On February 28, microdisplay expert Karl Guttag announced on his blog that he had identified a Himax (NASDAQ:HIMX) Liquid Crystal on Silicon (LCOS) device in an early Google Glass prototype. Subsequent to that analysis, I uncovered and revealed evidence that HIMX will be the key supplier to Google (NASDAQ:GOOG) when its high-tech glasses are released, later this year.
Since that time, Mr. Guttag has been inundated with requests for his technical views on Kopin (NASDAQ:KOPN). Presumably, investors are curious as to whether HIMX or KOPN will win follow-on deals with Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and others who enter the market to defend themselves against Google pre-emptive strike on this space.
Having worked in the area of microdisplays since 1998, Mr. Guttag is uniquely qualified to provide insight on this topic. He is the former CTO of two microdisplay startups (Silicon Display Inc. and Syndiant Inc.) and a former Texas Instruments Fellow. A device he worked on at Syndiant was being seriously considered for Kopin's Golden-i® with a prototype being shown in Syndiant's Suite at CES in 2011. Further, the first LCOS silicon he helped design (in 1998) was utilized by CRL Opto which became Forth Dimension Displays and was acquired by Kopin in January 2011.
I recently had the pleasure of working with Mr. Guttag on the strengths and weaknesses of KOPN's offerings. His most recent thoughts are as follows:
As an engineer with an interest in product strategy, I'm bothered when what a company is saying doesn't make technical and/or business sense. I had several of these "that doesn't make sense moments" in reading KOPN's most recent earnings transcript. The quotes below are taken directly from the Seeking Alpha transcript and were made by KOPN CEO John C.C. Fan.
"Our business model now has moved from commodity business to a business, where higher gross margin potential and growth potential, which mirrors technology companies such as Qualcomm. The future is car-based [sic, AR-based?], hands-free, voice-activated mobile computing systems. And Kopin is now focused and positioned to be a leader in providing critical components, and licensing reference systems through partners who develop branded, wearable computing products."
I read this as KOPN's intent to move away from CyberDisplay®, a commodity business (low resolution near eye display devices) and its III-V component business (recently sold) to focus on system devices, in particular their Golden-i head mounted AR system. Kopin is trying to turn the corner from being a component company to being a system company that integrates those same components. While this may seem logical, historically many companies have tried (including my former employer Texas Instruments on multiple occasions) but very few have succeeded.
Kopin's business is now primarily based around its aging "commodity" transmissive color filter CyberDisplays which has pixels that are from 5 to more than 8 times bigger than the pixels of reflective field sequential color (NYSE:FSC) LCOS today available from multiple companies. The CyberDisplay pixel by its very nature as it scales down blocks significantly more light and colors bleed together losing color saturation. This puts the CyberDisplay at a severe disadvantage in ultra sleek and/or high resolution applications.
While Kopin bought FDD in 2011 which has a form of FSC LCOS, but FDD's technology has been aimed at low volume, high end, niche applications. FDD's silicon design is far behind the competitor's FSC LCOS devices which have small pixels, small displays, few signal wires to the display, and very small drive electronics. There are serious design and manufacturing challenges make FDD's current products competitive.
So while Mr. Fan mentioned Google Glass (or "Glass") several times to make the connection between Kopin's near-eye products, and all the publicity surrounding Google Glass, Google Glass is not using Kopin's display devices, but rather a competitor's field sequential LCOS technology (most likely Himax). Furthermore, Google (and others) can choose from better suited devices for their next Glass design as well which will likely have higher resolution and requiring smaller pixels to stay small. Thus, the use of KOPN's CyberDisplay or FDD's devices in future versions of Glass or any similar product seems unlikely.
I would agree with Mr. Fan that Golden-i has developed a useful monocular system with advanced voice recognition and motion/orientation detection. But still, Golden-i is rather large and requires over the head support that while acceptable for industrial use for which it seems to be intended, it is not a sleek consumer oriented device like Google Glass at a consumer price point.
I see Kopin with Golden-i falling into the same trap that has beset other companies trying to become system companies based off their existing component's business, namely that it puts constraints on what components the system business can use. Meanwhile, their competitors are free to pick and choose from the best of all available component developments. If Golden-i continues using Kopin's displays it could be locked into larger and lower-resolution designs.
Additionally, if the Golden-i group is allowed to change to a non-Kopin display to compete, it ends up being an embarrassment to the display group. At best, the extra time it takes to justify and prove the "need to change" puts the system group at a disadvantage to its competitors. It also puts the Kopin in competition with its customers causing their current customers to seek alternatives to the CyberDisplay. What starts as "synergy" by using internal components usually ends with internal conflicts that are a nightmare to manage.
According to Mr. Fan, "We have been anticipating the wearable computing wave for 25 years" leads to questions like, "then why haven't you made a big business out of it? Much of those 25 years is sunk costs in old technology. Additionally, I believe is that there are still major challenges for wearable computing which is why it has remained a niche market for those 25 years. The next logical question is "if the wearable computer market does take off now, why won't companies with deeper pockets such as Google simply take the market?"
Mr. Fan's statement, "But in order to enter the wearable computing market, the company's 6 core competencies, namely: software, speech enhancements, display, ASIC, optics, and ergonomics" at best abuses the concept of "core competency" which would suggest unique leadership in all these areas. They may have some experience in these areas, but other companies, including Google are able to make wearable devices with important attributes better than Kopin. I see Kopin's core competency is in making relatively low resolution transmissive color filter displays for near eye (only) applications. At issue going forward for Kopin in head mounted AR is that their technology is being superseded by other companies with displays that are both smaller and higher resolution.
In a follow-on article, Mr. Guttag will discuss the strategic directions he believes would make the most sense for Kopin.
Disclosure: I am long HIMX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.