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SabSe Technologies Acquires Jaxtr
I find it sort of interesting that I had a post about Jaxtr sitting in my drafts, from back in December 2008. Back then, the one-time darling of VoIP whose investors included some of those investing in Skype before it, had reported that it had laid off 13 workers (about 30% of its workforce) and that the much heralded CEO, Konstantin Guericke, had stepped down.
That draft was titled “Jaxtr revisited” and referred to the company’s burn rate:
Jaxtr raised $10 million in their Series A in August 2007. In September 2007, I said they would burn through that within a year, and it looks like they did, because they had to take another $10 million in June 2008.
In that post, I was highlighting some potential trouble spots ahead for Jaxtr, including the fact that they’d soon need even more capital and there would be challenges raising it in this climate, especially with a continued “burn cash now for some future unspecified opportunity later” business model. I also discussed little details like the potential for rampant fraud, once they start charging. I never got around to publishing that draft.
Of course we don’t know if these things contributed to the sale of Jaxtr to SabSe Technologies, Inc. (www.SabSeBolo.com) announced yesterday, for an undisclosed sum, but it seems like they could have.
SabSe was co-founded by Sabeer Bhatia, an original co-founder of Hotmail. They are in the free conference calling business. All the access numbers listed on the website are in India. A large percentage of Jaxtr users are also in India and in Pakistan. I’m guessing SabSe makes money on termination and are hoping to use Jaxtr’s local numbers, in some related manner, perhaps expanding their conference calling services beyond India.
Another Twitter cynic
Serial CEO Peter D. Csathy says:
Twitter’s revenues will pale compared to the ever-growing expenses needed to scale the service. And, my prediction is that the Twitter nation will lose steam in its passion and the bloom will be off the rose.
So, Twitter — here’s a tweet in less than 140 characters — “SELL NOW! Follow YouTube’s lead!”
It’s interesting when I see people talking about how they wish they had thought of Twitter first. As I see it, that misses a critical point. First, you have to come up with the $55 million it has taken to create and operate the service (so far). Do you have access to that kind of money? If not, then the idea might not be enough.
It’s a myth that if just any schmo came up with a Twitter-esque idea that VC money will come rolling in. There are plenty of other ideas that could have lost $55 million in the same amount of time on the cutting room floor (that never receiving funding and therefore went nowhere). @Ev was not just any schmo - he was already rich and had already made a bunch of VC’s a lot of money before he started Twitter. He may not know much about building scalable infrastructure - guess what it doesn’t matter - he knows how to raise money. And that’s what matters.
Likewise, it’s a myth that the users (insane growth) come first “without spending money” and that the money comes after. This happens one in a zillion times but even in most of those cases, at least SOME money came in early. Many startups that have created the mythology that they had “amazing growth without any money” are BS. They raised a lot more money than people think before they had significant growth (Skype, Facebook, and Twitter all come to mind).
Twitter is cool (but also has issues) but it’s taken $55 million (and 45 people) to get here and they still don’t have any revenues or a published plan to get revenue, so the costs and requirement for more and more other-peoples’ money goes on. The founders themselves recently said “We’re one percent into Twitter.” Does that mean they will need $5.5 billion? 
They also said “if we described Twitter in three sentences, the first two would be about not putting too much fidelity on it, and the last sentence would be ‘we don’t know.’“
So before you start having Twitter-envy, you need to ask yourself, “do I have access to $50 million (or $5.5 billion)?” If not, then don’t worry about it - you were never going to build a high operating cost company like Twitter or Youtube anyway, whether you had the idea first or not.
Twitter in the news
With Twitter Inc’s recent raise of another $35 million, bringing their total to $55 million, with an estimated valuation of $200 million to $250 million the company has been making the rounds on the wire. This AP story today, Can all that Twitters turn to gold amid the gloom? says that “Twitter intends to start testing ways to make money this spring.”
[CEO Ev Williams] hinted the company is exploring ways to charge for expanded commercial access to Twitter, but emphasized that all personal accounts will remain free.
Well, I guess that’s as long as Twitter is still in business, that is. At some point the VC money will dry up and one of these revenue strategies is going to have to pay off.
[Twitter usage] was seen in just 5 percent of respondents between 45 and 54.
This matters for Twitter’s financial future because most younger people don’t make a lot of money, which could make it more difficult for the company to appeal to advertisers.
The aritcle suggests that Twitter may be challenged to start charging for things users have been getting for free, as has happened with other sites like Yahoo!, Facebook and MySpace:
Its prospects are clouded even further by the resistance that Facebook and MySpace have faced as they have tried to inject ads into forums where people primarily goof off or fraternize.
Twitter’s revenue plans remain secret for the moment, but they are under a lot of pressure to fish or cut bait in terms of revenue generation.
If OpenSky proves the market, will Skype cherry pick?
Microsoft created quite a reputation for letting third-party developers build apps and then either purchasing the company or copying and driving out of business those that were most successful.
Skype has said they aren’t opening their network because their customers haven’t asked for it. Is that the truth, or is that just a convenient excuse?
If Gizmo5’s OpenSky proves there is a market for SIP to Skype, will Skype “cherry pick” that app and build that feature into their service? Or if Gizmo5 shows there is demand for it, perhaps they still won’t do it because maybe it’s not really about business - maybe it’s about religion, the church of Skype.
Michael Robertson moves beyond Skype open/closed debate
Rather than bicker over what “open” means and whether Skype is open or not, Michael Robertson has just ignored the whole thing and taken action instead.
Today, Gizmo5 launched OpenSky, a SIP to Skype gateway. if you want to call a Skype user named echo123 you simply call SIP address sip:echo123@opensky.gizmo5.com
The free version can be used by anyone for calls up to 5 minutes long. For longer calls, you need to use their paid service, which is $20 per year for individuals.
I guess this will test Skype’s claim that no one is asking for this service.
Why iPhone is not “boring”
I’ve seen several comments and posts recently suggesting that iPhone is just another boring story.
I believe an historic day passed us by last week. Sure, Apple opening up the iPhone App Store received some press, but I haven’t yet read anything that really “gets” the significance of this event. There’s all kinds of moaning and groaning about the quality of apps, the price etc. and while there may be truth to these gripes, the fact most people are missing is that, unless Apple screws it up in some big way, the world changed last week.
I consider it as potentially significant as the effect the introduction of WWW and Mosaic had on the Internet. Last week, Apple changed everything about the mobile phone ecosystem and I don’t think very many people noticed - yet. That world will never be the same, just like the Internet was never the same after HTTP.
The other players, whether device makers or carriers, are not even on the same planet - it seems like they aren’t even aware of the situation. They aren’t even asking the right question, to say nothing of having the right answer. There are hundreds of millions of mobile phones with Java on them - and nobody knows it. Most people have no idea how to buy anything for their phone beyond ringtones (if they even know how to do that). Their phones probably have the capability to run apps - but there is no place to get them. Well, or say in the case of Symbian phones, there are too many places to get them.
Apple is changing all that with the iPhone store. And gripe all you want about the warts of the current apps or the prices or whatever, all that mises the point. Ordinary people now know how to obtain apps (free or otherwise), how to install them - perhaps more significantly, the entire idea of adding apps to a phone is now “normal” - it’s now part of the collective consciousness.
And developers have a place to put them, not “yet another place”, but the place, the one and only place. I always said iPhone was about iTunes from the start.
Of course this is about distribution and execution - Apple has the right capabilities to create this “perfect storm”. Unlike carriers, Apple knows how to build and manage software and services (can you say iTunes?). Unlike other device makers, Apple has their own distribution and marketing - they don’t need to rely on the carriers to market their device.
The future of Mobile is now Apple’s to lose and the rest of the mobile space better be worried.
Lessons from a VoIP Entrepreneur
This needs a lot more work, but since time is short, I may never get around to it, so here I provide the less than fully formed version.
Om Malik today posted about the woes of a silicon valley VoIP startup that launched with much fanfare last year. In this post, Om says:
the company focused on developing strange concept promotions for a device whose value proposition in a nut shell is: cheap calls. Cheap calling is a tough, low margin and volume business
I stand by everything I said about that company’s business plan as far back as 2004. Specifically:
- “The product solves a problem (call costs) that is going away (costs are going to zero without them)”
This was not obvious back in 2004, when a lot of people were still paying 10 cents per minute for domestic calls, and “discount” rates were still around 5 cents per minute, but we certainly see it coming true today. What’s more important than call costs going to “zero”, is that the costs for long-distance calls stops being a pressing issue for people - it stops being on their radar. I think we can safely argue that this point has already arrived - especially for domestic calls which is the key selling proposition of the product. We can even argue that it’s no longer a high priority issue even for landline calls between many popular regions (there are exceptions, like India, where cost is still a major issue). - “People won’t open their wallet for a large upfront purchase, as shown by Tivo etc. and especially not for “phone stuff” which is perceived as “should be cheap”
First, very few consumer products cost over $400, and certainly nothing in the telephone aisle costs that much; it’s rare to find phone products costing more than $100. One can buy an entire multi-handset cordless phone setup for under $50 these days. A home phone is not an iPod and $39, to say nothing of $399, is considered “expensive” in the phone aisle.
These are fundamental problems and dropping the price to $250 is not going to change anything in any meaningful way.
Sitting on the outside, with nothing at stake, it’s easy to criticize other peoples’ business and marketing plans. We constantly hear how we need to move beyond the “cheap” message for VoIP. However, the problem is that the “save money” message is the only thing that consistently drives customers to action. We could argue that it’s a self-inflicted wound, and is driven by the fact that “cheap” is the only selling proposition companies push, so therefore it’s the only message customers seek. There is truth to that, but I now believe there’s more to it than that.
I’ve been at this for more than four years now and have gathered a lot of real world experience and informing data, including lots and lots of marketing A/B testing, feedback from real customers, plus actual behavior data (what people actually do is not the same as what they say they do). And all this points to an interesting conundrum for VoIP. It’s a catch-22 problem very similar to that of TiVo. TiVo has the problem that people don’t know their TV is broken until they have TiVo. They have to buy the product to figure out that they want to buy the product.
We find a similar thing with VoIP. Customers adopt the product on the premise of saving money, but they often fall in love with it due to something else and “saving money” becomes merely icing on the cake. The problem is, they only figured this out AFTER they already bought the product - catch 22.
This is the major marketing challenge for VoIP. You can’t blame companies for selling on the “cheap” message. The reality is, nothing else drives customers to their product as effectively, so what are they supposed to do? Again, much like TiVo, these other value propositions are too complicated, making them too expensive. You’ve got all kinds of different VoIP models out there, but nobody has cracked this conundrum… yet. When they do, it will change everything.
Andy and others on “free” business models
Andy Abramson refers us to Dean Bubley’s post on Pudding Media and Ike Elliott’s post on Free is Not a model and says:
[it] pretty much sums up what I’ve been saying for years on Ken Radio..about the “If It’s Free It’s Me, If I Gotta Pay It’s No Way” crowd.
While on the one hand I agree, I don’t think investors are there yet. If we look where they make their bets (where they distribute their money) we see jaxtr, Rebtel, Jajah, and the latest, MSFT $240 million investment in Facebook just last week.
These companies are clearly not valued based on revenue (to say nothing of profit). They are valued on potential. Andy rightly says “what media planner in their right mind wants a 4-6 percent conversion user base after years of free use?” I’d argue that many of these companies will be lucky to get 4-6 percent conversion. Jaxtr’s CEO has been quoted as saying they hope to get just 1% of users to pay.
Elliott says:
You have to have a plan for monetizing the eyeballs. Google did a great job of this, which is why they are over $700 a share.
Someone needs a history reminder. Google DID NOT have a “plan” for doing so. They eventually stumbled upon adwords and they have been riding that one trick pony ever since. These investors invest in My Space, LinkedIn, Facebook, et al because they hope those companies will be so lucky too. Obviously, these companies probably do have some kind of “plan” for revenue on paper. Just as obviously, Andy isn’t buying it.
The really funny part is this is nothing new. Yahoo! was perhaps the first example of a colossal failure in this area when they tried to offer a paid version of their service and found no takers among their millions of “eyeballs”. But for the moment at least, despite these historical data points and despite what Dean and Andy say, investors are still ga ga for the “freemium” model.
Jaxtr math doesn’t add up
Jaxtr also seems to be another of these companies where the math just doesn’t work and one has to wonder on what basis they raised money and (supposedly) have received acquisition offers.
According to Tech Untangled, they are signing up 16,000 accounts per day. That is pretty impressive, for sure (if true - and nobody is saying how much they’re spending in marketing to get those subs).
But looking closer, they say that 80% of their customers are in “220 countries outside the US.” According to Michael Cerda, a majority of usage comes from “India, China, and Sri Lanka (the CEO himself said about 75% of their users are in these areas)” — we know these geographies do not tend to hold high revenue potential:
customers there are loyal only to your offer of “free” or “cheap” - when something cheaper comes along, those customers are gone.
Jaxtr plans to make money by charging people who use more than their allotted 100 minutes per month. An interesting choice, given that there aren’t many businesses with lower margins than calling minutes.
Their stated goal is to reach 20 million subscribers in 12 months and to get 1% of these to pay for additional minutes.
That math doesn’t add up. Jaxtr gives out local numbers to the caller (not one number for the callee). These have real costs, whether they are used or not. Jaxtr gives away the first 100 minutes (and extra minutes for signing up new customers). Given that about 75% of users are making calls from mobile phones, these 100 minutes also have significant costs (mobile calls outside the US cost typically 10x - 20x the cost of landline calls).
I don’t even see how the supposed 1% of paying customers will result in gross margin, or, in other words, how such a customer offsets the costs of that one customer. To say nothing of how they will offset the costs of the other 99%! And all this is BEFORE any marketing costs, G&A, salaries, etc.
My math says that those 16,000 new accounts represent, conservatively, at least $10K in new monthly costs added per day (I would not be surprised if it were really $100K); and that means their monthly costs increase by roughly $300K each month, which means they burn through the $10 million they just raised in less than 12 months, before they hit their goal. Even if they reach their goal, if they get 1% to pay $2 per month (average), they will have revenues of $400K per month — but their costs will be something like $20 million per month! Of course, this doesn’t factor in advertising revenue, but I don’t think that changes things enough to make Jaxtr work (especially given that these are just direct operating costs, not including salaries, marketing etc.)
Although, I suppose in this game of “sell it while it’s hot”, the whole idea of profits is not part of the equation. Skype didn’t need any for their multi-billion dollar sale to Ebay (and may still not have any profits, given how Ebay doesn’t say). Grandcentral didn’t even have revenues. The list goes on.
What am I missing?
Survey says more households with cell-only than landline-only
In a survey of 13,000 homes, Mediamark Research found that 14 percent of homes had only a cell phone and no landline, whereas only 12.3 percent had a landline and no cell-phone.
Based on the comments around the net on this survey, it’s clear the trend is age biased, something confirmed by analyst Andy Arthur “But there’s an older group that will never give up landlines, and will never accept the new technology.” The arguments of landline vs. cell-phone tend to be around safety and reliability (availability) with some people saying cell-phones won’t work in emergencies and others saying landlines are just as likely to not work.
I think it ultimately comes down to whether you see it as a good thing for your “house” to have a phone number. One poster said it simply:
One word: babysitter. If we’re out of the house, and something happens to one of the kids, I don’t want to rely on the babysitter to (a) have a cellphone and (b) have it adequately charged.
To the reliability in an emergency situation, I don’t think it’s smart to rely on any single thing. If it really matters to you, then have as many ways to contact people as you can, mobile phone, landline, and even Internet phone and IM, which are probably as likely to work in an emergency as either landline or cell phones. As to whether a landline or a cell-phone is more likely to continue to work or not, there is no clear answer - don’t believe the hype or myths from either camp. It depends on the specific emergency and there is no cut and dry answer. That’s why, if you really care about that issue, you should have both. Otherwise simply accept the risk that you might be out of touch in an emergency.
I still find value in having a separate number for the house (or household) and other conveniences of a fixed phone. But that’s my situation today (with a child still living at home). Many people are in a different situation. The following comment provides a good understanding of why the telephone companies are losing their landline customers though:
The land line is reasonably enough priced that I *would* have one except for the OVER ONE HUNDRED PERCENT taxes and fees which make it unreasonable!!! Yes, the base landline here is $12/mo. There is another $14/mo in taxes and fees.
…
Greedy archaic landline companies need to get with the times. They’ve lose me for good, but they might be able to stem the tide of people dropping landlines if they act quickly. HAHAHAHA who am I kidding - they won’t do anything and then they’ll ask for government money to bolster their failing profits and bail them out of trouble.
It’s a good point. The telephone companies are going to have to do something, something beyond the stupid triple-play and N-play marketing gimmicks. How much longer will I continue to find value in that overpriced landline service and how long will I stomach those unruly bogus “taxes and fees” (they are not really taxes, but simply profit for the telephone companies).
