More cash, more chances for VoIP

The story of VoIP continues with the latest round of funding at Vonage. From PRNewswire we learn:

EDISON, N.J., May 9 /PRNewswire/ -- Vonage, the leading provider of broadband phone service, today announced the closing of a $200 million financing round led by Bain Capital, with strong participation from existing investors including New Enterprise Associates (NEA), 3i, Meritech Capital Partners, Institutional Venture Partners, and existing investors. This latest round of financing brings total investment in the company to $408 million.

Boasting 600,000 subscribers, Vonage is the de-facto placeholder for what VoIP is yet to be: the alternative to fixed-line telephony, local and long-distance, and much more. It is difficult to call into question the viability of the Vonage model, even though no VoIP-enabled killer-app has surfaced into the shopping lists of customers. However, a series of exceptions could be taken with the current positioning statements of most VoIP services, chief amongst being 'low-cost telephony.'

Before Vonage even came into being, price wars among the long distance carriers brought the price per minute of most phone conversation down to pennies. The low prices were due in part to: excess capacity combined with VoIP technologies, opaque cost structures at the big long-distance carriers, and the apparition of a myriad of small players squeezed in between.In essence, the above reasons centered on a cost structure that allowed such low prices for the consumer. On the other hand, the sustainability of such costs has proven to be questionable. Several of the large carriers are no longer in business, and the small ones (the squeezed in between) cannot scale much beyond their initial scope.

When Vonage entered the stage, the prices of phone conversations were already low, for local and long-distance alike. A look at the cost structure at Vonage is indicative. Vonage spends about $400 to get a new customer who, in turn, pays back to Vonage $25/month. Assuming monthly operating costs between $10 and $12 per subscriber, we see that Vonage needs to serve a new subscriber well over 20 months to break even. So unless somebody (read, for example, cable companies) is willing to subsidize for that long the challenger category to the Baby Bells, providing low cost telephony may not be the way to stay in business for the VoIP promoters. For one, the Baby Bells could do a number of things to temper VoIP, and for another, VoIP architectures don't seem to scale well on the provider side.

As a way out for a company like Vonage, one can think of:

1. An application rich environment that targets the mobile individual (e.g. follow-me abilities, and connecting IM, email, phone, calendar, etc.);
2. Selling the company to the public or some cable operator.

Adding to the recent infusion of cash a friendly regulatory environment in Washington, makes for a hopeful landscape for Vonage/VoIP despite some regulatory hurdles big states that are hosts of individual Baby Bells may raise along the way--see Texas' lawsuit against Vonage over how it handles emergency calling.

-these are some thoughts from a larger project I have undertaken with my partner, M. Vexler, VP with IPCC-

Is Redmond Adopting Win-Win Strategies?

Until recently, typical of the companies its size, Microsoft has leveraged its intellectual property (IP) portfolio mostly in the context of IP exchanges. That is, until May 4 2005, when Microsoft unveiled its IP Ventures program meant to link venture capital community, entrepreneurs and emerging businesses with its multibillion-dollar R&D effort.

Microsoft IP Ventures opens up hundreds of internally developed technologies to entrepreneurs and new businesses by licensing and spinning out Microsoft's innovations to facilitate new product and business development.

"Our research labs and efforts across the company have created a large portfolio of innovative technologies that extend the reach of personal computing today, with much of it going into Microsoft® products," said Rick Rashid, senior vice president of Microsoft Research. "At any given time, there are hundreds of projects under way at Microsoft. IP Ventures provides yet another vehicle for extending this reach and delivering innovations to customers in a variety of areas." (http://www.microsoftipventures.com)

So, Microsoft gives something away for sure. Let us consider some of the reasons:

1. Its R&D (700+ people worldwide) has become too big for Microsoft to capitalize on its IP by itself;
2. Need for additional direct revenue (it is estimated IBM gets $1B a year from licensing out IP);
3. In addition to its developer tools, Microsoft's IP could become yet another powerful way to ensure the growth of the ecosystem centered on Microsoft technologies;
4. Potential for long term returns from the equity small companies trade for the Microsoft IP.

What can go wrong? It is hard to say. Let us only mention that open source, IBM, and SUN, have been giving away IP for some time now. Thus, the impact of the reason #3 above may be diminished. As well, tying one's future to the odds of success of fledgling companies is a risky endeavor that requires specialized assets and resources. Thus, the impact of the reason #4 above is uncertain--especially for the accounting types. Also, given Microsoft behavior, ungentle at times, toward smaller companies that seemed to take away some of its revenue, companies will need re-assurance that everybody in the ecosystem is going to earn something and be able to keep it.

All in all, this cannot be a bad time for the Microsoft centered companies. The customers are likely to get more innovative technologies, the partner-companies are likely to get access to the Microsoft smarts and channels, and Microsoft itself will get the rest.