Alec Saunders SquawkBox

Team Jajah is nothing short of amazing these days.  Barely on the heels of their eHarmony announcement comes the announcement that they've opened service to India.  For 3Rs, callers can now call to and from the US.  Perhaps more interesting even than the new service were Jajah founder Roman Scharf's comments:

“By October, we will launch our secondary business model that will allow US, UK users to make free long-distance calls and by 2007-end India will get our free telephony service too,” Roman Scharf told Business Standard.

Free POTS calls? Perhaps Ooma is too late to the party already.

People have been pinging me all morning about Ooma, the new hardware based peer-to-peer VoIP solution that was announced today.  Caveat: I haven't yet used the product, or talked with the founders, so folks like Walt Mossberg, Om Malik, and Michael Arrington have an advantage over me. 

Ooma is a line of innovative new hardware products which consumers plug into their home broadband connections that gives free telephone service.  The Ooma hub is a $399 box which you plug into your broadband connection and hosts the Ooma services. You may also plug the Ooma into a traditional phone line for 911 services. Additional lines can be added by purchasing the $39 Ooma scout, which you then plug into phone jacks in your house. 

When you make a phone call the Ooma routes the call appropriately — either to another Ooma subscriber, or to a land line.  It sounds a lot like Skype hardware, just more expensive.  It's different in two ways:

• it distributes the terminations. Rather than pay per minute termination fees (a la Skype-Out), Ooma uses the outgoing landline of another Ooma subscriber to terminate the call.  In theory, that makes long distance free as well.  In the beginning, the Ooma team will supplement this with some terminations of their own, in order to ensure adequate service coverage.  No doubt Ooma will pay for these.  It isn't clear if the customer will.
• it's a platform for new services.  Ooma founder Andrew Frame is very clear that there will be new services that roll out on this platform in the future.  And right now, multi-line, voice mail, and the other services that Ooma will roll out with are initially a pretty rich offering.

The two potential flaws that I see in Ooma's plans are

1. the price of the device. A $399 price point, even for unlimited calling for the rest of your life, is not an impulse purchase.  The traditional method of reducing price (phone company subsidies in exchange for a contract) won't work here either.  They're attacking the incumbents. 
2. the quality of the consumers broadband connection.  At our home we have tried numerous broadband telephony solutions over the years, and it's always been a lot of work to keep the call quality consistent. 

Certainly the idea of Ooma is something that has intrigued me for a very long time.  The origins of my company's name — iotum — date back to the 2003 when our business plan was to build a small piece of VoIP hardware for people's homes that would be a platform for innovative VoIP telephony services, including peer-to-peer terminations. 

Nor is Ooma the first to try this play.  David Beckemeyer's PhoneGnome, for example, is also a platform for new services that can be plugged into your home phone lines, albeit without peer-to-peer terminations.  Nimcat Networks, acquired by Avaya, delivered a peer-to-peer PBX solution built into handsets.  And Jeff Pulver, several years ago, announced a peer-to-peer termination startup interconnecting Asterisk boxes.   

However, Ooma may be off to a better start than previous startups — with $27 million in funding, and what (judging by what others have said) appears to be a well thought out product, maybe they can finally scale his mountain. 

Yesterday EBay reported their numbers.  Skype's revenues grew by $11 million from Q1 to Q2 2007, from $79 to $90 million. Skype-out minute volume, however, was flat, at about 1.3 billion for the quarter.  This morning Jim Courtney, and Om Malik are both asking how Skype manages to grow revenues without increasing minute volume. 

The answer is pretty clear friends.  Skype raised their prices in January. 

• Skype Pro replaced their previous premium bundle of Skype-In and voicemail with an upgraded bundle.  While Skype Pro includes a lot more, it also costs 24 euros per year rather than 15 euros. 
• They added a connection charge of 3.9 euro cents per call, which previously didn't exist.  The impact of this cannot be understated.  Take the previous quarter, with 1.3 billion Skype-Out minutes used.  VoIP service providers assume an average call duration of between 7 and 11 minutes, so let's say the average Skype-Out call is 10 minutes in duration.  That's 130 million potential connection charges, and a cool 5 million euros (just shy of $7 million US) in revenue. 

Om also notes that registrations were in a slight decline for the quarter too — down from 25 million to 24 million.  Don't forget that Skype ran a campaign late last year, and into the early part of January offering unlimited calling to North American's for $15 annually, if customers signed up before the end of January.  Now the price is $30.  It's likely there was a rush to sign up before the end of that campaign.

Skype is an interesting company to watch because it's a hybrid blend of Voice 2.0 economics and old-style telco minute charges. The combination of flat rate economics and service charges plus the relatively low penetration rate into their install base would suggest that with clever marketing to the Skype install base, EBay can turn Skype into a money machine.  With a 200 million strong install base, EBay is right to focus on making those loyal users more profitable, which is what this quarter's numbers are showing.