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Andy Rubin Thinks He's Created The Next Must-Have Tech Gadget But Will Anyone Buy It?
By Julie Sloane

(FORTUNE Small Business) – Andy Rubin's future is riding on a six-ounce piece of plastic. Sitting between us on a table in his Palo Alto office, it, like Rubin, seems too modest to be a "piece of the future," as one of his staffers describes it. Outside, 79 employees sit in open workspaces, each typing away with surgical focus, working to make this gizmo the next must-have accessory in the always-on lifestyle of e-mail, cellphones, and the and the Internet. Rubin has nailed down $48 million in venture funding and expects his company to be profitable within the next six months. While we chat, someone's dog runs by. Is this a scene from 1997? It would seem so but for one thing: Andy Rubin has a plan that may let him pull off the impossible.

Rubin, 39, is the CEO of Danger, an ambitious startup joining market giants like Nokia, Handspring, and even Microsoft, which are all trying to answer the burning questions about mobile devices: Why do people carry around both a cellphone and a PDA? And why, after years of wishful tinkering, is there no simple way to get Internet access on the go? Americans love their phones, but when it comes to sending e-mail or browsing the Web on them, few are willing to pay. The dream of a capable all-in-one convergence device for the masses is nothing new, but these days talk of "the next big thing" raises more eyebrows than hopes.

Danger's effort to change all that is the Hiptop, a style-conscious handheld for the 18- to 34-year-old set, offering e-mail, instant messaging, full Web browsing, address book and calendar, electronic games, and a digital camera attachment, in addition to being a mobile phone. The size and shape of a gently used bar of soap (a designer got the idea in the shower), the Hiptop has a gray-scale screen that swivels with the flick of a finger to reveal a BlackBerry-like thumb keyboard.

On the face of it, Rubin and Danger don't have a chance against their heavy competition. But Danger has one advantage: a blank slate. It doesn't have the baggage of preconceived notions that a Nokia or Handspring might have when trying to figure out what consumers want from a wireless handheld. For the past two years Rubin has been turning conventional wireless wisdom on its head with the way he's had his team design the Hiptop and support it technologically, and with the revenue model he's created. On paper, it largely adds up. With the product's July launch, the market will now decide whether the company's name--derived from the Lost in Space robot's cry, "Danger, Will Robinson!"--fully inherits its ironic intentions or serves as a warning to any entrepreneur who refuses to accept conventional wisdom.

Danger was born out of gradual dissatisfaction. Together, the company's co-founders, Rubin, Joe Britt, and Matt Hershenson, had decades of experience with consumer technology, working in the '80s and '90s at Apple, WebTV, General Magic, and 3DO when they were hot Silicon Valley companies. As inveterate techies, they had it in their blood to buy and evaluate the latest gear. (Rubin, says Britt, buys one of everything.) By December 1999, Rubin and Britt were ready to leave WebTV and were lamenting the lack of a good inexpensive handheld for consumers. Hershenson happened to be at WebTV's offices visiting his friend Britt and joined the conversation. These guys are tinkerers at heart--Rubin builds robots as a hobby and Britt rigged his home lighting to be computer-controlled--so dissatisfaction quickly bred motivation to do something about it.

By January 2000, two months before the tech bubble peaked, the three had raised $1.7 million from friends and family, mostly on their reputations alone, and in succession quit their jobs. They used the money to develop a prototype, and the device went through many iterations. At first it wasn't wireless; then it could only receive but not send wireless data. When it became clear that higher-speed networks, known as 2.5G, would indeed come to pass, the Hiptop was born, albeit one the size of a paperback book.

Rubin shopped the "paperback" around to a dozen VC firms, ultimately impressing Greg Galanos, an executive managing director with Mobius, then known as Softbank Venture Partners. In October 2000 he invested $9 million in Danger, based on the technology and the chemistry, excitement, and experience of the founders. "Danger's swinging for the fences," says Galanos, "but Andy, Joe, and Matt have all been in different startups. They have the scars on their backs from the wrong way to do things."

Those startup experiences, working as engineers on some of Silicon Valley's most ambitious--and failed--projects of the 1990s, helped Rubin and his team refine their vision for the Hiptop. While at General Magic in 1993, Rubin was the engineering manager for the Motorola Envoy, the first wireless PDA, a $1,200 item. Rubin keeps one in his office (purchased for $200 on eBay) both for nostalgia's sake and as a reminder of technology overreaching. In '93 there were no PDAs and few e-mail users (e-mail was a key Envoy feature). Educating the market was too big a chore. "Now there's a generation that has grown up on instant messaging and the Internet, and know they need it," says Rubin.

The other particularly formative experience came from Rubin and Britt's stint at WebTV, 1996's hot startup that let users access the Internet through their TV sets. WebTV initially won praise because it was the first product that made getting on the Internet as simple as using a blender. "WebTV was a good appliance," Rubin says, "but it wasn't easily expandable. When users wanted instant messaging, it took us six months to come up with it." Those delays sunk WebTV. With the Hiptop, Rubin realized he could preserve the simplicity and correct the mistake. Instead of being just a stand-alone product, the Hiptop would have its intelligence residing on a server so the device could be updated regularly with new features without ever changing the hardware.

This means the Hiptop itself is, in the words of CTO Britt, "relatively dumb." It has just enough memory to store information like your address book and recent e-mails, with the most complicated parts of the applications running on the server. This approach has the added benefit of keeping the price down; the Hiptop will cost less than $200, which lets Rubin target consumers. Roughly comparable products (see box) cost at least double what the Hiptop does because of hardware needed to run apps locally.

Of course, server technology doesn't mean squat to an 18-year-old. Rubin knows young adults want their gear to be "really, really cool," a phrase you hear endlessly at Danger. He recruited veterans of the videogame industry, who know a bit about creating addictive products, to help design the Hiptop. That shines through in customizable features such as the translucent scrolling wheel that glows in a rainbow of colors and the sophisticated musical ring tones. The form factor is also new for this type of product, neither Palmlike nor phonelike. As Hershenson, the co-founder who leads the hardware team, says, "If you want to do a new thing, you want a new device."

Device in hand, Rubin sought deals with wireless carriers. His pitch--which is also his business model--flies in the face of how the wireless industry makes money. Instead of netting cash from unit sales, as device makers like Motorola and Palm do, Rubin told would-be partners that he would sell them the Hiptop at cost. Then, another surprise: Danger's not going to manufacture the Hiptop. Its carriers are. Rubin also expects them to market and sell the Hiptops and provide customer service and billing. They even have to share the spoils. For its part, Danger plans to take a cut of the carriers' monthly service fees and charges for software extras (built by third-party developers) in exchange for running the server-based infrastructure. The plan gives Danger a steady stream of revenue and aligns its partners' interests with its own. It also raises the question, Why would a carrier go to all this trouble for an unproven device?

Rubin responded to this inevitable query like a poker player revealing his ace in the hole. Pulling up a PowerPoint slide titled "Give," he detailed what Danger offers carriers in a way that shows he's not just selling soap but creating a whole new way for them to clean up. First, they can offer the Hiptop to consumers with little or no subsidy. It's already affordable, so carriers can make money from day one instead of hoping to cash in eventually through service fees as they do with many phones today. Danger's technology also lets them offer something new: all-you-can-eat data for a low, flat fee. Rubin anticipates that they will offer both voice and data for $25 to $35 a month.

Most important, Danger's potential variety of applications could enable something that's been very difficult for the carriers themselves to achieve: differentiation. By partnering with developers that create everything from Powerpuff Girls graphics to spreadsheet applications, Danger can offer each carrier a menu of varied software options. "Motorola makes the same phone for everyone," says Rubin. "The Hiptop can be sold to VoiceStream and Sprint with totally different functionality."

Rubin's audacious pitch has so far sold 400,000 Hiptops to three carriers. He won't reveal names, but Danger's April FCC filing indicates they will debut in July with VoiceStream in the U.S. (One of Danger's investors is the venture arm of Deutsche Telekom, VoiceStream's sister company). Danger also has deals with a carrier in Canada and one in Britain.

Relying so heavily on carriers could backfire, though, as Rubin is entrusting his baby to large corporations that have a lot less to lose than Danger if this doesn't work and that also aren't renowned for wooing the youth market. Amy Francetic, a consumer wireless analyst for Cheskin, says carriers are perennially poor at marketing to consumers: "I saw AT&T's 'What is mlife?' commercials on the Super Bowl and didn't know what the heck that was."

Rubin concedes Francetic's point and counters, "We've committed partners to a certain budget to market the product, but we have a flash powder that we can throw in the fire." That spark includes trying to generate grassroots buzz at summer music festivals and fall back-to-campus events. The company is also trying to educate carriers about how best to tailor their advertising and promotions.

The only trifling issue remaining for Rubin and Danger, then, is to sell consumers a lot of Hiptops. Danger has done a curious job of getting on the public's radar thus far. It's won early acclaim for the Hiptop, taking a Best of Show award at last January's Consumer Electronics Show, for example. But it has also missed two launch dates, blaming the holdup on the slow roll-out of the 2.5G networks and a desire to announce multiple partners at once. "When you say a product is coming out soon, most people think three to six months," says Giga Information Group research director Ken Smiley. "Go beyond that, and people think, 'Whatever.' "

The truth is that no one can even pretend to know what will happen in this crowded and fickle market. The party line among analysts and device makers has been "Show me the product." Palm co-founder and Handspring CEO Donna Dubinsky echoes the sentiment of all when she says, "If they can deliver everything at the price they say, at the volumes they say, then they might have a really interesting thing on their hands. Those are a lot of ifs."

Not even Rubin, with all his best-laid plans, can be cocky about success. "Worst-case scenario," he jokes to his co-founders, "if Danger went away, [the Hiptop] would still be an awesome phone."