It’s been a busy week around here for the big tech companies. At Xconomy, we don’t usually report on things like product releases from Microsoft or sales figures from Amazon—our main focus is on new ideas, models, and companies—but readers need to understand where the big players are heading so they can see the gaps and opportunities for new businesses. So, for each of these pieces of mainstream tech news, I’ll tell you why savvy innovators and business leaders should care.

—Google (NASDAQ: GOOG) demonstrated its Web-based Chrome operating system for the first time in public yesterday. It won’t be available for another year, but the tech community is scrambling to understand all the implications. (Google’s Seattle engineers have contributed technology to the Chrome Web browser, helping to boost security—one potential advantage of a cloud-based operating system).

Sure, a fully cloud-based OS is a direct threat to Microsoft’s business model and the ecosystem of companies that support Windows. But more than that, it could reshape the landscape of online advertising by providing a new platform for launching ads on mobile devices, video channels (YouTube), and Internet TV. Perhaps the only thing that can slow down Google’s dominance on the Web is the federal government. In other words, this could get ugly.

—Microsoft (NASDAQ: MSFT) has teamed up with LinkedIn to provide info about your business contacts within Outlook e-mail. It’s all part of Microsoft’s Outlook Social Connector, an add-in that feeds you data from your social networks. Integrating e-mail with social networks and search is a fast-growing area, with startups like Gist in Seattle (backed by Paul Allen and Foundry Group) helping lead the way. Gist’s CEO T.A. McCann told TechFlash that he’s known about Microsoft’s effort for a while and doesn’t see it as a direct challenge. Gist’s offering is more advanced, he said, and it includes features like integrating with Salesforce.com and the iPhone. But startups and investors beware: if you’re in this crowded space, you better have a product that cuts through the noise and has a way to attract customers fast.

—RealNetworks (NASDAQ: RNWK) is in discussions with Viacom’s MTV Networks to sell off at least some of its stake in the Rhapsody music service, as first reported by PaidContent. In a regulatory filing, prompted by a tender offer to issue new stock, Real said it is in talks to reorganize the management structure and/or corporate governance of the division, which might mean giving up its majority ownership stake (51 percent) in Rhapsody. Back in September, digital-media guru Bill Baxter (now at Seattle-based Cozi) wrote in Xconomy about Rhapsody’s fierce competition with Pandora, iTunes, and piracy. Message to startups: the world of digital music services is probably not where you want to be.

—Amazon (NASDAQ: AMZN) has been busy ramping up operations ahead of the holiday shopping season. Its billion-dollar acquisition of Zappos is helping it expand into shoes and apparel, and its Kindle sales look poised to take off, especially now that Barnes & Noble’s competing e-book reader, the Nook, has sold out until January. Amazon has really become the business and technology model to follow in online retail and product search. While there is still room for e-commerce startups to compete in various niches, they would be wise to study how Amazon built its brand and customer relationships before branching out to the wider world of retail.

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I sat in on a good venture capital panel yesterday at Mobile Northwest 2009 in Seattle. No huge arguments or chair throwing to speak of (we’ll see what we can stir up at the next few Xconomy Forums). But some solid and useful observations from Geoff Entress of Voyager Capital, and also a prominent Seattle-based angel investor; Adrian Smith of Ignition Partners in Bellevue, WA, an expert in telecom and wireless; and Puneet Tandon of Bellevue-based T-Mobile USA, who is looking to sign partnerships with top entrepreneurs in digital media and social networking. (You can also see some comments from mobile VC Tom Huseby’s keynote here.)

The panel was moderated by Tricia Duryee, the Seattle-based correspondent for mocoNews, a website that covers wireless telecommunications. Here are my quick “top three” takeaways from the discussion of the local mobile industry:

1. The panic may be over, but caution rules. Entress says he’s added nine companies to his portfolio this year, out of a total of 32 he’s involved in (and six mobile firms, including TravellingWave, Swype, Dashwire, and Treemo). “We’re definitely not out of the woods yet,” he said. “But 2010 might be a good year for selling companies.”

2. It’s not all about the iPhone. Entress and Smith pointed out that Apple has only 17 percent of the smartphone market, so there’s plenty of opportunity on other platforms, like the BlackBerry and devices that use Windows Mobile. “Apple has a huge amount of mindshare,” Smith said, “but the critical thing is the development environment around [mobile applications].” Tandon agreed, saying, “Barriers to doing business with us [carriers] perhaps have been lowered.” Entress stressed the importance, especially for startups, of trying to avoid “getting locked into any one carrier, handset, or operating system.”

3. Watch advertising, input technologies, and connected devices. Tandon pointed out that by sometime next year, there are projected to be 3.3 billion Web-connected devices, and 70 percent of them will be connected via wireless operators. That means carriers will be willing to pay to know “who are the social influencers in your subscriber base,” he said. Smith and Entress said Google’s $750 million acquisition of AdMob signifies that mobile advertising is here to stay—but that the deal was the “first one out” (like YouTube for video), so don’t look for anything near that sort of valuation again. Entress added that he’s working with a number of startups selling new ways of inputting text on mobile devices (using speech recognition, touch-screen methods, and so forth). For all our fancy gadgets, it seems we still struggle to communicate.

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We’ve all been wondering how the Adobe layoffs, reported earlier this week, may affect the Seattle area—especially given the slew of other recent cutbacks in the local tech industry. Adobe (NASDAQ: ADBE), which is headquartered in San Jose, CA, has a strong presence in Seattle. As of recently, it employed some 500 people, focused on product development, operations, and advanced technology and research, at its Fremont offices.

Well, one prominent executive who’s leaving the company locally is Bill McCoy, Adobe’s general manager of ePublishing Business. McCoy is Adobe’s main e-book person. He made key contributions to Adobe’s PostScript and PDF technologies, and his team has helped lead projects like Adobe Reader Mobile SDK, Adobe Content Server, Adobe Digital Editions, and Adobe InDesign. He’s on the board of the International Digital Publishing Forum, and has been heavily involved in the EPUB standards movement. (You can read more about McCoy at TeleRead.org.)

In a blog post this week, McCoy said he’s leaving Adobe “in the near future” to pursue other opportunities yet to be determined. “I will be taking a little bit of time off, but there is no doubt that I’ll continue to be involved in the future of digital books, especially where that future intersects with web standards and open source,” McCoy writes. “I believe that Adobe will continue to play a critical role as an enabler of interoperable solutions, but I also believe that the community needs to stay vigilant to ensure that for-profit corporations don’t just talk the talk about being open, but also walk the walk.”

It sounds like Adobe is overhauling its efforts in the area, as its competition with Amazon and other e-publishing companies heats up. In a blog post, Adobe said it “has made the decision to expand its investment in digital publishing, creating a new organization focused on delivering products to increase digital revenue opportunities for book, newspaper and magazine publishers. This organization will combine the efforts of Adobe’s eBook business responsible for the Adobe Reader Mobile SDK, Adobe Content Server, Adobe Digital Editions, and PDF and EPUB authoring support in Adobe InDesign with Adobe’s digital newspaper and magazine efforts.” The company added, “We are particularly excited about what we have in store for 2010. We plan to further our reach to emerging mobile reading platforms to allow readers to read anywhere, on any device.”

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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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Len Jordan, a general partner at Seattle-based Frazier Technology Ventures, will be joining Madrona Venture Group, also based in Seattle, as of January 1, 2010. Jordan will start at Madrona as a venture partner, the firm announced today, and will identify and lead new investments across technology areas like software, mobile, and Internet, as well as helping coach entrepreneurs and existing portfolio companies.

The other half of the story is that Frazier Technology Ventures will not be making any more investments beyond follow-on rounds for its existing portfolio companies. “We aren’t making new investments, and we’re not raising another fund. Earlier this year, we made that decision,” Jordan says.

Jordan joined Frazier in 2003 after a distinguished career at RealNetworks, where he was a senior vice president in charge of media systems, and also worked on products in mobile and gaming. Before that, he spent a number of years in the software business at two companies in Oregon—Creative Multimedia and Central Point Software (both were acquired). Jordan currently represents Frazier on the boards of Control4, DS-IQ, Medio, and Wetpaint, and will continue his duties with those companies.

“We’ve known Len for a long time, back to his RealNetworks days,” says Matt McIlwain, a managing director at Madrona. “It’s a clear fit from a culture perspective and an investment perspective…He’s a very experienced and seasoned venture capitalist. He’ll make decisions while functioning in a partner capacity.”

It sounds like Jordan’s skills and relationships are pretty complementary tofit well with the existing Madrona team. “We really like the fact that Len has significant operating experience,” McIlwain says.

Jordan concurs, “What I can add is early-stage operating background. This is a team sport.” He says he wants to “be able to sprinkle any help” where it is needed in Madrona’s portfolio. “There are a lot of relationships I have that may be complementary to Madrona on the deal flow side,” he says. “I have deep relationships with BestBuy, T-Mobile, Verizon, HP. In terms of deal sourcing, I’ve found this is a very person-to-person business.”

I asked Jordan more about the future of Frazier Technology Ventures. “The current fund is in the fifth year of a 10-year cycle. You won’t see any changes in the foreseeable future,” he says. He adds that FTV has 11 active portfolio companies. “The irony is the portfolio will actually do quite well,” he says. “Frazier has a great portfolio, but we’re also a relatively new group. In a regular fundraising environment, you’d probably be fine.” (Frazier Healthcare Ventures remains a separate family of funds, as always.)

Meanwhile, Madrona has continued to strengthen its team recently. In August, the firm added former aQuantive CEO Brian McAndrews as a managing director, bringing in more expertise in digital advertising, marketing, and media. The addition of Jordan helps the firm more on the software and operational side. “What really excites us about Len is he’s a strategic thinker who has experience both in the technology side of companies and in having a board member view,” McIlwain says. “The highest and best use for Len is looking to develop investment themes, meeting with companies, and making a couple of new investments.”

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EvoNexus, San Diego’s free high-tech incubator, announced that it has enrolled three more startup companies during ceremonies yesterday that officially marked the opening of its new facility.

CommNexus, the San Diego wireless industry group, announced five months ago that it was leading the creation of the free and “no strings attached” startup incubator, to be headed by wireless industry executive Cathy Pucher. EvoNexus, which is structured as a nonprofit organization, plans to eventually house 10 to 12 technology startups; it named its first three startups less than two months ago.

CommNexus and EvoNexus have both moved their offices into part of a 25,000-square-foot commercial office building that was previously occupied by San Diego-based Leap Wireless, (NASDAQ: LEAP), which sells prepaid discount mobile phone service through its Cricket Communications subsidiary. By providing the office space to EvoNexus for one year at no cost, Leap made the largest single contribution of more than three dozen companies and individuals that donated in-kind services and cash to the incubator, according to Pucher.

“San Diego is an innovation economy,” Leap CEO S. Douglas Hutcheson told the crowd. “We’ve spawned more new companies in San Diego than I think anyone would have believed, and it’s vital that we support that.”

For the startups that are lucky enough to get selected, the incubator provides free office space, including utilities, Internet service, office equipment, and volunteer business mentoring for up to two years.

“Other cities don’t recognize the collaboration that we have here,” San Diego Mayor Jerry Sanders told a lunchtime crowd of roughly 150 people who attended a ribbon-cutting ceremony for the incubator. The mayor was joined by other local dignitaries and industry officials, including CommNexus board chairman John Major, the former chairman and CEO of two San Diego wireless companies, Novatel Wireless and Wireless Knowledge. “As we entered into the recession of recessions, a lot of non-profits hunkered down, and frankly that would have been the easy thing for us as well,” Major said. “But that’s not the way we operate.”

Pucher, the incubator’s executive director, told me …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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Some tech companies seem to be at their best when things are at their worst. Those are the ones you really need to keep an eye on, especially in a recession. Isilon Systems is one of those companies.

The Seattle-based data storage firm (NASDAQ: ISLN) is announcing its third-quarter earnings this afternoon, and it will be interesting to see how well its products are selling across a wide range of industries—everything from movie studios and media companies to financial institutions and biomedical research organizations. I recently sat down with Isilon’s founder and CEO, Sujal Patel, for a wide-ranging interview about the nine-year-old company’s technology and business strategy. It makes for a pretty compelling case study of a tech startup’s growing pains, and how it has bounced back from adversity to become a leading player in a crowded and competitive field.

In case you don’t know all the twists and turns in Isilon’s history, here’s a quick recap. Patel, a former engineer at Seattle-based RealNetworks (NASDAQ: RNWK), co-founded Isilon in January 2001. The basic idea was to provide cheaper and more efficient data storage for companies needing to host or deliver video, music, and other multimedia content that requires a lot of storage space. In his previous role as chief architect of RealNetworks’ media delivery software, Patel had seen many customers struggle to upgrade their storage capabilities. So there was a real problem to solve. But the tech bubble had collapsed, so customers weren’t necessarily in the mood to buy. Patel says he “pretty much timed the worst spot of the decade to start a company.”

What’s more, there were already about 250 venture-funded storage companies out there, Patel says, and about 50 of them sounded just like Isilon. Patel says he built his business plan around solving the specific problem Real’s customers had, and “how that problem would be pervasive across all mid-range to large enterprises over the next decade.” To start with, he set an incredibly narrow customer focus on photo-sharing and streaming media websites, and media companies.

Isilon’s technology approach was to cluster together a large number of storage “bricks”—each one includes disks, memory, processing, and networking—into a single storage unit. It was a novel approach in the field of network-attached storage, which today is a $4 billion industry with big players like NetApp, EMC, and Hewlett-Packard. Isilon’s technology requires solving some very tough software problems, but the payoff is better storage performance that is also cheaper and easier to manage, for companies dealing with huge amounts of unstructured data. “We can build one gigantic network drive, and we can scale it as the customer’s needs change over time,” Patel says.

Venture capitalists were sold. In August 2001, Isilon closed an $8.4 million funding round …Next Page »

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SmartDrive Systems, a San Diego company that uses video recording technology and web-based services to reduce the costs of operating motor vehicle fleets, has raised $12 million in venture capital in a deal that could be worth as much as $25 million, according to a regulatory filing.

The company was founded in 2004 by James Plante, an automotive electronics executive and entrepreneur, who served as SmartDrive’s founding CEO until April 2008, when Greg Drew was named CEO. Drew tells me that Plante continues to serve on SmartDrive’s five-member board of directors, and remains a key investor in the company, which has more than 350 employees worldwide.

Investors in the current round include Oak Investment Partners of Palo Alto, CA, and New Enterprise Associates of Menlo Park, CA, according to Drew. The CEO tells me that SmartDrive, which has now raised more than $22 million in total venture funding since the beginning, intends to use the current round to accelerate the acquisition of new customers.

Drew says that SmartDrive’s strategy remains focused on helping fleet operators mitigate their risk by combining video, audio, GPS, and accelerometer technologies into a SmartRecorder device that is mounted above the windshield of fleet vehicles. “Our focus really is on enterprise accounts that are looking to transform their safety program,” Drew says.

SmartDrive’s customers include ambulance companies, taxi companies, school districts, utilities, waste management companies, and other fleet operators. SmartDrive says its event recorder and related web-based services can help reduce vehicle damage, workers’ compensation costs, and personal injury costs by as much as 50 percent.

SmartDrive’s competitors include San Diego-based DriveCam, which raised $19 million in venture funding in August.

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Back in August, Connect CEO Duane Roth outlined an initiative to address a dearth of venture capital investment by seeking to develop alternative funding sources for San Diego’s early-stage technology companies. A key part of the non-profit group’s initiative is to pursue additional federal support—and now that effort is facing its first major test as Congress takes up a bill that would provide funding through the Small Business Administration for equity investments in certain types of technology startups.

A House bill dubbed “The Small Business Early Stage Investment Act of 2009” would basically make the federal government a limited partner in qualified investment firms that make venture capital investments in early-stage companies in targeted industries. Roth tells me the bill, which was introduced by Democratic Rep. Glenn Nye of Virginia, fits his initiative “perfectly.”

Roth says he also helped recruit Martin Sabarsky, the San Diego-based chief operating officer for biofuels startup HR BioPetroleum, to testify yesterday before the House Small Business Committee in support of the bill. Roth describes HR BioPetroleum as an ideal case study that explains why federal funding is needed to boost venture investing. The company, which has offices in Hawaii and San Diego, saw its plans to build a commercial algae facility on Maui indefinitely postponed in September 2008, when financing for the project collapsed amid the free fall on Wall Street.

“Our subsequent attempts to attract additional venture capital/private equity investment to continue development in the midst of the continuing financial crisis have thus far failed,” Sabarsky said in his prepared testimony, which was submitted on behalf of BIO, the Biotechnology Industry Organization. BIO contends in a recent statement that venture investors have become especially risk averse when it comes to providing capital to small, early-stage biotechs and biofuels startups.

“Even in more ‘normal’ financial times, the private equity and capital markets have increasingly failed to fund promising, early stage scientific research beyond the basic research stage and before the revenue-generation stage,” Sabarsky said in his testimony.

The bill that Sabarsky, BIO, and Connect are supporting is H.R. 3738, which was introduced last week, and would amend the Small Business Investment Act of 1958 to provide funding for investments in technology startups in eight targeted industries: energy; environmental; life sciences, information technology; digital media; cleantech; and defense. The measure authorizes $250 million in federal funding for the first fiscal year after enactment, but Roth says sponsors want to provide $3 billion to $5 billion for venture investments over a five-year period.

To get federal funding, a participating investment firm must make all of its investments in small businesses, with at least half in early-stage small businesses in the eight targeted industries.

Connect’s Roth says the Early Stage Investment Act would also reinstate the federal government’s Small Business Investment Company (SBIC) program, which provided federal funding to certain venture funds.

Roth says firms that participated in the SBIC program in the 1990s incurred huge losses when the dot-com crash hit, and the federal government was forced to write off much of its funding. “The Bush Administration got nervous and stopped funding the program in 2004,” Roth says. “So now the Obama Administration is trying to revisit this with lots” of federal stimulus funding.

Roth, who was back in Washington, D.C., last week when the bill was marked up, says he’s “guardedly optimistic” about the measure’s prospects. So far, the bill seems to have bipartisan support, and Roth says there’s no indication that anyone intends to oppose the measure.

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I’ve been predicting for a while that the marketing agencies and website developers that don’t have deep technical capabilities in search engine optimization will be left by the side of the road. Now we’re seeing it come to pass with Adobe’s $1.8 billion buyout of Omniture. [Adobe Systems announced the acquisition on Sept. 15, and U.S. antitrust regulators recently granted an early termination of their review.]

When Adobe’s chief marketing officer, Ann Lewnes, says marketing is the new finance, she’s not talking Orwellian double-speak. She means the digital age is driving the corporate marketing function to become accountable for spending in a far more rigorous and precise way than the “Mad Men” days of estimating “reach and frequency.” And that’s what Adobe’s Omniture acquisition is really all about.

This merger is intended to develop creative content in a holistic way and to measure the value of that content—whether it is video, web pages, mobile content, or social media content. This deal represents a way to “close the loop” in terms of creating digital content and measuring its impact.

Precisely measuring how people use a website is what we do at San Diego-based Covario. We view this deal as a brilliant strategic move for Adobe—one that could change the rules of the game for digital media, from creation to measurement to monetization. It represents changes in technology that will finally and irreversibly mark the end of an era.

This is what we see coming in the new Adobe media world:

—Video developers and agencies will build Adobe Flash creative content with Omniture tracking codes implanted from the beginning. This will enable them to track online views of that content across the web, and perhaps even begin to …Next Page »

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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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An interesting tidbit from the mobile industry: Film cameras are going out of style, while camera phones have become ubiquitous. But even as the popularity of things like mobile data plans and text messaging continues to grow in the U.S., people still have problems doing simple things with photos on their phones.

That’s according to an annual survey of wireless consumers conducted by Ontela, a Seattle-based mobile software startup. The latest results, from a poll of 414 U.S. residents, were released today to coincide with the start of the International CTIA Wireless I.T. & Entertainment expo in San Diego. Nothing earth-shattering here, but the results give some context for understanding certain segments of the mobile market.

The survey found that less than half of respondents (48 percent) this year owned a traditional film camera. That’s down from 61 percent in 2008, and 67 percent in 2007. By contrast, 87 percent of respondents said they owned a mobile phone with a camera—up from 78 percent in 2008, and 70 percent in 2007.

More than half of those surveyed (52 percent) had a text messaging plan, as compared with 28 percent last year. And 27 percent had a mobile data plan, compared to 16 percent last year. Despite the rising rates of mobile expertise, though, 61 percent of respondents said they are unable to upload a photo from their phone to the Web.

If these trends hold for the general population, they represent a big market opportunity for Ontela, which makes mobile software that automatically sends photos and other digital media from your phone to your inbox, computer, or photo-sharing site. The company sells its software to wireless carriers, who in turn bundle and sell the service to subscribers.

Ontela was formed in 2005, and is backed by about $15 million in venture funding from Steamboat Ventures, Oak Investment Partners, Hunt Ventures, Voyager Capital, and Eastven Venture Partners. Back in March, Ontela’s CEO, Dan Shapiro, noted in an Xconomist post that mobile phones are in fact poised to kill off point-and-shoot cameras, both digital and film, for good.

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When California Gov. Gray Davis created the California Institute for Telecommunications and Information Technology in 2000, it was part of a broad state initiative that spawned four new centers for science and innovation with a shared mission “to invent the future.” The specific mission for the institute known as Calit2 (Cal IT²), which is based at UC San Diego and UC Irvine, was to “radically expand the capacities of communications and information infrastructures.”

In the nine years that he has served as Calit2’s director, Larry Smarr has done all that and more. He describes the institute as a “collaboration framework” that enables researchers throughout the University of California to take a multi-disciplinary and systems-based approach to complex problems. As a result, Smarr says Calit2 has engaged hundreds of UC researchers, formed affiliations with over 300 federal agencies, and worked with more than 200 industry partners. “I have to say we’re pleased with the progress we’ve made,” he says. (Smarr talks about the origins of the Internet in Part 1 of my story here.)

But Smarr also is looking at the path forward. He tells me he’s spent the past six months “on a vision quest” to identify the large societal challenges that he anticipates the next decade will bring. And if there is a thread that runs through his vision, it is to harness the power of Calit2’s expanding resources—“to build across the successes that we’ve had”—to tackle four over-arching problems of the next decade. These are Smarr’s big ideas for what he calls the digital transformation of healthcare, energy, the environment, and of our culture itself:

—Healthcare. Smarr sees healthcare moving increasingly to “a prevention and wellness model” that relies on innovations in the emerging field of “wireless health” technologies and the digital transformation of medical care. In our conversation, Smarr compares the way it will work to an automobile maintenance schedule:

“I just bought a new car, a hybrid,” Smarr says. “It has 30 computers in it. It probably has another 60 or 70 sensors, actuators, and memory chips. So my car will easily run …Next Page »

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The Washington Technology Industry Association (WTIA) announced today it is joining forces with TechAmerica, the advocacy organization, to become a unified tech entity in Washington state.

The move broadens WTIA’s membership to include more companies in hardware, electronics, and devices, which complements the trade association’s strengths in software, digital media, and telecom, says Ken Myer, WTIA’s president and chief executive. WTIA is now TechAmerica’s exclusive management and marketing partner in the state.

Under the terms of the partnership, WTIA will support TechAmerica members and programs locally and market joint membership in TechAmerica and WTIA to tech companies across the state. WTIA will also deliver TechAmerica’s business programs and policy (together with WTIA’s usual offerings). In turn, TechAmerica is transferring its Washington state council programs and staff to the WTIA. Current TechAmerica members based in Washington state (about 100) will automatically become members of WTIA.

There have been various name changes involved in these longstanding organizations. TechAmerica was previously called the American Electronics Association, which was founded in 1956. As the organization enrolled more software companies, it became the AeA, while WTIA was previously named Washington Software Association and was founded in 1984.

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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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Former BAE Systems executive Walt Havenstein takes over today as SAIC’s new CEO, but the big question is if the new boss will move the company’s headquarters from San Diego to McLean, VA. Get our roundup of San Diego’s biztech news here.

—San Diego defense contractor SAIC (NYSE: SAI), which has been shifting some key executives and corporate functions to Northern Virginia since 2006, appears poised to announce the relocation of its headquarters from San Diego to McLean, VA. If SAIC moves its HQ, San Diego’s roster of Fortune 500 companies would go from four to three. It only increased to four in August when CareFusion (NYSE: CFN), the Cardinal Health spinoff, established its HQ here. The other two are Qualcomm (NASDAQ: QCOM) and Sempra Energy (NYSE: SRE).

—How unique is your company’s culture? Xconomy asked the CEOs of startups in Seattle, Boston, and San Diego to use one word to describe their company’s corporate culture. We got 21 different answers. San Diego’s CEOs said Innovative, Love, Open, Entrepreneurial, and Speechless. Actually, “speechless” is my word. VMIX CEO Mike Glickenhaus was the only one who said, “I wish I could come up with one but I can’t.”

—At a time when rapid changes in technology are bringing Internet TV closer to reality, DivX CEO Kevin Hell says he is positioning the San Diego-based digital media company to be the friendly and agnostic technology provider. Hell says he wants the DivX format to be the “any-to-any-solution” that plays video content on any device from any manufacturer.

—Corporate buyout executives from Qualcomm and Google voiced cautious optimism about the economic climate for M&A deals involving venture-backed companies during a panel discussion organized last week by the San Diego Venture Group. Qualcomm’s Duane Nelles and Google’s Karim Faris also said it’s becoming more important for startups to secure an early corporate partner with a vested interest in developing the technology.

—San Diego Gas & Electric is leading a coalition of 28 companies, academic institutions, and other organizations to integrate emerging “smart grid” technologies in the regional power grid—and are bidding for $100 million in matching federal stimulus funds to help pay for it.

—Connect, the San Diego non-profit group that promotes technology and entrepreneurship, issued its second-quarter report on San Diego’s innovation economy. The study found 102 new technology companies were created during the three months that ended on June 30. That’s more than the 66 startups during the first three months of the year and better than the 76 companies launched during the same quarter in 2008.

—In its fifth edition of the “Venture Impact” report, the National Venture Capital Association found that venture-backed companies employed more than 12.1 million Americans in 2008. These companies generated $2.9 trillion in revenue in 2008, roughly one-fifth of U.S. gross domestic product. San Diego attracted $1.2 billion in venture investment across biotechnology, software, and information technology, among other areas, according to the NVCA report.

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When I set out to write “Seven Projects to Stretch Your Digital Wings” two weeks ago, I really meant to put all seven projects into one column. But I’m famous around Xconomy for my inability to say anything briefly. If 800 words are good, then 1,600 words are even better—that’s my motto.

The point being that I only got through three projects in that first column—on art, writing, and photography—before I ran out of time and space. Last week, I finished two more, on audio self-publishing and computer animation. In today’s third and last installment, I want to suggest two final projects that will give you a chance to express yourself in digital media that may be a little less familiar: maps and 3-D virtual worlds.

6. Put Yourself on the Map with Platial

Mapmaking hasn’t traditionally been seen as a craft open to amateurs, or even one where self-expression is encouraged. A map, after all, is a public resource, and is supposed to be objective and accurate, right? Well, maybe in theory. In practice, the digital revolution is transforming the meaning of maps just as drastically as it’s changing the way we think about music and news and other forms of communication.

Platial is a website where average users can try a new form of storytelling that combines maps, photos, and writing. Once you’ve signed up for an account, you can create your own themed maps for other Platial visitors to browse. Each map consists of a set of locations that you designate on an underlying Google map; for each location, you can add a title, a written description, photos, and Web links.

One way to use Platial would be as a kind of personal photo-travelogue, uploading pictures from your trips across the country or around the world. But a lot of people seem to employ Platial to document personal interests or obsessions. For example, a user named “Barnaclebarnes” has created a map of famous film locations, like the house in suburban Tujunga, CA, where Steven Spielberg filmed E.T. And I’m working on my own Platial map showing locations around San Francisco used in one specific film, Hitchcock’s Vertigo.

You can designate a map on Platial as closed—meaning it’s for your own personal doodling—or open, meaning anyone can contribute to it. One cool open map is “Where I Was When I Heard Obama Won,” where you can join the more than 15,000 people who have marked the spots where they learned of President Obama’s historic election. For people on the go, the folks at Platial have also built an iPhone app called Nearby that figures out where you are and shows you nearby Platial locations created by other users. The app also lets you create and document new locations directly from your phone.

To me, the intriguing thing about Platial is the way it melds the personal and the public—allowing users to anchor their inner visions and insights by attaching them to maps representing our shared landscape. And Platial is just one example of a worldwide explosion of Web-mediated geographical expression and exploration. The phenomenon goes by fancy names like “neogeography” and “locative media,” but it boils down to …Next Page »

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