AirCell still expects in-flight cellular service

Despite yesterday’s Federal Communications Commission (FCC)  decision not to lift a ban on cellphone use on airliners, Louisville’s AirCell LLC is still hoping to offer in-flight cellphone service in the not-too-distant future.

In a Wall Street Journal article yesterday, AirCell’s CEO Jack Blumenstein says that U.S. airlines should soon begin offering in-flight Internet service, instant messaging and wireless email. And while government approval of cellphone service is now stalled, “the likelihood of cellphone service on airplanes coming into play is still very high,” he says.

Privately held AirCell, founded in 1991, paid $31.3 million at an FCC auction last June for three megahertz of radio frequency spectrum to be used for in-flight Internet service. Both the FCC and the Federal Aviation Administration (FAA) have approved the company’s Internet service, but not its propsed cellphone service.

The FAA reportedly is concerned that cell phones and other portable electronic devices could interfere with navigational and communications systems, while the FCC worries that airborne cellphone signals could overload networks on the ground. The Journal reports, however, that some 30 countries have now given telecom approval for in-flight calls, although air-safety reviews are still ongoing. Quantas, Emirates and Ryanair are reportedly hoping to begin offering in-flight cellular service before the end of this year.

Meanwhile, AirCell is constructing a network of 80 to 100 ground towers across the U.S. that could eventually provide both voice and data in-flight services. It is reportedly pitching the service to multiple airlines, although no customers have been announced. The company, which currently provides satellite phone service to private jets, holds a U.S. patent on technology to allow in-flight use of both GSM and CDMA cell phones.

AirCell’s North American air-to-ground broadband system is scheduled to debut in early 2008, allowing airline passengers to surf the Internet, use e-mail, and connect to corporate networks using WiFi-equipped laptops, handsets and other devices. It reportedly costs $100,000 to equip each airliner, although the process is relatively simple, and can be done by maintenance workers overnight.

Boeing spent $1 billion several years ago to launch its Connexion in-flight Internet service, but closed the business last year after users balked at paying steep charges of $10 per hour, or $27 per 24-hour period. AirCell’s Blumenstein says his company plans to charge no more than $10 a day to passengers, who also will be able to use their memberships in existing WiFi service programs like T-Mobile, iPass and Boingo.

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CU prof questions private equity profits

During a week when Kohlberg Kravis Roberts & Co. agreed to pay $25.6 billion for Greenwood Village-based First Data Corp. — the second- biggest leveraged buyout ever — some are questioning whether private equity firms are paying their fair share of taxes.

And one of the voices speaking in favor of increased taxation is University of Colorado Law School Associate Professor Victor Fleischer.

An editorial in Monday’s New York Times cites a recent paper by Fleischer presenting several arguments against the current U.S. practice of taxing private equity “performance pay” as capital gains, rather than as ordinary income. The distinction is important because capital gains are taxed at a modest 15% rate, less than half the rate of most other corporate and personal income.

Reuters, Bloomberg and Wall Street’s Dealbreaker blog also have picked up on Fleischer’s blog comments regarding the Blackstone Group’s proposed public stock offering, which is controversially structured to allow it to keep its favorable tax rates.

Private equity certainly looms as a large and tempting target these days. But what bothers most critics is not so much the favorable tax rate on the returns from “at risk” money used to fund the buyout deals. What really draws their ire is the industry’s customary “two and twenty” — a hefty 20% of deal profits and 2% of funds under management — that private equity managers collect for their services. Those fees also are taxed at the favorable 15% capital gains tax rate, rather than as ordinary income.

“This quirk in the tax law allows some of the richest workers in the country to pay tax on their labor income at a low rate,” writes Fleischer.

Private equity investors such as KKR, Blackstone, the Carlyle Group and Texas Pacific Group, having raised hundreds of billions of dollars in cheap capital in recent years, are now pouring it into a flurry of acquisitions at a record-setting pace. There’s much debate about whether deal values are getting too high, and about the ultimate social impacts as hundreds of companies are privatized, broken up, downsized and re-sold, often for huge profits.

Those issues aside, however, one reason for the recent private equity boom is almost certainly the favorable tax treatment these deals, and their architects, receive.

The New York Times editorial calls for Congress to address the issue of private equity’s “preferential” tax rate. And Sen. Charles Grassley (Rep.-Iowa) is reportedly considering just that. British lawmakers also are considering tax changes to collect a bigger share of private equity profits.

Fleischer, writing this week in the Conglomerate business law blog, says he’s “agnostic” about whether the preferential capital gains rate on private equity investment capital is appropriate. “But I certainly agree that allowing that preferential rate for capital gains on returns to human capital (i.e. labor income) is excessive,” he says.

Buckets of cash for Photobucket?

The blogosphere and the mainstream press are abuzz with speculation about the expected sale of Denver-based photo-sharing startup Photobucket Inc., and how much the fast-growing company may be worth.

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Michael Arrington’s TechCrunch blog reports that Photobucket has hired investment bank Lehman Brothers to explore a possible sale of the company, which he says could be worth $400 million or more. Pretty amazing for a company with less than $10 million in sales last year.

Arrington hasn’t disclosed the source of his revenue data and projections for the company, which leads some to suspect the bankers may have leaked the data to help prime the market for a sale. His data, which includes no profit/loss information, indicates that Photobucket’s sales climbed from $4.4 million in 2005 to $9.3 million in 2006, and should reach $32 million this year. About 74% of Q4 2006 sales reportedly came from advertising.

Commentators at ValleyWag, HipMojo and the Daily Deal’s blog doubt that Photobucket can sell for as much as $400 million. Blogger Simon Brocklehurst, on the other hand, sees potential for an even higher price. “If pushed into it by a bidding war, I’d say that someone might be prepared to pay north of $600M – maybe even up to a $1B,” he writes.

So exactly who and what is Photobucket?

The company — which has its technology, development and operations functions in Denver and a business and sales office in Palo Alto, Calif. — basically allows people to store a limited number of photos and videos online for free, or larger amounts for $25 yearly. The stored images can then be linked to from anywhere on the Internet, and are especially popular with users of social media websites such as MySpace and Facebook.

Photobucket’s website currently reports 39 million registered users (it’s reportedly aiming for 60 million by year-end), 17.6 million unique site visitors per month and 7 million images uploaded daily.

In an effusive article last week, Fortune senior editor David Kirkpatrick called Photobucket “the most important site on the Internet that hardly anybody understands.” Critics worry the company could be hurt if MySpace and Facebook were to stop accepting its links. But Kirkpatrick sees that as an improbable prospect, which would likely provoke a “user revolt.”

Co-founders Alex Welch and Darren Crystal were software engineers at Denver’s Level 3 Communications, Inc. before starting Photobucket in 2003. CEO Welch, 30, earned a business administration degree from Colorado State University. Chief technical officer Crystal studied electrical engineering at the University of Texas and was a network engineer for computer maker Dell Inc. before joining Level 3.

The two used savings, credit cards and money borrowed from Welch’s parents to start the company in Crystal’s basement. Welch writes in a recent article for the eventuring website of the Ewing Marion Kauffman Foundation that they got early financing from a neighbor’s friend at Guaranty Bank in Longmont, after venture capitalists turned them down. Later venture funding eventually came from New York’s Insight Venture Partners and MenloPark, Calif.-based Trinity Ventures

Red Herring magazine reported recently that Welch has a previous connection with photography. He used to work for a Colorado rafting company, taking pictures as boats floated by. Today his company operates the world’s largest photo-sharing site, which as of February employed about 60 people, including 45 in downtown Denver.

Secure64 Software attracts attention

Greenwood Village-based Secure64 Software Corp. continues to attract impressive press coverage for its Internet security software.

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Last week the company was featured in a Wall Street Journal article describing how the latest computer processor chips from Intel and AMD offer new ways to protect servers from computer viruses and other attacks. The article quotes Colorado State University computer-science professor Daniel Massey, who has been running the Secure64 software for more than a year, as saying: “nobody can get into this box.”

Another article this week in SEO/SEM Journal examines, but does not confirm, the company’s claim to offer the world’s only “genuinely secure” operating system. Other recent coverage of the company has appeared in Network World, c/net and The Register.

Secure64 claims that its $9,995 Secure64 DNS software — the initial version of which runs only on Itanium-based Hewlett-Packard Integrity rx2660 computers — can withstand denial-of-service attacks while still responding to more than 100,000 legitimate queries per second.

The software, which has several patents pending, protects domain name system (DNS) Internet directories while allowing users to manage email, web access and e-commerce services.

It’s no accident that Secure64’s first products target HP’s Itanium-based servers. The company’s chief technology officer, William Worley, was an HP Fellow and chief scientist and one of the key architects of Itanium technology, which was developed in Fort Collins.

The company, which started in 2002 and now has 23 employees, has raised $7.5 million in angel funding and reportedly plans to seek $5 million to $10 million in additional funds soon.

Springs group seeks more biotech buzz

When it comes to biotech, Colorado Springs tends to be overshadowed by the bigger life-sciences industry clusters up the road in Denver and Boulder. But the Springs’ biotech industry appears to be building momentum.

This week a new chapter of the Colorado Bioscience Association (CBSA) launched in Colorado Springs, with support from the University of Colorado at Colorado Springs (UCCS) and the Colorado Springs Economic Development Corp. (EDC).

The group, which met for the first time Wednesday, aims to provide support to existing bioscience companies, help recruit new ones and work with UCCS to commercialize new technologies.

“With over 25 bioscience companies already here and more in the pipeline, we will continue to invest in this industry,” says EDC CEO Mike Kazmierski. “We see it as a vital part of our future.”

Colorado Springs bioscience companies include, among others: Aspire Biotech, HemoGenix, Nextgen Pharmatechnologies, Analytic Development Corp., and Pyxant Labs Inc.

For more CBSA information, contact Executive Director Denise Brown, Tel: 303-592-4073, or http://www.cobioscience.com.

Revolutionary running shoes?

Inside Triathlon magazine has an interesting interview this week with Danny Abshire, co-founder and owner of Boulder’s Newton Running, which is trotting out a new line of running shoes at this weekend’s Ford Ironman 70.3 race in Oceanside, California.newton3.jpg

The company claims that its shoes — named for Sir Isaac Newton and his laws of physics — return an average of 58% of a runner’s energy to their stride compared with typical running shoes’ 42% energy return. In development for a decade, they use a so-called “active membrane” that stretches on impact and then returns to its original shape, pushing “actuator lugs” in the soles outward and returning energy into forward propulsion.

Most runners, however, will have to adjust their technique from landing heels first, to landing on their forefoot, which the company contends is how we all naturally run when barefoot.

Newton’s running team of elite triathletes claims to be running faster and covering more ground since switching to the new shoes.

Four models are available initially, in limited sizes and quantites, through Newton’s website, www.newtonrunning.com, and at Abshire’s Active Imprints shop in Boulder. Prices range from $155 to $175 a pair.

AeA issues U.S. tech warning

Today, for the second time in two years, the American Electronics Association (AeA) issued a strident call for U.S. education reform, greater investment in basic science and technology research and a more lenient visa system to encourage the world’s best and brightest engineers and entrepreneurs to come here to pursue their careers.

In a report entitled “We are still losing the competitive advantage” (see full pdf copy here, or executive summary here), the Santa Clara, Calif-based organzation noted that although awareness of America’s lagging tech competitiveness appears to have increased, very little actual progress has been made.

Congress introduced numerous bills during the last session calling for visa reform, increased R&D investment and improved science, technology, engineering, and math education. But as the report notes: “Not one of these bills was passed or ever seriously debated.”

In a letter accompanying the report, AeA CEO William Archey and Chairman Timothy Guertin describe the United States as “the proverbial frog in the pot of water, oblivious to the slowly rising temperature of a world catching up to us. Today, the heat is still rising and we are still in the pot. There is hope that we are finally feeling the heat and are poised to do something about it. Hope, but not certainty.”

Numerous signs of declining U.S. competitiveness are evident right here in the Mile-High state.

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