Evan Schuman's StorefrontBacktalk

For years, the retail and supply-chain worlds have spoken of item-level tagging as the holy grail of inventory control, but added it can’t be done until tag prices hit 5 cents. With recent pricecuts delivering 12.9-cent chips, is that Holy Grail imminent?

When leading RFID chip manufacturer Alien Technology announced this week that it was cutting the price of its 96-bit Gen 1 RFID labels some 44 percent to 12.9 cents apiece, it was more than a typical price cut. It pushed the industry tantalizingly close to the much-ballyhooed 5-cent RFID tag.

Today, RFID chips are overwhelmingly used in warehouse and supply chain applications, tracking crates and pallets.

But the ability to track every single product distributed throughout store shelves?for inventory, marketing and security purposes?requires that the chips have to cost just pennies each, or else they could add too much cost to lower-priced goods.

Alien officials said they have accomplished the price cuts because of their proprietary manufacturing techniques (called Fluidic Self-Assembly or FSA) and demand volume for Gen 1 chips.

RFID analysts said both of those points are most likely true but added that the imminent distribution of more powerful Gen 2 chips is a more likely reason for the sharp price cuts right now.

“Gen 2 is about to hit the market so you may get stuck with a lot of inventory,” said Mike Liard, the RFID practice director at Venture Development Corp. “But it’s a significant (price) reduction for sure. You can’t deny that.”

Simon Yates, a senior RFID analyst with Forrester Research, agreed. “The catch to this whole story is that they have gotten the price down to 13 cents on first generation tags,” he said. “It’s like they have heavily discounted their existing inventory, which most companies aren’t going to be investing in.”

The difference between Gen 1 and Gen 2 RFID implementations is that Gen 2 delivers a greater range (or, more precisely, greater accuracy at a long range) and is better at resisting interference.

That interference resistance is important when a retailer or consumer goods manufacturer has a warehouse with tens of thousands of these tags trying to communicate at the same time.

Those snazzier capabilities come at a price, though. Yates sees the initial Gen 2 tags selling for $1.25 each. And there’s the rub for whether the Alien move is mostly about inventory reduction or not.

Alien executives argue?and most analysts agree?that Gen 1 RFID chips are good enough for many applications today and that few retailers will be able to justify the higher cost.

Analysts generally agree with Alien’s projections that Gen 1 tags are likely to be dominant through the end of next year, with Gen 2 volumes picking up sharply in 2007.

Alien’s execs say that demand will be strong because the Gen 1 chips are not only less expensive, but they perform basic RFID functions quite effectively.

“Gen 1 has been around. We’ve shipped more than 50 million units. That’s the tag that is in use,” said Keith McDonald, Alien’s senior VP for sales/marketing.

McDonald told a story of a large customer of his who simultaneously tested Alien’s tags against two manufacturers of other types of tags. The customer reported that the Alien tag performed the worst of the three, but that he was buying them anyway, McDonald said. When he asked why, he said the customer replied, “It worked well enough. The top tag was 50 cents and your tag was 30 cents. It does the job at the lowest price we can pay.”

McDonald added: “So price on the tag has become a real issue with users.”

Yates agrees with the premise but projects it somewhat differently. He sees retailers and consumer goods manufacturers as having almost as many RFID tags today as they need for Gen 1-level work. They may not need to purchase many more Gen 1 tags and will instead save their dollars to purchase Gen 2 chips to handle more sophisticated projects.

But what will happen in 2007? McDonald predicts that as volumes for Gen 2 tags soar, that volume will bring those prices way down, and then the playing fields would be level.

Alien plans to start sampling Gen 2 tags in October, start shipping by the end of November and be selling “millions of units” by next year’s first quarter, McDonald said. In the meantime, the price reduction should help keep Gen 1 volumes high.

Another analyst, IHL Consulting Group President Greg Buzek, said his concerns are less about longevity and more about quality.

“The cost savings is certainly welcome news, but there is always a ratio between cost and quality. If they have been able to maintain quality and lower the cost, then certainly this is a breakthrough and one that would help speed adoption of the technology,” he said. “If quality has been sacrificed, then it will not help the industry. We will only know the answers once the retailers start testing it. And the price alone will help assist in the testing.”

But even higher volumes of both tags will not likely get pricing down to the targeted 5-cent level. Some have suggested that the ultimate answer might be a deep-pocketed investor who would subsidize the price to artificially lower it to bring in item-level tag dollars.

Whether such a strategy would work depends on how solid the enthusiasm is for true item-level tagging. And Forrester’s Yates expressed serious doubts about whether it’s going to happen.

“You don’t need to know where each individual can of Coke goes,” he said.

Alien CEO Stav Prodromou attributes much of the cost reduction for Gen 1 chips to his company’s manufacturing techniques, which he says allows them to create 20,000 chips a minute.

But he stresses that the chip is just a small component of the tag and a tiny part of the final price. “It’s the assembly and the testing and the film and the antennae and the conversion into a label,” Prodromou said. “All of that together is much more than the cost of the chip, the silicon.”

But with the increasing need for more minitiaturization?targeting a 50-micron chip, about one-twentieth of a millimeter?manufacturing procedures will make all the difference.

Printing an antenna directly onto the tag is one method he is using, Prodromou said. “It’s the difference between something being applied to the package and something that is an inherent part of the package.”