Mother of Invention: 8x8's Not-So-Secret Recipe for Pure-Play VoIP Success

Last Wednesday I googled "VoIP news" to check the buzz on VoIP pure-play 8x8's announcement that morning announcement of its new hosted small office "key" system and plug-and-play IP phones. The news was way, way down on the list – right behind Worldwide VoIP phone training launched by snom.

8x8 is VoIP's Rodney Dangerfield. It just gets no respect. Consider how it stacks up against its far better-known pure-play VoIP competitor, Vonage:

In the last five years, 8x8 revenues grew 460.3 percent while Vonage's grew 0.0 percent. 8x8 made $700,000 during the first quarter of this year. Vonage lost $8.9 million and is shopping for a $215 million refinancing deal to stay out of bankruptcy. 8x8 holds 73 patents. Vonage just got its first. Despite this, Vonage's stock price is $1.58 while 8x8's is $1.03.

Illustrating, I guess, the relationship of stock price to any useful reality.

The fact is that the longtime Silicon Valley company – they've occupied the same Santa Clara address for two decades – enjoys the distinction of being the only profitable pure-play VoIP company. And it's not luck or accident.

They do it by quickly innovating in the face of market and technology change; spending money on inventing and developing things – about 10 percent of revenue, according to 8x8 Director of Corporate Communications Joan Citelli -- instead of, say, gargantuan media buys.

"Necessity is the mother of invention," 8x8 Vice President of Marketing & Sales Huw Rees replies wryly when asked about the company's strategy.

The name 8x8 refers to the company's birth as a maker of math co-processors for 286 and 386 microprocessors back when dinosaurs roamed the earth, in the 1980s.

"By the 486, Intel integrated the math processor and sales dried up literally overnight," says Rees. "So what do you do then? The plan was to go into communications and develop chipsets and software used in video conferencing. In the 1990s, we had a 90 percent market share. The problem was that 90 percent of a very small market was still a very small business.

"So the idea was to sell [that technology, also used in AT&T's Picturephone] as the ViaTV videophone," he continues. "The ViaTV was quite a success – we sold about 100,000. The problem was that we had to keep discounting to keep them moving off the shelves. And the writing was on the wall that the world was going IP, so an analog videophone wasn't going to be a long term product."

It also seemed clear that video wasn't going to be the killer app for IP communications. "Voice is still the application that people can't do without," adds Rees. With its video conferencing expertise, 8x8 was already halfway there. "Take the video out and you're left with voice," Rees adds.

The company acquired some service-side businesses so it could build an end-to-end system and started selling the technology platform to service providers in the late 1990s.

But 2001 was déjà vu all over again. "The [telecom] market collapsed and we were left with technology and no customers to sell to," Rees says.

Tacking away from the platform approach, 8x8 decided to build a service for end-users, launching one of the first consumer VoIP services, Packet8, in 2002. "Ever since we made that decision our business has been growing," reports Rees.

But plenty of other companies saw potential in the nascent VoIP business, too. Vonage, Skype and others launched pure-play VoIP services in 2003, and by 2004 cable and phone companies were crashing the party.

But if the residential VoIP market was getting crowded, business VoIP was virgin territory. Seeing a problem ready for a solution, in 2004 the company launched the Packet8 Virtual Office hosted IP-PBX, which now serves 12,000 customers and is adding about 1,000 new customers each quarter.

With a solidly growing base of less price-sensitive customers, 8x8 could skip the scramble for residential VoIP subscribers at any cost to concentrate on higher-margin services and capabilities. By 2006, the company had decided to focus on business VoIP, rather than promoting residential business.

While Virtual Office targets the small-to-midsize business, this year 8x8 extended its reach at both ends of their existing market.

In June the company built on the hosted services model with its new Virtual Trunking service, delivering IP phone service -- the dial tone -- through the existing broadband connection instead of a dedicated physical line like a SIP trunk or T1.

"We'd frequently get inquiries and when we explained that Virtual Office replaced the PBX, a certain percentage of people would say: 'But we just bought a PBX,'" explains Rees. “We were missing that chunk of the market."

Because this requires no infrastructure capital investment, 8x8 can sell Virtual Trunking anyplace there's broadband service. And customers can take advantage of VoIP without wholesale change or new infrastructure, continuing to use existing equipment and phone systems – even TDM systems.

Not only does this expand 8x8's market, it also opens the door into larger companies and bigger sales. So far the market response has been better than expected, according to Rees, and about half a dozen customers are up and running.

"The interesting thing is that size of the businesses [asking for quotes] is larger than expected. Companies with many T1s are asking for quotes. There's definitely interest in the market for these services."

The Packet8 Hosted Key System – the only such offering currently on the market, according to Rees -- extends the company's market in the other direction, replacing traditional small office systems with multi-keyed phones (hence the name) that allow several people to share a single line.

"Many customers have asked for this," he says. "Many small businesses have key systems, not PBXs. From an end-user perspective, they don't have to change their behavior.

"We now have a sufficient portfolio of solutions [that] we can literally service any size business," continues Rees. "Multi-site businesses can easily standardize phone service with a single provider – across the country and across the world."

Someday we may all be sorry we didn't buy 8x8 when it was $1.03.

* * * * * * * * * * * * * * *

Communications Direct has an excellent discussion of the Packet8 hosted key system, 8x8 Finds The 'Key' To VoIP, and the technological challenges of building this seemingly simple solution. "It's actually incredibly difficult to implement using SIP," Rees told me.