Alec Saunders SquawkBox

Look out!  Aswath’s talkin’ business.  Vonage, that is…

Riffing on Cynthia Brumfeld’s analysis of the revised Vonage S1, and the iotum / Phonegnome announcement, Aswath concludes that reduced churn and increased revenues are the keys to success for VoIP providers.  Moreover (and thank you for the kind words Aswath), new applications are the way to deliver those revenues.  Hear hear!

The real issue is margin, not revenue.

Once again, the real issue is margin, not revenue.

Seven months ago, EBay acquired Skype.  Since that time, Skype’s registered user base has grown from 54 million to a staggering 100 million.  That’s growth of 46 million users in seven months.  If Skype’s acquisition costs were the same as Vonage’s, gaining those subscribers would have cost a cool $9,614,000,000.  Servicing those 100 million customers would have an annual cost of $10,440,000,000. 

Vonage is a telco.  Skype is not. 

Vonage has telco economics.  Skype does not. 

This past quarter Skype earned $35.2 million from its 96 million (at the time) subscribers. That’s a 42% improvement over the prior quarter, and revenues are actually growing at a faster rate than subscribers.   We all know, though, that 96 million overstates real usage.  Right now there are 3.3 million Skype subscribers online.  Sometimes I’ve seen as many as 6 million.  So, let’s be generous and say that there are really 15 million regular Skype users - the Skype hardcore.  Monthly, Skype is probably billing 80 cents per hardcore user, or around $10/year.  That sounds about right to me.  I don’t know when I last bought Skype-Out credits, but it was a while ago.

By way of comparison, Vonage made $27.70 per subscriber per month, or $332.40/year.

80 cents per month doesn’t sound like much, compared to $27.70, does it?  So why am I so bullish on Skype (I am), and so down on Vonage?  There are two reasons: churn, and operating expense.

By 12 months from now Vonage will have 25% of their subscriber base churn away, or roughly 400,000 customers.  The cost of replacing those subscribers will be $83,600,000.  In contrast, it doesn’t really matter how many Skype users churn away.  More are coming all the time, and the cost of acquisition is basically zero.

The hard costs of running Vonage’s network are $8.70 per month, per line.  That works out to about $167 million annually.  Skype spent about $2 million last year on infrastructure costs.

The result?  Vonage lost $72.8 million on revenues of $118 million last quarter.  We don’t know what Skype’s loss was, because EBay doesn’t break it out.  But logically, without Vonage’s costs, it must be lower.

Let’s do a little thought experiment.  Let’s assume that Vonage continues to add subscribers at their current rate, and Skype does also.  By the end of 2006, Skype should be approaching 150 million subscribers.  Vonage, should be at about 2.5 million.  Let’s also assume that Skype’s revenues continue to grow at the same rate they have recently.  Q4 of this year should be a $100 million quarter for Skype.  Vonage, with 2.5 million subscribers should have about $208 million in revenue. If the trend holds true, then Vonage should see losses of approximately $125 million on that $208 million.  And what will Skype’s loss be? 

                Ebay is forecasting that Skype will be profitable in Q4 of this year.

The real issue is margin.

Break out the champagne!  It’s official.  The iotum / Phonegnome partnership has been announced, and as of today, Phonegnome users can become iotum subscribers as well.  Phonegnome is our first commercial deployment, and that’s a huge step for any startup.  Woo hoo!

What’s particularly exciting is the common vision that we share.  I call it Voice 2.0, and it’s all about the separation of directory, access, and applications.  It means that applications players can build products that are agnostic of network.  And customers can buy access separately from applications.  In this specific instance, with Phonegnome you are buying access from the incumbent, long distance from a third party, applications from another third party (including iotum), and directory from the incumbent.  Voice 2.0 is real, and you can buy Voice 2.0 products today!

And lastly, thank you to David Beckemeyer and the Televolution team.  Working with you guys was a pleasure.  Here’s a virtual glass raised to our mutual success!

You know how the old rhyme goes — "sticks and stones may break my bones, but names will never hurt me!".  Unfortunately not so in the world of marketing.   Wendy has a short post on naming products over on her blog.  Her rules:

1. Tell something about the product benefits,
2. Be easy to pronounce, spell, and remember,
3. Speak to the target audience (not what you like)
4. Be able to extend across future products (ie. so you can leverage the brand)
5. Be able to be legally protected.

One more thing to remember is that there is a difference between naming a product and naming a feature.  A product implies brand, and longevity.  It’s okay for a product name to be a little fanciful, and perhaps evocative of what the product does.  The exact opposite is true of a feature name.  A feature name needs to explicitly describe what the feature does in language that’s unambiguous enough for anybody to understand.  If it’s not, you’ll be investing in documentation writers and technical support people to explain to customers how your product works after they’ve purchased it.

Periodically something arrives in my inbox that really sets me laughing.  Here’s a story about a guy who buys his wife a "pocket taser", and then decides to try it on himself.  Probably another urban legend, but funny nonetheless.  Does anyone know if there’s enough energy in a pair of AAA batteries to power a device like this?

—-

Last weekend I saw something at Larry’s Pistol & Pawn Shop that sparked my
interest. The occasion was our 22nd anniversary and I was looking for a
little something extra for my wife Toni. What I came across was a
100,000-volt, pocket/purse-sized taser. The effects of the taser were
suppose to be short lived, with no long-term adverse affect on your
assailant, allowing her adequate time to retreat to safety…. WAY TOO
COOL!

SON-OF-A-…. that hurt like hell!!! A minute or so later (I can’t be
sure, as time was a relative thing at that point), collected my wits (what
little I had left), sat up and surveyed the landscape. My bent reading
glasses were on the mantel of the fireplace. How did they up get there???
My triceps, right thigh and both nipples were still twitching. My face
felt like it had been shot up with Novocain, and my bottom lip weighed 88
lbs.

I’m still looking for my testicles. I’m offering a significant
reward for their safe return.

Still in shock,
Tommy

I’m not sure what set Ken off yesterday, but he’s published a pretty strong piece condemning splogs.  Phoneboy follows up, noting that bloggers are "attention whores".  Bloggers need an identity.

Yesterday I gave an interview to Grant Buckler, a local freelancer who’s writing a piece on blogging.  I pointed him at all my favorite sources, like Scoble and Shel, and talked about the impact that my blogging has had on iotum.  Thinking about it later, I realized that I could have broken down the reason to blog to two simple ideas:

1. thought leadership.  The goal of a thought leadership campaign is effectively position a company around vision and ideas in the market — for example, the Voice 2.0 meme which I keep writing about.  Blogging is an essential part of a modern thought leadership campaign. 
2. customer responsiveness.  Leave the comments on, and you have a great vehicle for having a conversation with your market.

So think about it.  A splog fulfills neither goal.  It’s just a link farm designed to generate Google search results.