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Telerupted: Twilight for Telephone Networks
Session initiation protocol-compatible VoIP devices already account for as much as 20 percent of landline telephone traffic, thanks to the efforts of companies like Cisco, which sells to enterprises, and Comcast (in the U.S.) or Free (in France), which target consumers. Mobile telephones will not remain a safe haven for long, however, as more companies like Fring and Truphone start to offer VoIP alternatives to operator voice plans.
Such plans involve downloaded SIP User Agent software that can also voice-enable gadgets like the Nintendo DS, Sony PSP or iPod Touch. Dan Borislow claims the marketing blitz for his SIP-based magicJack puts him on track to sell 500,000 of the devices by the end of this month. Yet the displacement of analog phones by VoIP devices has not displaced the telephone network itself.
The state of affairs is analogous to printing email before it reaches the destination in order to preserve a role for the post office. It will not last. The ubiquitous use of SIP makes it possible to configure VoIP traffic to peer directly via the Internet, but the business models of VoIP companies depend on the minutes-based charging enabled by the telephone network. Companies like Skype and Vonage, as well as the Web 2.0 voice plays Jajah or Jaxtr, provide for free calls between users, but they all generate revenue by sending off-Net calls to the telephone network.
The 20 percent VoIP penetration number implies that both called and calling parties have VoIP devices about 4 percent of the time. This leaves plenty of work for the telephone network, but the long-term utility of passing VoIP traffic through the telephone network does not look promising. At some point, the penetration of VoIP devices will cross a threshold that makes the minutes-based business model of telco and VoIP players alike untenable.
The strategy of using VoIP to make the telephone network more efficient has short-term merit in that it avoids the expensive process of changing end user behavior. The usual mode of price competition serves as a reasonable placeholder until VoIP devices get sufficiently mature and achieve critical mass. A regulatory environment that requires VoIP players to implement traditional functionality associated with E911 and CALEA contribute to preserving the status quo. In the meantime, patent litigation remains a drag on investment capital, and the availability of suitable Internet connectivity remains particularly weak in the mobile context — Internet access in any form remains an obstacle in many locations around the world. Reliability gives the telephone network an edge over the Internet for sales calls and other high-value communication.
Telephone network integration may provide a useful transition strategy en route to VoIP nirvana, or it may represent a unrecoverable dead end for the current crop of VoIP startups. Companies that depend on the telephone network inherit of a range of artificial constraints. VoIP devices connected via the telephone network lose the prospect of delivering high-quality audio. Traditional telephones do not support the use of domain names for routing or hyperlinking. Global flat-rate termination that serves as a driving force for applications of the Internet get sacrificed. Embracing the telephone network postpones the search for new forms of communication.
The dependence of VoIP plays on the telephone network does not erase the risks VoIP poses to the telco status quo. At this point it’s not even clear if there exists a role in a VoIP infocom ecosystem for traditional service providers. The metered usage charges that make the telephone network attractive from a business model perspective do not exist in an Internet context. Infocom seems likely to mirror the existing infotech bring-your-own-device ecosystem with hardware vendors, software companies and access providers. It will take at least another decade for the forces at work to play out, but this provides little consolation for an industry that traces its roots to 1876 and telco executives unable to retire before the music stops.
eBay Snoring, Skype Roaring
eBay reported its first-quarter earnings today, and there was nothing impressive about the results, especially their core auction-related business. On the other hand, Skype seems to be doing pretty well.
Skype continued its strong growth trajectory, reporting $126 million in revenue for the quarter, representing 61% year-over-year growth. Skype added 33 million registered users in the quarter, ending the period with more than 309 million registered users around the world. Skype now has the largest registered user base within eBay Inc.’s portfolio of businesses.
Those are impressive numbers. For the fourth quarter of 2007, Skype revenues were $115 million and there were more than 276 million registered Skype users around the world. No wonder Skype Journal’s Jim Courtney is able to make the argument: Skype is thriving. What do you guys think?
This morning a lot of analysts are weighing in on eBay’s earnings. I culled out the bits about Skype to share with you folks.
Mark Mahaney of Citi Research writes:
While its Transactions revenue growth rate slowed to 62% Y/Y — down from 80% Y/Y in Q4 — the segment’s usage metrics improved. Key was the acceleration in Skype Out minutes to 1.7B, up 33% Y/Y, vs. up 10% Y/Y in Q4.
And from Ben Schachter at UBS:
And although user growth at Skype is still solid (though decelerating), eBay has yet to drive any meaningful synergies between stand-alone Skype and its core business. Management does plan to test possible synergies more aggressively this year, but time will tell (we are dubious).
Now these are two very fine analysts and I respect them quite a bit, but I think Skype has regained some momentum, despite eBay. (My big piece on what eBay should do with Skype is going to be published over the weekend. Watch out for it. )
Here Comes Trouble: A Social Directory
The declining relevance of telephone directories erased 95 percent of publisher RH Donnelley’s market capitalization over the last 12 months. Although Google’s free 1-800-GOOG-411 service may attract some share of the directory assistance business, the crux of the problem lies with the diminished standing of wired telephones in an increasingly crowded communications landscape. The demise of paper directories does not, however, mean there exists a clear alternative to accommodate the growing list of communication coordinates most people juggle. A “social directory” created by merging the telephone directory with the social networking model may provide a way forward.
Given the open-ended nature of the information that gets indexed, search engines remain poorly suited to the task of finding contact information. Success depends on a cleverly structured query; search engines do not, after all, distinguish contact information from other types of information. But while a directory with a relatively finite and narrow data set (e.g. contact information) would greatly increase the probability of success, the process of creating directories still awaits an Internet upgrade.
The standard model for directories fails with respect to mobile phones, email addresses and instant messaging screen names. Posting the Yellow Pages online retains the same city and state search limitations of the paper directories, and the infrequent publishing cycle of directories becomes unworkable at the current pace with which communication coordinates get added and subtracted. Further, the growth in communication options makes it impractical to rely on a single service provider directory. What makes much more sense in our Internet-heavy world is a user-generated directory in which individuals own and update their own listing.
The lack of a directory for mobile phone numbers traces to the fear of unwanted calls. A directory that supports authentication along the lines of social networks solves this problem. Keeping your number secret and employing Caller ID are poor substitutes for actually controlling who can call you. The social directory could implement an invite authentication process like any other social network. People already include some contact information in their social network profiles, but a purpose-built social directory could offer additional communication functionality.
The social directory represents a far more elegant solution than that of spamming friends with requests to update contact information through services like Plaxo. The social directory could make a social circle accessible via clickable links while hiding the actual contact information. Rather than giving out a telephone number or email address to a new acquaintance, users of a social directory would associate their listing with keywords (such as “plumber” or “dog lover”).
As the number of communication options increases, so does the burden of managing contact information, yet Internet-enabled directory options remain lacking. Google’s 60 percent share of Internet searches gives the company both gatekeeper status in the information Internet — not to mention a rich market capitalization. However, Google’s revenue represents less than a third of what the declining telephone directories generate in the U.S. alone. Riches await the infocom company that achieves gatekeeper status for the Internet’s communications applications.
Here Comes Trouble: Saving Big Iron in Telecom
The migration of value from hardware to software transformed startup Micro-Soft into monopoly Microsoft between 1975 and 2000. A similar transformation continues to gain momentum in telecom, with software innovation displacing big iron as the primary source of competitive advantage. The telephone network operates in a manner quite analogous to the time-share model displaced by the PC, which means communication may soon only require Internet access and a communication device, not the permission of AT&T.
The most recent quarterly results from the telcos starkly demonstrate this reality, with year-over-year declines in access lines of roughly 10 percent. Displacement by cell phones, cable VoIP, and the waning need for second lines (e.g. fax, dialup Internet, etc.) are driving this decline — in other words, a collapse in usage. It should come as no surprise to anyone paying attention to how many times they pick up a telephone that the FCC’s annual trends in telephony service statistics show a 40 percent drop in telephone network minutes since 2000.
Telecom represents an anomaly among technology-driven industries. There exists no equivalent to Moore’s Law. The quality of a telephone call between neighbors in 2008 differs very little from the same call in 1958. Reliability, audio quality, and even the telephone itself remain largely unchanged. This makes the industry even more vulnerable than the computing time-share business, where companies like Digital Equipment delivered annual cost performance improvements when the PC arrived on the scene.
Verizon’s VoIP patent lawsuits only accelerate these trends. The telcos enjoy very high margins on the $7-to-$10 per subscriber that comes via the likes of Vonage, Cox and Charter; legal successes hasten the pace of work to shut off this revenue. The cable companies can pursue settlement-free peering of voice traffic between each other. People with SIP-based broadband phones get voice functionality without touching the telephone network. The telcos have still not recovered lost revenue from the last group of competitors (i.e CLEC’s) defeated in the courtroom.
The to-do list for telco-free communication nirvana parallels the developments that broke the grip of time-share computing. The wannabe infocom industry needs compelling applications that accelerate adoption a la the spreadsheet and desktop publishing. These compelling applications seem unlikely without a communication operating system analog to MS-DOS that simplifies the task of hardware interaction and resource allocation. The infocom industry needs to produce compelling devices that go beyond features and functionality already available from the telcos.
The telephone companies still control key inputs in Internet access and backbone capacity, but discouraging new communication applications gets problematic as dependence on data revenue grows. A more enlightened approach may prove more successful. FM did not entirely eliminate AM radio. TV did not entirely obsolete radio. Mainframe computing remained important for applications requiring high reliability, and the telephone network seems likely to remain the most reliable means of delivering E911 functionality. Consider the example of IBM’s contribution to the demise of time-share computing with the introduction of the IBM PC. But beware of the Harvard dropout with new ideas about software.
Here Comes Trouble: Telephone Number Tyranny
The Internet domain name system emerged as an overlay of meaningless IP addresses 25 years ago, and yet the wait for a mechanism that would reduce the need to keep track of meaningless telephone numbers continues. Sure, the conversion to automated switching saved the telephone company from employing operators, but it shifted the burden of switching to the public. And as Edward Tuck explained in a 1996 IEEE Symposium speech, the creation of the Public Switched Telephone Network (PSTN) did not necessarily improve telephone service:
Telephone service I had in 1984 was in most ways worse than the service I got when I was a little boy in the South in the 1930s. Then, I’d pick up the receiver, and the lady would say, “Number, please,” and I’d say, “I want my Mommy!” She might say, “Well, Skippy, she was over at Miz Ferguson’s, but she left there and now she’s at Miz Furrey’s. Somebody’s using the phone there right now, but I’ll break in and tell them you need your Mama.” We had call waiting, call forwarding, executive override and voice recognition. I didn’t even have to dial. Things went straight downhill from there.
Telephone companies continue to add annoyances, requiring the “1” for long distance, requiring area codes for local calls, and changing area codes to accommodate growth. In the case of caller ID, the telcos have the temerity to charge extra for the inadequacy of their services. ISPs certainly don’t enjoy a similar revenue stream for revealing the identity of the person sending email. Did anyone notice the Internet survives without directory assistance charging $1.50 to help people find URLs? Telephone companies charge for the privilege of an unlisted number, or for opting out of directory assistance. While on the Internet, obscurity remains free.
Technicians across the country stare into boxes of jumbled wires countless times every day, because telephone numbers reflect physical equipment in the field. But telephone numbers that reflect the general vicinity of a caller’s location represents a poor substitute for identity, and serve as a relic of the days before flat-rate calling. A new domain name assignment propagates across the global Internet in hours, but it can still take the telephone company a week to provision a telephone number. The persistence of telephone numbers reflects the long-standing pursuit of innovations that serve the telephone company, not telephone customers.
Progress in carrying voice over the Internet left the burden of telephone numbers in place. But while the 16-digit keypad may be ubiquitous, there is no imperative to use it. Why not utilize Internet and infotech platforms to recreate operator type functionality? Dial-by-name platforms work very well. Search engines turn the entire content of web sites into keyword alternatives for domain names, so why not allow callers to associate key word tags with their directory listing? Exchange keywords rather than telephone numbers with someone at a party or business meeting. Making users cope directly with telephone numbers makes no more sense than expecting people to navigate the Internet via IP addresses.
Here Comes Trouble: Infocom Voice
During the spring of 1995, I participated in a series of meetings at AT&T Bell Laboratories, at which management lamented the impending doom of the telephone business model. The looming threat, however, was neither MCI (which had instigated the breakup of AT&T) nor the Bell companies (which did eventually undermine and absorb AT&T). No, the once-dominant telco feared a $50 software product released by two 20-year-olds at a startup in Israel: Vocaltec Internet Phone, which made voice communication an application of the Internet.
The death of the telecom business remains a standard prediction, but telephone bills continue to arrive 12 years after Vocaltec introduced VoIP to the masses. ITXC (now a part of VSNL) used VoIP to help cut international calling rates to an average of 10 cents a minute currently from 99 cents a minute in 1995. Vonage gets credit as the first to offer flat-rate, unlimited usage plans, erasing the distinction between local and long-distance calling. But aside from price, the telecom business remains largely unchanged by VoIP.
Consider the improvement of infotech platforms since 1995. Intel et al remained true to Moore’s Law by expanding processor performance 100-fold, while the price performance improvements of storage, memory and many other components exceeded this pace. But although improved performance and falling costs usually combine to produce new applications, this does not seem to be the case for VoIP and the voice business.
Reducing the price of a telephone call does not erase all the frustrations associated with communication. Humans can detect sounds of up to 20kHz, yet the frequency response of the traditional telephone call has remained stuck at 3.3kHz since the 1930s. The audio quality of a telephone call compares unfavorably even to the 5.6kHz frequency response of AM radio; we still revert to military radio protocols ( “A” as in alpha and “T” as in tango) when spelling a word.
Miscommunication remains a significant source of daily frustration. CallerID seems to be the best telecom has to offer. (Imagine paying extra for the privilege of knowing who sent you an email.)
The differences in the pace of innovation between telecom and infotech can be traced to differences in their respective business models. Telecom companies chase profit growth through margin expansion, which requires controlling costs and resisting the potential for competition to reduce price (e.g. controlling supply).
Conversely, competition forces infotech companies to chase profit growth through revenue growth. This requires investment in the innovations necessary to create demand. The pace of innovation in communication promises to accelerate as the search for revenue growth leads infotech companies to pursue communication business more aggressively.
Developments in communication shape human history. The Renaissance followed the printing press because less expensive books produced educated citizens that demanded more representative government. The telephone offered more than simply a better telegraph. If the infocom sector can move beyond cheap telephone calls, it might finally represent the threat to the status quo imagined by my AT&T colleagues.
For Skypers, First the Party, Then the Job Cuts
Almost 10 days ago, Niklas Zennstrom, the co-founder of Skype, threw a party to remember at London’s swanky The Cuckoo Club. The nightclub, which is normally the haunt of Prince Harry and his brother and the rest of the jet set, played host to Skypers — both current and past — including co-founder Janus Friis. Unfortunately, after the party came the hangover.
It is rumored that nearly 30 Skype employees — mostly in the London office, but also some in Estonia, came back from the weekend to find pink slips waiting for them. I am told that most of the folks who were cut were from the marketing side of the business. We have emailed Skype PR to get an update/confirmation on the news of job cuts. It is cruel to say, not a very merry Christmas for those who have been nudged out.
Several senior executives had already quit the company. On Oct. 1, Zennstrom announced that he was resigning as CEO and Skype took an impairment charge of about $1.43 billion.
Skype recently made the wrong kind of headlines when it pulled a switcheroo on some of its London-based SkypeIn customers. eBay has been trying to rationalize the Skype’s operations and at the same time trying to figure out what to do with its ultra-popular but not quite profitable P2P voice service. Google was rumored to be interested in Skype, but we haven’t heard anything at all.
Cat Got Adobe’s VoIP?
Updated with more details: Adobe Systems has become the underpinning of the online video revolution. But when it comes to melding voice and web applications, they seem to be falling behind, despite having grand ambitions and a vision to match.
I first wrote about Adobe’s (ADBE) VoIP/voice plans back in September of 2006 . It has been eerily quiet on that front since then. This September, Adobe talked about a secret project called Pacifica, which uses SIP and currently enables point-to-point communications, but it is far from being deemed complete.
Updated: Our sources indicate that Adobe’s VoIP efforts have some internal challenges. For instance, the whole project is dragging because the company is trying to figure out how to monetize its efforts and get people to user their server-side offering as a backend. Adobe doesn’t want a repeat of online video, where YouTube got the upside of Flash video. Nevertheless, our sources indicate that the Adobe will soon have an update that would have SIP P2P enabled functionality.
And as Adobe plods its way forward, suddenly there’s a whole slew of companies already building VoIP applications, including soft clients, that use SIP for voice calling and Flash to interface with the end user. There is a lot of talk about Ribbit and Tring Me, for example; we’ve also heard about Pudding Media’s VoIP client for Meebo, Flashphone, and of course Jeff Pulver’s reboot of Free World Dialup, now called FWD International.
The problem is that most of these companies are using their own workarounds to make voice connections over SIP. In a typical Flash client, voice is encoded in the g711 codec, carried to proprietary servers that connect, in turn, to SIP servers. As these startups start to gain traction, their workarounds will sooner or later begin to obviate the need for a Flash Voice Server.
My good friend Aswath says that Flash-Voice is going to be big in 2008, and that “we are set to see lots of VoIP clients based on Flash that uses UDP for media transfer.” If Adobe wants to play a role in the web-voice business, it’d better hurry up.
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Two Deals Show Skype’s Relevance In New Work Space
Last week’s Skype blackout and the impact it had on millions brought home the fact that the little P2P voice service has become an important member of modern communications. Two new, discrete bits of news add further weight to that theory.
Earlier today, IBM (IBM) said it was going to buy WebDialogs, which makes a suite of products that enable desktop sharing, conferencing and collaboration software known as Unyte, for an undisclosed amount of money. Unyte rides on Skype, and has been a stand-out amongst Skype Extras.
IBM plans to embed the application (and its functionality) into IBM’s Lotus Notes and Sametime products. Skype, despite lingering doubts about its reliability and security, has become part of the enterprise infrastructure. IBM plans to use Unyte to expand its Web conferencing offerings to small- and medium-sized businesses, and to smaller work groups within larger companies.
Cisco Systems (CSCO) and Microsoft (MSFT) are targeting some of the same customers, but IBM is being prescient in latching onto the Skype bandwagon — the small- and medium-sized businesses represent the biggest opportunity for Web-based collaboration and conferencing.
Increasingly, the work force is getting distributed (a trend we track on Web Worker Daily), and there has been need for tools and other technologies to keep the remote teams working.
Skype and other tools for low-cost desktop conferencing are gaining in popularity. “Desktop video conferencing is the small business video system of choice,” said Peter Brockmann, president of Brockmann & Company, a consulting firm.
This is also an opportunity for hardware vendors that design devices which enhance this experience. PChome Online, a Taiwan-based Internet portal and online shopping company, has recognized such an opportunity and has decided to spin out its IPEVO business unit. IPEVO makes Skype-focused hardware and sells it to small businesses and consumers.
Does Skype Outage Expose P2P’s Limitations?
Update: Peer-to-peer by its very nature is supposed to work without a problem, with packets finding their way to good peers, and then moving on to their final destination. The Skype outage - you couldn’t login to your Skype account - that started sometime last night makes you wonder about how resilient are P2P services.
It is still not clear why it happened and what exactly happened. Skype has released no details just yet. Tom Keating says that the problem started after he and his colleagues downloaded some of the new patches Microsoft released to upgrade its operating systems, Windows Vista and Windows XP.
Since Skype is a P2P network that relies on other peers for the network to function properly, it’s possible a Microsoft update is causing a conflict.
On the Mac, however, I had no trouble logging in this morning, but the client kept crashing. If a software upgrade from Microsoft (or for that matter any other OS vendor) can render Skype, one of the largest P2P services useless, then P2P economy is standing on shaky ground.
Update: On second thoughts, I want to be clear that if you are going to build a mass market consumer service on P2P and use authentication servers or add layers on top of the basic architecture, then you are on shaky ground and need to build in some sort of redundancy. (Thanks Ethan, for showing me the light!)
Folks at Joost, Babelgum and other P2P companies should be concerned about their business prospects going forward. Venture capitalists who have been funding P2P-based services should take this as an early warning on the fragility of the whole P2P ecosystem, where a small glitch can cause widespread problems.
On the flip side, if Skype’s authentication servers asphyxiated, then let this be a reminder that Skype is not quite your phone company replacement. This must have impacted thousands (if not millions) of companies and web workers who lost money and productivity. (Update #2: Skype blogs says that it is their software issue.)
“The folks who get hurt by this are the Skype based service providers who need the Skype connectivity layer to keep things working,” writes Andy Abramson.
FWD relaunches to break the telco trance
The media educator John Culkin remarked: “We don’t know who discovered water, but we’re certain it wasn’t a fish.” The observation summarizes why I recently pitched Jeff Pulver on relaunching FWD, the VoIP operator formerly known as Free World Dialup. (Disclosure: I am helping Pulver relaunch FWD.)
Though not as well-known as Skype or Vonage, FWD, now 12 years old, is the longest-surviving VoIP company in the world. From the beginning, FWD distinguished itself through advocacy efforts (e.g. FCC Pulver Order) and enabling tools (e.g. free SIP device registration), which helped the company attract some 700,000 registrations.
FWD does not seek to provide a communication service as much as empower amateurs to create their own communication solutions. The do-it-yourself ethic saves end users from waiting for the so-called experts to awake from their telco-trance and figure it out for us.
A decade into an Internet-enabled communications era, most communication offers remain bound by 20th century definitions. Consider the examples of SunRocket and the newcomer, Ooma. We can debate the technical innovation or pricing advantage(s) of their respective products, but both companies viewed the world through a telco lens focused on one thing: Getting a share of profits enjoyed by entrenched telcos.
The usual business theory that success depends on providing better value to consumers falls short in the case of telco startups. It fails due to two line items on the income statement: ‘marketing expenses’ and ‘COGS (cost of goods sold). Marketing is expensive because it’s hard to win customers.
New entrants like Ooma will spend far more on customer acquisition than incumbents ever have, because incumbents acquired their customers in a monopoly context and now need only invest in retaining them. Incumbents own the telephone network, too, which puts new entrants at their mercy for interconnection, inflating COGS. There are still more expense traps for new entrants that survive the marketing and interconnection gauntlets (just ask Vonage.)
The death rate of start-ups that touch the telephone network remains near 100%, but startups pursuing new ways to enable voice communication need not limit their efforts to improving the telephone call, because “communication” is not synonymous with “telephone call.” After all, a telephone call falls woefully short as an alternative to meeting someone in person. The audio quality of telephone calls compares unfavorably to even AM radio.
FWD sustains itself through a membership option to keep the focus on communication rather than billing systems. Ooma represents a step in the right direction. It trades the usual services model for a consumer electronics model, but the Ooma device still has to compensate for a ton of telephone network baggage.
The arrival of the Internet can release us from the limitations of the telephone network, yet so far we have been inexplicably unwilling to use this key to our freedom to venture outside the telephone network prison. Even as the experts tell us the price of a voice call will drop to zero, both AT&T and Verizon managed to enforce price increases in the last 12 months.
This is one reason why calling costs still leave two thirds of the world’s population with few, if any, communication options. Yet all this can change for those following FWD’s lead: Imagine a communication future as if the traditional phone network never existed.
Ooma wants voice to be free
Voice over the Internet, so far, has been a game of cheap minutes, shoddy quality, and unreliable connections. It’s also been a money-losing proposition. The promise of voice being free has remained just that - a promise. Palo Alto-based startup Ooma promises to resolve those frustrations in September 2007 while offering free voice calls for life.
In doing so, it’s relying on a very old tech strategy: Just as PCs shifted some functionality from mainframes into your house, Ooma’s boxes will handle locally some of the telecom switching that normally happens on phone networks. Go ahead, roll your eyes. I did too when I first met Andrew Frame, the founder of Ooma, over a year ago.
Frame, a former Cisco employee, came across as a paranoid startup founder hyping his company. “This will cause some major shifts in the voice business, it will make voice free,” he said.
But it’s clear Ooma is part of a large trend, one of chips and software commoditizing services. iTunes did it to music, Sling Media did it to television, and Ooma is on the right track to do it to voice calls.
That promise has attracted a number of investors: Draper Fisher Jurvetson, the Founders’ Fund, Draper Richards, WI Harper and Worldview Technology Partners are backers of the three-year-old company. From them, Ooma garnered $27 million in two rounds of venture funding. It’s not strictly true to say Ooma is offering free voice – after all, you do pay a monthly tariff for your broadband connection. Similarly there are other costs, including value-added services, the company plans to roll out later. The company will also charge a modest fee for international calls.
Ooma’s achievement was to build a slick box, which runs a couple of general purpose processors and embedded Linux, costing about $399. It will eventually be sold at consumer electronics stores with a promise: free voice service within the US.
The simplicity of the box masks complex technology. You plug it into your broadband connection and you are all set to go. You pick a number of your choice on the website. If you have an old fashioned landline, you can plug it into the box as well. A port allows you to connect to the kind of home phone network that most homes already have.
An optional device, called Scout, allows you to extend your Ooma network across your home via vanilla phone jacks. All your current handsets can plug into any phone jack. The phone rings, just as it always does. Using a hack that most DSL folk are familiar with, Ooma offers a second line that relies on sending information at higher frequencies, ones that are available outside of those used by the voice channel. You can use it to make or pick up a call on another handset without disrupting the first call. And like old-fashioned voice mail systems, you can listen to a voice message before picking up the phone.
So how does Ooma manage “free” voice calls? Say you call Manhattan. Ooma routes the call to an Ooma box to the 212 area code, with the local carrier accepting it as a regular outbound call. It works even if the destination number lacks an Ooma box.
It’s free to you, though it does cost the Ooma box in far-flung area codes, but most of the local call plans are flat rate and come with unlimited calling. Ooma piggybacks on existing phone services, bringing all the things you expect from a traditional phone service, like dialing 911. (Walt Mossberg gives his thumbs up to this service.)
In telecom lingo, this is called distributed termination. The more boxes on the Ooma network, the more termination points - and , more voice calls the system can carry to the public switched phone networks. This sounds eerily similar to Jeff Pulver’s Free World Dial-Up in concept. Execution is a different story, and we always can count on Jeff to think of the next big voice thing. Ooma has really done is basically take a media gateway and put it into its box.
Think of it another way: What the PC did to the mainframe, Ooma is doing it to the telecom switch. It’s a brilliant technological achievement, tempered by some serious regulatory and go-to-market challenges. These challenges are not simple.
I cannot overstate the wrath Ooma will feel from incumbents. Since Ooma threatens the carriers’ core business, they’ll do their best to crush it, arguing Ooma bypasses the local access regulatory structure. Don’t forget the mortal combat between Vonage and Verizon. If so, Ooma’s $27 million in venture funding will be nowhere near enough.
And Ooma will need to convince customers to buy the device. The $399 price tag for the box puts it out of range of people who need cheap voice: budget-conscious callers. Voice, local voice to be specific, is pretty cheap in the US, and that might cause adoption resistance.
It is a dilemma Frame and his team will need to figure out.
If you have any ideas, leave your comments below, or email Ooma using this address - gigaom@ooma.com. The first 50 people to email will receive a free Ooma box.
Update: During the beta test, you will need an incumbent phone line, according to Ravneet who signed up. The company did not reveal this during our conversation. Secondly, this incumbent requirement will go away in September 2007, when the product launches. I have posted some clarifications in comments, and will answer more of your questions. This post was written late at night, so I might have skipped a few things.
CellCarriers fear mobile VoIP planet
Why is T-Mobile UK blocking calls to mobile VoIP start-up Truphone?
Mobile carriers are scared of one thing: becoming dumb pipes whose only utility is to carry voice and text. And it is one of the reasons why they are fighting tooth and nail with the mobile VoIP providers, using all sorts of tactics to make mobile VoIP a non-starter. (See video below the fold!)
The company bearing the brunt of this scorched-earth policy is Truphone, a UK-based start-up that has developed a mobile VoIP client that makes it easy to make cheap calls (cheaper than mobile minutes that is) over dual mode phone, like Nokia N95 and Nokia E-Series phones. Once again, the company finds itself in the cross hairs of a behemoth that wishes to see Truphone go away.
T-Mobile UK is refusing to interconnect with mobile VoIP provider Truphone. T-Mobile customers making a call to Truphone’s number range (07978 8xxxxx) will not be connected. T-Mobile told Truphone, that as a result of a policy decision, they don’t connect to VoIP-based low cost calling services. T-Mobile UK’s decision to block Truphone might have come as a response to the new and radically better Truphone 3.0 client that allows you to send Free SMS messages and allows VoIP calls over 3G. According to M:Metrics, nearly 86% of UK mobile users are heavy SMS users, and that means it is a cash cow that carriers like T-Mobile can’t afford to be slaughtered by IP-based SMS services. (Jesse Kopelman had discussed the impact of Mobile VoIP in his excellent post here.)
On the issue of Voice calls, Truphone CEO James Tagg says, “This affects every new entrant into mobile telecommunications because the only company that can facilitate interconnection with T-Mobile is T-Mobile. It amounts to T-Mobile being able to veto a new entrant into the market. This would put telephony back 100 years, to a time when interconnections were not assured.”
T-Mobile is offering to pay Truphone 0.21 pennies per minute, even though it charges its customers 35p per minute. Truphone claims that its call termination costs are 9p a minute. “T-Mobile is blocking our numbers unless we accept this loss-making offer and, since T-Mobile is the only company that can route calls from its customers it has a complete veto on the Truphone service,” Tagg says.
This is not the first time Tagg is fighting the big guys. A few months ago, the company got into trouble with Orange and Vodafone, which had prevented Truphone from working on devices that carried their own version of the operating system.
Since then, Vodafone has introduced a new policy which makes it more expensive to use data plans for anything other than browsing and email, a move that is designed to blunt the uptake of Mobile VoIP, especially over fast 3G connections.Fighting the incumbents is not the only challenge Truphone faces –Vonage and countless other VoIP providers have learnt the hard way that fighting the cheap minutes battle is an unviable strategy in the long term.
Mobile VoIP: Killer App in More Ways than One
By Jesse Kopelman
This year we are seeing widespread US deployment of CDMA EVDO Rev A. The next two years should bring the same for both UMTS HSPA (both uplink and downlink) and WiMAX.
What these technologies have in common, besides a lot of capitalized letters, is vastly improved performance, in terms of latency and data rate, over what has previously been available with wide-area wireless networks. A side effect of this increased performance is that the mobile wireless connection can now support high quality VoIP. It seems a certainty that this capability will change the mobile telephony industry forever.
The $80/month that carriers charge for standalone unlimited data plans sounds pretty good for an industry where many struggle to break an ARPU of $60/month, but it suddenly doesn’t look so good when one considers that high end voice plans can get upwards of $200/month. It would be a huge blow to carrier profitability to have the rate plan ceiling so drastically lowered.
Meanwhile, they are caught between the hammer and anvil, as they can’t raise data prices without hurting uptake there and data use has become a significant revenue source. The situation will get worse over time thanks to two factors: First, over the next two to three years T-Mobile, Clearwire, and Sprint WiMAX will all emerge as players in the nationwide mobile broadband market. Second, improved devices in the PDA and smart phone form-factor will allow for VoIP without compromising the expected phone look and feel.
In the end, traditional mobile carriers are powerless to protect their voice margins from the threat of VoIP. They could try blocking VoIP, but how well will that fly when they’ve got compete with both a T-Mobile eager to gain market share to recoup their 3G spending and WiMAX carriers with no legacy voice revenue to protect?
Also, do Verizon and AT&T really want to fight yet another Net Neutrality battle? Sprint Nextel is an especially interesting case, as the only way for its WiMAX efforts to succeed is at the expense of its legacy operations and vice versa. Another tack would be to market the circuit-switched service as having superior quality to any third party VoIP offering. This could be quite compelling to high end users who are often business people, but is largely undercut by years of scraping by with a service that is markedly inferior to landline.
To make the argument stick, they’ll have to invest considerably in improving the network and that will be a losing game as pressure from VoIP will only hasten the pre-existing downward pricing trend. Perhaps, since they can’t beat them they ought to join them – shut down their circuit-switched networks and go completely packet based.
A carrier’s own VoIP service will always have an inherent advantage over that of a third party – it doesn’t have to go over the Internet. It’s debatable that going VoIP will make it less expensive for a carrier to offer voice than their current highly optimized circuit-switched networks, but there is no doubt that only having to operate a single packet based network for all services will save money.
This is the direction they are heading with IMS, already. The point is that competition, especially competition from third party VoIP, is going to force them to move faster than they might like. Meanwhile, the cash cow of legacy voice may not have as much milk left in her as they thought.
Jesse Kopelman is a long time GigaOM reader and an expert in wireless technologies, who has been involved with many wireless network builds. This is his first contribution to a new feature on our site called Conversations, where we will invite folks whose comments we have enjoyed to share their thoughts on topics that interest our community of readers.
Why do we have a VoIP patent mess?
Verizon’s lawsuit against Vonage is the VoIP version of showdown at Ok Corral!
The weary entrepreneurs have gone from fighting the regulatory morass to fighting the patent morass. The ability of Verizon et al to play the dimensions of uncertainty associated with patents makes one nostalgic for the ability of Verizon et al to play the dimensions of uncertainty associated with the regulatory pronouncements of the FCC. Anyone not attracting a patent lawsuit should feel a bit embarrassed. All the companies with some claim to success will get their turn before Verizon exhausts its legal budget.
Lost among the legal theories, predictions of Vonage’s demise, and the wishful claims Vonage’s troubles are unique is the fact that the future of the VoIP industry depends on challenging vague, generic, overly broad patents. The hope for low cost communications, cool applications, and connected devices has been lost in a patent system gone wild, where companies file patents, just as telemarketer dial for dollars.
The birth of the VoIP industry happens to coincide with the greenlight on “method patents” aka software patents. The framing of Verizon’s patents as “technology innovations” reflects a press release version of reality. Verizon’s patents address methods of communication between network elements.
They would have been unpatentable as little more than mathematical algorithms until lawsuits overruled the patent office’s distaste for method patents in 1999. Efforts to establish the quality of method patents represents a particular challenge, because applying companies pursue an application fatigue strategy. Companies make a long list of broad claims and await rejection. They use information in the rejection to refine the claims and repeat the process.
Method patents remain in dispute and Congress appears ready to pursue reform, but the VoIP industry seems unlikely to survive long enough to benefit from a cure. The need for a better means of vetting software patents motivated IBM, Microsoft, GE and others to assembled a public peer review process in conjunction with the patent office, but other priorities and a slow start mean the project does not offer a near term solution for the VoIP industry.
Participants in the VoIP industry will need to quit cowering in the corner and initiate their own efforts to move the patent process back toward meritocracy. The three surviving patents Verizon claims Vonage infringes represent a good place to start. They look like the prototypical “garbage patent” clogging the system.
Five years of graduate engineering education, five years at Bell Labs, and five years working on VoIP startups should equip me to appreciate the innovation content of Verizon patents. In fact, as the Project Director for Vocaltec Communications, I was the senior technical person responsible for implementing Verizon’s first VoIP pilot in 1997. Reading and re-reading the patents leaves me at a loss as to their innovation content.
Extensive scrutiny of patent claims represents the only way forward. The Internet that sparked several million articles associated with Wikipedia can cope with due diligence on 2200 VoIP patents. AT&T successfully prosecuted 600 patent infringement cases between 1876 and the expiration of the telephone patent in 1891. This time around there is no patent on the basic innovation underlying VoIP.
Verizon can’t make the Internet go away with a patent lawsuit. Vonage’s poor showing in court does not prove patents on implementation issues and features will ultimately sink the VoIP industry. Verizon’s success reflect genius in applying for and defending patents, not genius in innovations protected by patents.
I don’t begrudge Verizon’s right to pursue all legal means to preserve the status quo, but three generic and ambiguous patents seem a thin reed for a $90 billion company. If patent disputes ultimately undermine the VoIP industry, it will owe to the self-inflicted wounds of inertia, not patents. The industry need not sit idle for the next 15 years waiting for patents to expire. Take a look and judge for yourself.
Click here for our previous Vonage-Verizon patent dispute coverage.
Will Skype save Nokia Internet Tablets?
Nokia’s Internet tablet efforts – the 770, and more recently, the N800 – have produced a mixed bag of results. While the techies have been enthusiastic about the Linux-based tablets, the consumer electronics crowd (and buyers) hasn’t been overwhelmingly enthusiastic.
On Tuesday, some Nokia folks stopped by in our makeshift offices and articulated their vision for the tablet series. The company is betting that as more web services start to support the platform, the devices will gain in popularity. The Finnish phone maker believes that tablets are the next evolution of computing, and as web service matures, these Internet-centric devices will gain more traction.
And one such service is Skype. Nokia is expecting that Skype support will make the device more alluring, especially in the overseas markets.
The Nokia N800 is a nifty looking device that is very capable when it comes to making VoIP phone calls – we use Gizmo client all the time. Google Talk hasn’t exactly become our favorite, but like most we think Skype could actually make us use the device a lot more, especially for quick calls to other Skypers.
“Skype is certainly the most popular,” says Ari Virtanen, Nokia’s vice president of convergence products. Nokia will release in an early beta (without SkypeIn/SkypeOut support) in a few weeks, but the full version of Skype client is expected later this summer, Virtanen says. The Skype support, if nothing else, makes the N800 more attractive to folks who don’t want to lug a laptop along on short day trips.
We see N800 becoming a good way to consume music from subscription services such as Rhapsody and Napster. Nokia folks showed off the Rhapsody service, it was simple, easy to use and music streamed quite nicely over an EVDO-powered Wi-Fi network. Nokia wants to add more such services: Yahoo Music, MSN and Yahoo Messenger amongst others to boost the utility of the device. “It is an Internet services based platform,” says Virtanen.
“The world of computing has gone from mainframes to desktops to now laptops,” says Virtanen, “and the next step is tablets.” That future is going to take a lot longer than either Nokia or anyone else can imagine.
The sales register isn’t exactly jangling with regularity. Nevertheless, Nokia plans to add more retail outlets to its sales channel, especially in the US. Currently the device is sold online, and at Fry’s and CompUSA.
The big boost for N800’s descendants will come when Sprint launches its WiMAX network, sometime in 2008. At higher speeds, most web services are going to become easily accessible, and the N800 type devices will see their utility go up.
Is VoIP an Excuse for Bad Voice Quality?
In a few hours, the annual Spring VON is going to kick off in San Jose, California. Hundreds of companies, big and small will hawk their wares, pundits will pontificate and a lot of people will talk about convergence. But no one will bring up the dreaded question: Is VoIP an excuse for bad voice quality?
Earlier this morning, with my broadband on the blink, instead of iChatting (free) with my parents, I called them from my old fashioned telephone line – you know the kind the incumbents have been selling for over 100 years.
The conversation involved a lot of yelling into the phone – like we used to back in the day when the Internet wasn’t around, and long distance phone calls cost $3 a minute. While the price of the calls has declined to a few pennies, so has the quality of voice.
One can clearly recall a time when Sprint made a big deal about its voice quality, touting it in a “hear the pin drop” advertisement. AT&T spent hundreds of millions in coming up with a better voice experience, a business that didn’t clearly help save the company, though it made Joe Nacchio (oh yeah, the very same one) quite famous. All that is part of the history phone companies seem to want to bury.
The long distance call between San Francisco and New Delhi might as well have been a call between the International Space Station and my landline – choppy, static filled and barely audible. It is a pattern you observe time and again, because more and more incumbents are using VoIP technologies to carry their international traffic, trying to squeeze whatever little profits there are from the ever-declining business.
Lowering their operational costs is an understandable business move, but for companies whose primary reason for existence has been voice, it is just not cricket. On a testier day, WTF would have been my choice of words, but today, the slight nip in the air, bright sunshine and backache in remission, I am in a more generous mood.
VoIP has been a protocol of choice for a while now, and that is why it is hard to understand the quality problems. While consumer facing services such as SunRocket and Vonage, the shoddy voice quality can be blamed on the broadband bandwidth constraints, the long distance carriers (owned by incumbents now) should not have these problems, given that most of them own their backbones, and the gear seems to have matured enough to provide better voice quality. (Read: PSTN vs. VoIP)
Call me old fashioned, shouldn’t incumbents and the upstarts make Voice their core competency, a deluxe experience (like BT), before offering television and high-speed connections or some dumb Wi-Fi phones? Or is it just that we as consumers have been desensitized, our expectations lowered by the poor quality of mobile phone connections that we will put up with anything as long as it is cheap? I don’t think that is the case – and I pray to god, I am not in minority. If it is poor quality one needs to put up with, then free iChat makes more sense to me. Even Skype – which does a relatively good job for a free service!