More on Vonage Debt Buyback

Televolution founder and CEO David Beckemeyer sent me some comments on my post Is Third Time a Charm for Vonage Debt Buyback? . David points out that there have been contrarian opinions about Vonage right along, despite the general industry cheerleading:

"The funny (sad) thing is you could have said most of these same things (no business) back in 2003. Some of us did say it back then, but the capital markets were blinded at that time. What I said back then:

• Minutes would be commoditized, cost approaches zero - at the time, Vonage was charging $40/mo and "experts" said it was cheap  
  
•  Regulatory Issues would be a nightmare - check
  
•  911 isn't going away (thus changing their cost advantage) - check
  
•  ILECs will retaliate - turns out they haven't had to, Vonage isn't a big enough threat

I recognized right away (unlike Vonage investors) that Vonage had few, if any cost advantages over a regular telco. The only difference is they don't put the wires in the ground - but unlike Cable and ILEC, that's also a disadvantage because they don't own or control the pipe into the home. And Vonage also lacks the buying power of the telcos.

But the most important problem for Vonage has, and continues to be, and I think this is still the biggest elephant in the VoIP room: THE HOME PHONE IS NOT BROKEN. It is not high enough on the radar of problems to make switching to unreliable VoIP worth the trouble, for most people."

And while we're traveling down memory lane, in Nov. 2004 I also suggested that the emperor's financial pants didn't 'pencil out' in "Is Vonage Overvalued?" Turns out I was right. Maybe I can get a job running an investment bank.

Communications technologists should be afraid of a McCain Palin government

It's been hard back into the swing of things, being distracted as I am by the Klondike Annie Oakley and her remake of the 1957 classic movie A Face in the Crowd.*

But as entertaining as the electoral circus is, those of us in Internet communications have serious reason to worry about a McCain Palin administration, given federal government's power over communications technology.

Look at the way these candidates use technology. Barack Obama has conducted a 21st century digital campaign. John McCain, on the other hand, has to have Cindy turn on the computer for him – something the average American two year-old can do.
Fact is, you can't possibly make intelligent policy about a subject you know nothing about. Think about George Bush and the Iraq war.

So let's look ahead to the communications policy of a McCain Palin administration.

Take Open Internet, an issue that means a lot to the VoIP universe. McCain: "Cindy, open the internet." Palin: "I told the government thanks, but no thanks. If we want to open internets we'll do it ourselves."

Or frequency auction policy. McCain will just get a prescription for Enablex. Palin will consult the Book of Revelation: "But in the days of the voice of the seventh angel, when he shall begin to sound, the mystery of God should be finished."

I'm not just being cynical or mean here. We're dealing with fundamental differences in worldview. Barack Obama and Joe Biden live in the modern world – the post-enlightenment world.

McCain, of course, is living in the Nixonian world of people who want to be President for Halloween – and the other 364 days of the year. All worldviews are equal, as long as he's Decider-in-Chief.  The campaign's intellectual magisterium, Sarah Palin subscribes to a pre-enlightenment worldview that has been trying to claw its way back to power ever since Galileo reported that the earth revolves around the sun.

The Inquisition didn't arrest the great astronomer because they thought he was wrong. That was secondary. They arrested him because he attacked the authority of their entire worldview: an intellectual context where facts were discernable through the prism of beliefs. Galileo said that facts were discerned by observing the evidence -- the scientific method.

If you think I'm over the top, you haven't spent time among the Assemblies of God. George Bush is Charles Darwin compared to these dead enders.

These are people who not only take the first chapter of Genesis literally, they also take literally the word "foolishness" in St. Paul's first letter to the Corinthians: "For the wisdom of this world is foolishness with God." (3:19 ). Paul was speaking specifically about the "foolishness" of a messiah who came, not as a king, but as a one of the world's poor and oppressed.

But extreme fundamentalists use this justification for willful ignorance on any and all subjects – biology, climatology, sex education, levees in New Orleans, you name it. Point out that carbon dating shows that fossils are millions of years old and they will tell you that carbon dating is a fraud. It isn’t mere irrationality. It's quite logical. Using their intellectual model, carbon dating has to be false – otherwise the 5,000-year-old-world model is wrong.

Like the Inquisition? You're gonna love the McCain Palin administration.

OK, I had my rant. Back to reality. I'll be at CTIA tomorrow and IT Expo next week. I'm moderating sessions on VoIP security and FMC. Come and say hi. I don't bite in person -- only in writing;)

*A Face in the Crowd tells the story of Lonesome Rhodes (Andy Griffith, pre-Mayberry) and his meteoric rise from a guitar-picking Ozark hustler cooling his heels in a rural jail to a demagogue, TV star and political king-maker. Rhodes' undoing comes when, off-camera, a live mic broadcasts him mocking his audience as "idiots," "morons" and "guinea pigs."

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.