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?