Friday, May 27, 2005

More VON Europe notes/thoughts - Skype, Telio, peer to peer and James Enck

Finally - chance to write uninterrupted on the flight back home...

There�s no doubt that Niklas Zennstrom has got star power in the VoIP universe. From what I could tell, this was the first presentation of the show that had an overflow room to handle those who couldn�t get a seat in the room he was speaking in. It�s possible that Jeff�s keynote had overflow, but I think this was the most anticipated presentation of the show. He�s certainly the local hero, and it was great to see him in this setting.

For anyone who saw him speak at VON Canada (and I can probably count them on one hand among those here), there wasn�t much new in his message, with maybe a few numbers being updated on paid subscribers. At its core, Skype�s success is rooted in simplicity - it�s just so easy to use, at least for consumers. In terms of the trends behind this, Niklas points to the growing penetration of broadband as the foundation. Building on this, broadband allows for packetized voice to travel over the Net, and increasingly, telephony is becoming a software-based Internet application. In this environment, the economics of voice quickly fall to zero, and so far, Skype�s customer acquisition costs have been practically nil, and they�ve been able to scale with demand at little added cost.

The story still holds together well, though, and Skype would appear to be the first truly disruptive player in IP that has a global reach. I think that�s pretty significant, and I can�t help but reiterate one of Niklas�s key points � they�ve done it spending ZERO dollars on marketing. Pretty incredible if you ask me. That said, they actually had some nice goodies in the press room with earbuds and a SkypeOut trial package � those disappeared faster than anything on the table. So they�ve haven�t quite spent zero on marketing � maybe a few thousand dollars.

On the marketing front, though, there was an interesting item that�s old news by now for anyone following the telecom press. They�ve announced an affiliate program, which really confirms the power of the Net as a viral marketing tool. Basically, anyone getting others to sign up for premium (paid) services from Skype gets a modest commission.

This sounds very much like a page from Google, and I think that�s the best model for Skype to follow. The community is all Internet based, and users see the value of using Skype to communicate within this community. Of course, that�s the rub, as Skype is still at heart a closed system, which is contrary to the open nature of software and especially the IP community these days.

Along those lines, Niklas cited the Google maxim of �do no evil� to keep its credibility with customers. He certainly prides Skype in its honesty with users � it�s just a great voice application � there�s no marketing hype, no advertising, no spam, no viruses. These are solid virtues, no doubt, but I suspect they will be harder to uphold as Skype evolves its business model around revenues rather than free downloads.

And the �do no evil� mantra may ring hollow once Skype starts getting to be Google-sized, and they still don�t open up. It�s not enough to say they use SIP for their paid services � that�s a given. As the Open Source trend builds momentum, there�s a danger that Skype could start to look more like Microsoft in terms of having the dominant OS for Internet voice.

Finally, I couldn�t help but notice the URL on Niklas�s final slide. I haven�t seen any one else pick up on this, but it was a link to their jobs page. Interesting.

Subtle, no? An invitation to join the Force, or maybe the Dark Side? Maybe it�s time for the Open Source community to find its way into Skype and lead the charge from the inside out. Don�t worry, Niklas � I�m not advocating a palace coup! Skype is the poster child for VoIP, and I think we all want to see its success continue and really challenge the status quo. They�re in a better position than anyone to do that, even Vonage, although that�s another topic.

While we�re talking disruption and transformational forces, I�d like to note three companies I saw this week who, in my books, fall into that bucket�.

Popular Telephony � I briefly mentioned them in an early VON Europe posting. Peer to peer is just as radical as VoIP, and I believe it is one of the big trends shaping IP, right up there with WiFi/WiMax, and maybe even IMS. This is especially true for serverless P2P, which allows for theoretically unlimited scalability, at little or no additional cost.

What Skype is doing with P2P in the mass market for VoIP, Popular Telephony is trying to do the same in the enterprise market. In this context, it�s interesting to see they had a joint announcement this week, as Popular Telephony starts making a serious push with enterprise P2P. It�s also interesting to note that both have now made moves for mobility solutions, another sign that P2P is ready to grow beyond being PC-based.

Nimcat Networks � I also mentioned them along with Popular Telephony the other day. I wanted to mention them in the context of P2P as another example of how this technology is starting to find applications with real business models. Their nimX solution is targeted squarely at the low end of the business telephony market, and is a great example of how serverless P2P can be productized to address a specific need better than anything that�s out there today. As their CEO, Mahshad Koohgoli said, �SMBs � that�s where the pain is for carriers�. I don�t think the PBX vendors have much to worry about here, but this is exactly the kind of offering that brings IP to an even broader audience. I say bring it on.

Telio � while practically unknown in North America, they�re starting to look like the Vonage of Europe. Based in Norway, they�ve passed the 50,000 mark, which in absolute terms, puts them in the same league as AT&T�s CallVantage. Hmmm.

On relative terms � as James Enck points out � on a per capita basis, Telio�s numbers would ramp up to 3.5 million if they were in the US. That would put them ahead of everyone globally except Yahoo Broadband in Japan among those selling replacement line VoIP. Scary stuff. They just went public, and of course their market cap is nothing like AT&T, but financial analysts should start looking at them as the prototype for valuing public VoIP pureplays.

They have a very clean business in that they haven�t reinvented themselves in the way that the publicly traded US VoIP plays like Primus, 8x8 and Voiceglo have. They have no baggage � it�s just pure VoIP built by sharp people who really understand the technology. Ever notice how so much of the good stuff in VoIP is coming out of Scandanavia? Skype, Telio, GIPS, etc. More kudos to Jeff in picking Stockholm for this year�s show � his instincts are so on the money. He�s always in the right place at the right time.

James Enck, European Telecom Analyst with Daiwa Securities

There weren�t many analysts at the show, and James may have been the only one from Europe. I wish I had a chance to meet him, but I�ll do my best here to relay what he had to say.

James gave a great overview of what�s happening with VoIP in Europe, and cited Free Telecom, France Telecom and Skype as being the market leaders. By his count, they collectively have about 2.3 million users in Europe. Perhaps more importantly, he noted that VoIP has reached roughly 30% penetration of BB in Europe, and how good that was for only being out there for 2 years. To me, it�s just another proof point about how quickly VoIP is happening � just wait until numbers start coming out of China. I�m not tracking this, but I have no doubt they will be huge, and will look like it�s all just happened overnight � which is probably not very far from the truth.

Another interesting stat � James estimates that Skype users are Skyping an average of 7 minutes a day. I�m sure the vast majority of this is free minutes, but he noted this number is comparable to PSTN usage. That�s pretty interesting. Incredible how people�s habits will change when something really good comes along � or something that better, or just plain easier to use. Didn�t take long for Skype to catch up to PSTN! There�s just something inherently appealing about something that�s free and works really well�..

What�s even more scary? In places like the US and Hong Kong, the average usage for wireless is about 15 minutes a day. Double the PSTN! The ascendancy of wireless over wireline has really only been in the last 10 years max � really 5 for the good stuff. And this is all TDM traffic. What�s going to happen when wireless goes IP? Skype is there already. For a product we only use 7 minutes a day, you really have wonder just how solid the future valuations of the ILECs really are. Anyone hazard a guess as to how many minutes a day we spend online? Or on TV? I don�t have the state, but both are WAY more than 7 minutes, that�s for sure. For some of us, it�s more like 7 hours. Thanks for that inspiration, James!

Summing up, James had some great messages � some of hope and some of gloom. He posed the question � are we in the Woodstock phase, or the Altamount phase? Is it all about peace and love, or are we about to blow the whole thing up? He basically said �the complacency days� for incumbents are over. No doubt. Am not sure about it all blowing up � he had slide of an A-bomb mushroom cloud, so you know what he�s thinking! I think the telecoms are more likely to implode than explode, but for now, they have the market power.

That �now�, however, looks to be very fleeting. James gave some examples about how all the European PTTs are aggressively going after business in each other�s markets, much like the RBOCs have done in the US. This market is different though � it�s national carrier vs. national carrier, and is so contrary to the spirit of a unified EU market. Open competition will do that, of course, but this just looks like a zero sum game to me.

James simply likened it to MAD, another nuclear age reference. He gave a chilling example of a German carrier offering broadband to French subscribers with aggressive pricing and great bandwidth. Is this a war the Germans can actually win? Maybe. Memories are long in Europe, and you have to wonder what kind of port blocking schemes will pop up as this trend gains momentum. What true Frenchman would really want to get their broadband from Germany? The US and Canadian markets have their own problems, but nothing like this. With that said, James wrapped up by saying resistance is futile � you know how that one goes.

OK, they�re serving wine and dinner now on the plane � French wine. And earlier I had a German beer. I better stop now�..

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