for social media, or about how the employees in Startup Labs and Rich Media Lab will be integrated into the social theme. But she adds, “Interacting with other people is so personal and emotional to every single person out there. It’s important for every company out there.”

Cheng’s team has previously built applications like Kodu, which lets kids create games and stories using an Xbox controller and share them on a community games channel; and Salsa, a prototype that connects your e-mail inbox with social networks. (The latter sounds a lot like what the Seattle startup Gist, led by ex-Microsoftie T.A. McCann, has built and is actively testing.)

Asked what her greatest challenge is in the new job, Cheng said it’s addressing how to “take best advantage of this amazing opportunity.” Having been in the social computing space for many years, she says, now it’s time to “just go for it.”

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Ray Ozzie, Microsoft’s chief software architect, announced today the company is forming a new laboratory called Future Social Experience Labs, or FUSE Labs, which will focus on aspects of “social computing” beyond just communication and collaboration. The move is part of a wider restructuring of Microsoft’s labs: FUSE Labs is a merger between the Creative Systems Group at Microsoft Research in Redmond, WA; Rich Media Labs; and Startup Labs in Cambridge, MA. As part of the announcement, Ozzie said Reed Sturtevant, the founding managing director of Startup Labs for the past two years, is leaving the company to pursue other interests.

FUSE Labs will be led by Lili Cheng, a 14-year Microsoft veteran who most recently headed the Creative Systems Group and previously managed the user experience teams for Windows Vista. Before joining Microsoft, Cheng worked at Apple Computer in the human interface-advanced technology group, where she worked on QuickTime VR and QuickTime Conferencing products. Cheng is now general manager of FUSE Labs (in Redmond) and will report directly to Ozzie. “I’ve known Lili for many years, and have long been impressed by her vision and ability to create; to engage yet to also inspire; to lead; to make tough choices; to deliver,” Ozzie said in a memo to Microsoft staff.

Ozzie said he has “refined the missions” of Microsoft’s labs, in part because of “changing business conditions.” From his memo, it sounds like the goal of the new lab is to apply research in social computing (things like user interfaces, social networks, and human behavior) to help develop new products in the areas of entertainment, productivity, and teamwork—as well as to explore how Microsoft can extend the ways people use computer operating systems.

“The three groups being combined have concrete skills and code in areas where ‘social’ meets sharing; where ‘social’ meets real-time; where ‘social’ meets media; where ‘social’ meets search; where ‘social’ meets the cloud plus three screens and a world of devices,” he said. (See more on Ozzie’s three-screen vision here.)

It also sounds like the reorganization is meant to focus the impact of social computing research more immediately on the company’s product pipeline. “FUSE Labs will bring more coherence and capability to those advanced development projects where they’re already actively collaborating with product groups to help them succeed with ‘leapfrog’ efforts,” Ozzie said in his memo. “Working closely with [Microsoft Research] and across our divisions, the lab will prioritize efforts where its capabilities can be applied to areas where the company’s extant missions, structures, tempo or risk might otherwise cause us to miss a material threat or opportunity.”

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Seattle-based PopCap Games dropped a bit of a bombshell this morning. The casual games developer and publisher announced it has secured $22.5 million—the first outside funding in its nearly 10-year history—led by Meritech Capital Partners, a late-stage investment firm based in Palo Alto, CA. Also participating in the round are Larry Bowman, a PopCap board member, and John McCaw, a mobile and finance guru. The funding represents a minority stake in the company.

The news is surprising because PopCap has been profitable since its inception, and has shunned taking outside investment up to this point, even as the company has grown dramatically. From 2003 to 2008, PopCap’s consumer game sales shot up from $10 million to $170 million. Bejeweled, a puzzle game that involves lining up gems in a grid, made up about 40 percent of PopCap’s revenue as of last year.

The funding raises the question of whether the recession, which has hit video games hard, necessitated more capital for PopCap’s operations. The company’s chief executive, David Roberts, said the reason for the funding is to accelerate PopCap’s global expansion and distribution of its games. “We’re excited to have additional working capital that lets us be more aggressive with our expansion into social media and reaching new geographies,” Roberts said in a company statement. “We’ve been pursued by investment firms for many years and have resisted taking outside capital, but we liked Meritech’s style and believe there’s a tremendous opportunity to grow and evolve our business at a time when many other video game firms are retrenching.

Brian Fiete, Jason Kapalka, and John Vechey founded PopCap in 2000. It now employees 240 people in Seattle, San Francisco, Chicago, Vancouver (BC), Dublin, and Shanghai.

PopCap’s news represents the third large funding round for a Seattle-area gaming company in the past year. In September 2008, Big Fish Games landed $83.3 million led by London-based Balterton Capital, and in August 2009, Smith & Tinker revealed it has raised a total of $29 million from DCM, Vulcan Capital, Foundry Group, and others.

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Kirkland, WA-based Digeo, a 10-year-old home entertainment company backed by Microsoft co-founder Paul Allen, has been sold to Arris, a broadband communications firm based in Suwanee, GA, for about $20 million in cash.

Digeo is known for its high-definition digital video recorder, called Moxi. The acquisition gives Arris expertise, intellectual property, and talent in video networking and multimedia services delivery. Arris will gain about 75 Digeo employees (mostly engineers) in Kirkland, which will raise its R&D costs by about $3 million per quarter, the company said.

“Arris delivers the market position necessary to take the Moxi vision to the next level,” said Digeo’s CEO, Greg Gudorf, in a statement. “I am extremely pleased that the Digeo team will continue to drive the evolution of the Moxi platform.”

But observers point out that the purchase price means a substantial loss on the investment for Allen. PaidContent reports Digeo’s total funding was more than $110 million. In an interview with TechFlash, Gudorf said fewer than 10 Digeo employees would lose their jobs in the acquisition, and that he will stay with Arris during the transition. The news of Digeo’s layoffs was first reported by the Seattle Times.

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The last official week of summer brought a slew of Northwest deals, to go along with today’s heat wave. Two of the year’s biggest financings happened in tech and life sciences, along with a big acquisition in healthcare, while a host of smaller deals went down in software, digital media, and advertising—and one company inched closer to an IPO.

—Seattle-based Integrative Diagnostics, Leroy Hood’s early cancer detection company, has raised $7.5 million out of a $30 million equity round, as Luke reported. The investors were not disclosed, but we’ll have more on this story soon.

—Seattle-based Free & Clear, which offers phone-based coaching for company employees battling tobacco addiction, obesity, and stress, was acquired by Inverness Medical Innovations (NYSE: IMA) of Waltham, MA, for $100 million in cash plus up to $30 million in follow-on payments, as Wade reported. Free & Clear was backed by Polaris Venture Partners, Three Arch Partners, and Kaiser Permanente Ventures. Inverness offers medical diagnostic tests and other disease management services for consumers.

—Portland, OR-based Ensequence raised $20 million, led by Clay Mathile, the CEO of CYMI Technologies (and former owner of Iams, the pet food company sold to Proctor & Gamble for $2.3 billion in 1999). It’s one of the Northwest’s largest tech financings of the year. Ensequence was founded in 2000 and is a leader in the interactive TV business, which lets viewers do things like call up additional information on the screen. There is some question as to whether the firm is moving its headquarters to New York, where its new CEO, Peter Low, is based.

—In the biggest life sciences venture financing of the year, Seattle-based Calypso Medical raised $50 million led by Skyline Ventures and Frazier Healthcare Ventures, with Bay City Capital and InterWest Partners also participating, as Luke reported. The funds will be used to expand Calypso’s worldwide rollout of its radiation pinpointing product, which helps radiation oncologists and technicians better treat prostate cancer. Luke also reported on the story behind the deal here.

—Seattle-based Getty Images, the creator and distributor of photos and other digital media, has made a $4 million strategic investment in Daylife, a New York media and content services company, according to the Wall Street Journal’s All Things Digital blog. The two companies have also formed …Next Page »

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In one of the Northwest’s biggest tech financings this year, Interactive television firm Ensequence, based in Portland, OR, said today it has secured $20 million in funding led by Clay Mathile, the CEO of CYMI Technologies and former CEO and owner of Iams (the pet food company sold to Proctor & Gamble for $2.3 billion in 1999).

Ensequence has also named a new CEO, Peter Low, who was formerly the company’s president and chief operating officer. He succeeds Dalen Harrison, previously of Intel, who remains on the board.

The Oregonian reports that Ensequence initially said it is moving its headquarters to New York, where Low lives. But in an interview, Low reportedly said no official decision has been made, and that the employment status and the role of employees in Portland (more than 70 out of a total workforce of about 100) would not change. The company has raised a total of about $97 million, according to the report.

Ensequence, founded in 2000, is a leader in Interactive TV, which lets viewers do things like bring up information on sporting events they’re watching, or watch multiple programs on one screen.

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It can’t hurt for Rhapsody to offer an iPhone app. However, they are going to have to compete with rampant iTunes, Pandora, and rampant piracy. While Pandora has a paid option, their free option satisfies many of the needs mobile users have for music. If RealNetworks offers a similar “free” option, it could provide a natural up-sell path to a paid subscription. Further, having such a free version, combined with MP3 music download micro-purchases, could boost the sales of both their subscription services and their MP3 sales. That would be goodness.

As I see it, subscription services for music, while viable, is going to be a relatively small niche of the music business. Users are pursuing music across multiple devices, and the burden to carry DRM [digital rights management] along with the music creates adoption hurdles that limit the size of the total addressable market.

If you look at Rhapsody subscription growth, it is largely driven by inorganic customer acquisition. The integration of Yahoo! Music Unlimited customers and Verizon Wireless probably accounted for all the growth, possibly offsetting declines that would have otherwise occurred. I think this is a mixed signal. On the one hand, at best there has been little to no growth in the business in the prior six months. On the other, adding new modes of consumption, like Verizon Wireless mobile devices, has resulted in some growth. Though they did not split-out the latter in their last quarterly report, I suspect that most of the growth in the six month period ending on June 30th was probably the result of the Yahoo! Music Unlimited integration.

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Rhapsody, the online music service run by Seattle-based RealNetworks, is now available as an app for the iPhone and iPod Touch. It is the first time Apple has allowed on-demand music streaming on its mobile devices in the U.S. Rhapsody customers will have access to some 8 million songs for a monthly fee of about $15. RealNetworks is also working to bring Rhapsody to other mobile devices, such as Google Android phones.

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Pacific-Northwest Armani Exchange it isn’t, but it is totally the height of Geek Chic. Penny Arcade Expo (PAX) has become the ultimate destination for gaming fans.

Since 1995, every gamer has dreamed of being able to sneak into E3: the video game industry’s annual closed-to-the-public trade convention, where new games and products are introduced and sneak peeked. PAX has become E3 for the public. While Gabe and Tycho just wanted to throw a party about the joy of gaming and hanging out with other gamers, they have helped to level the playing field for the promotion and distribution of games by giving individuals and small companies the opportunity to promote their games directly to consumers in a cost effective method. Traditional tiered systems, typified by trade-only conventions such as E3, mean that consumers receive their information about games via others such as the press and retailers. But with today’s distribution becoming increasingly direct to consumer via download, the need exists to promote directly to consumers as well. PAX can play a large part in helping game publishers of all sizes do so.

But PAX is not a trade show that is open to the public, it is a festival of all things geek: with seminars as varied as “The art of the Dungeon Master” to “How the iPhone has Changed Portable Gaming”; tournaments as varied as “Settlers of Catan” to “Halo 3”; and a Saturday evening concert featuring geek musicians. Of course, there is a little geek in all of us, or a lot of geek in my case, and since the conventions founders Mike “Gabe” Krahulik and Jerry “Tycho” Holkins love tabletop games to casual games to hard core first person shooters, their convention embraces this diversity as well, meaning that the audience is as broad a demographic slice as you could imagine.

The largest Internet gaming segment, women over 30, was well represented and interested in all the new “casual” games from PopCap, Big Fish, and the like. Younger kids flocked to the new Nintendo DS games and Nanovor (had to throw in a plug somewhere). Tabletop gamers had plenty to do with Privateer Press’s skirmish game WarMachine and Well’s Expeditions new mass action miniature game Arcane Legions. Card players competed in Hasbro’s Magic the Gathering and laughed all night with endless Munchkin games from Steve Jackson Games. Of course, the majority of the show reverberated with sounds of either machine guns or wailing guitars as the seemingly endless variety of first person shooters and music-based games continued to entertain the console core demographic of 18-to-35 males in huge numbers.

You can imagine that a festival started by guys who love gaming, but also make their living by humorously skewering both games and gamers in their enormously popular online comic penny-arcade.com, the show featured both planned and unplanned humor and provided a venue for other critics of geek culture such as Mega64 and RedvsBlue.

Gaming of all types has always been and will always be a social activity, and PAX embraces that in its very essence, providing a great experience for gamers of all types and a terrific opportunity for consumers to directly engage with creators.

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The Labor Day holiday weekend is finally upon us. If you’re a video gamer or a game developer, this means only one thing: Penny Arcade Expo (PAX) is happening in Seattle.

PAX has become the biggest trade show in North America for computer and video games. It draws tens of thousands of people for a weekend of game exhibitions, demos, panels, gaming tournaments, parties, and concerts—this year’s band lineup includes Jonathan Coulton, Freezepop, and MC Frontalot. The expo is billed as a festival of gaming technology and culture. (And for all my East Coast peeps, just a reminder: PAX is coming to Boston next spring, March 26-28, 2010.)

All the action starts today at the Washington State Convention & Trade Center in downtown Seattle. It is completely sold out, so if you don’t already have tickets, you are out of luck. Judging from the security at the event last year, you’d have only slightly less chance of breaking into Bill Gates’s house as crashing the PAX sessions.

If you do have an entry badge, though, here are my top 10 most interesting sessions to watch:

—How Can We Make Online Gaming Communities Suck Less? (Friday, 2:30 pm)
Attempts to answer the universal question, “why are we awesome in person and bastards online?” And explore what can be done about it.

—Prepare to Drop (Friday, 3:30 pm)
Join members of Kirkland, WA-based Bungie for an in-depth look at the soon to be released “Halo 3: ODST,” and discussions around the game’s development.

—Original Gangstas: Why Table-Top Gaming Still Packs Heat (Friday, 6:00 pm)
In a digital age, trading cards, miniatures, and traditional boardgames are holding their own at the kitchen table and increasingly on Xbox Live Arcade.

—Culture Wins in Game Marketing (Friday, 6:00pm)
How to market different types of games successfully. Includes representatives from Wizards of the Coast, Ubisoft, and other companies.

—Twitter and Beyond—New Game Communities Online (Saturday, 1:30pm)
Online game communities are changing rapidly thanks to social media. No longer are gamers primarily congregating on official game forums. They’re using Twitter, Facebook, and …Next Page »

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It was a bit of a quiet week for Northwest deals, with some local venture dollars going to other parts of the country. Nevertheless, there was activity in gaming, music, robotics, biotech, and cleantech.

—Seattle-based Tuusso Energy completed a $2 million financing round led by Pivotal Investments, based in Portland, OR. The deal was made in partnership with Akula Energy Ventures, which will co-invest in Tuusso’s development of utility-scale solar power plants in the western U.S.

—Bellevue, WA-based Smith & Tinker said it has raised a total of $29 million in venture funding from DCM, Vulcan Capital, Foundry Group, Alsop Louie Partners, and Leo Capital Holdings. The gaming company was founded in 2007 and closed its most recent funding round last month. It is now promoting its new hybrid online/offline game, called Nanovor.

—Kirkland, WA-based OVP Venture Partners participated in a $45 million financing round for Complete Genomics, based in Mountain View, CA, as Luke reported. Enterprise Partners Venture Capital, Prospect Venture Partners, Highland Capital Management, Essex Woodlands Health Ventures, and OrbiMed Advisors also contributed. It’s the fourth round of funding for Complete Genomics (for a total of $90 million-plus), which is building a commercial human genome sequencing center in Silicon Valley.

—ProFibrix, a Netherlands-based medical company with a Seattle subsidiary, raised $11 million in a Series B financing from new investor Gilde Healthcare Partners and existing investor Index Ventures. The company makes a dry powder topical tissue sealant that stops bleeding during or after surgery.

—Seattle-based Bezos Expeditions, the venture investing operation of Amazon founder and CEO Jeff Bezos, has invested in Heartland Robotics, a Cambridge, MA-based startup led by MIT computer scientist Rod Brooks. Wade reported that the industrial robotics company has raised just over $7 million in an equity offering in which Bezos Expeditions participated. Other investors were not disclosed.

—Bothell, WA-based AVI Biopharma raised another $30 million through a stock offering underwritten by Jefferies & Company, as Luke reported. AVI (NASDAQ: AVII), which recently moved headquarters from Portland to Bothell, is developing experimental RNA therapies for Duchenne Muscular Dystrophy and Ebola virus.

—MySpace confirmed its acquisition of Seattle-based iLike, as Eric reported. Financial terms were not disclosed, but the widely rumored price was $20 million. iLike will remain in Seattle, with its 26 employees joining the MySpace team, according to Owen Van Natta, the CEO of MySpace.

—Seattle-based Cell Therapeutics (NASDAQ: CTIC), the cancer drug developer, raised $30 million by selling preferred stock and warrants to purchase shares of its common stock to a single institutional investor, as Eric reported. Cell Therapeutics will use the money as operating capital.

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In one of the Seattle area’s biggest tech financings this year, Bellevue, WA-based Smith & Tinker has raised a total of $29 million in venture funding to deliver and market a hybrid game for kids that bridges the online and offline worlds. The latest funding round was led by new investor DCM, based in Silicon Valley, with existing investors Vulcan Capital, Foundry Group, Alsop Louie Partners, and Leo Capital Holdings also participating. The amount of new funding, which closed in July, was not announced—the $29 million also includes seed and first-round funding raised by the company since its inception in 2007.

Earlier this month, Smith & Tinker launched its flagship game, Nanovor—sort of a cross between a collectible card game (like the original Pokemon) and a massively multiplayer online game, only different. I recently visited co-founders Jordan Weisman and Joe Lawandus at company headquarters (pictured above), to see the Nanovor game up-close and to talk about the 50-person company’s intriguing strategy for marketing it in the U.S. and abroad.

“This is billed originally as a hybrid, across two $21 billion industries,” says Weisman, Smith & Tinker’s CEO. “It’s targeted for ages 6-12. The idea is to merge their online lives with their face-to-face lives.”

The industries he’s referring to are video games and traditional toys—and their respective market sizes in the U.S. If anyone can penetrate and bridge those ultra-competitive worlds, it’s probably Smith & Tinker. Weisman is a renowned entrepreneur in gaming, with a long record of founding successful companies including FASA, Virtual World Entertainment, WizKids, and 42 Entertainment. He came to Seattle when Microsoft bought FASA Interactive in 1999. Lawandus, for his part, was a former executive with Cranium, Disney, and Hasbro, so he knows a thing or two about product management, sales, and marketing for toys and games. Together, they seem to have their real and virtual bases covered.

“Our vision is something that takes the best of both of those worlds,” says Lawandus, Smith & Tinker’s president. “We’re reinventing play for the connected generation. We believe there’s nothing as cool to a kid as another kid in the room.”

It’s a noble concept, at a time when kids—and adults alike—seem to spend more time looking at screens than each other. Here’s how it works, in a nutshell: On a website, you choose and create …Next Page »

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