February 05, 2008

Phonetime Graduates to Toronto Stock Exchange

Well, here's a good news item I'm pleased to share, especially as North America teeters on the brink of recession.

One of our local companies - Phonetime - has graduated from our venture exchange to our big board, the TSX. The news was announced today, and I say that they've graduated for a good reason - their trading symbol is PHD. Hah - can't get any smarter than that!

This is a really positive sign for a company that doesn't get much attention and operates a pretty simple, Voice 1.0 business. They've been on the venture exchange since 2000, and I've been friendly with them for a few years, so I can say first hand this is a good story.

Phonetime is basically a one-stop-shop for long distance telecom services across Canada. They operate their own national network, and have a healthy mix of both wholesale termination/origination business as well as retail offerings, primarily through calling cards. Sure, it's a low margin/high volume business, but if you establish your network and maintain a reasonably loyal mix of customers and distributors, it can be a decent business.

Not very sexy, but with Toronto's unparalleled mix of cultures and immigrants, this is a great market for these types of products, especially the calling cards. VoIP may not mean much to this audience yet, but calling cards make a lot of sense, especially for people who do not even have the luxury of their own landline.

For sake of transparency, I'm not a shareholder, but it's been on my to-do list for a while. I think I'll follow their progress on the TSX for little bit first and then see about becoming one.


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Posted by jonarnold at 08:31 PM | Comments (0)

January 14, 2008

New Coverage on Acme Packet and Veraz Networks

Just a quick post to draw your attention to some great coverage on two companies I've been a fan of for a long time - Acme Packet and Veraz Networks.

Colleague Catharine Trebnick has followed our industry for many years, primarily as a financial analyst. She knows it quite well and is currently a Principal at Boston-based investment bank America's Growth Capital.

They recently initiated coverage on these companies, and Catharine's reports have just been published. I've had a chance to review them, and aside from her strong company-based coverage, her reports provide a solid overview of the markets these two pure-play companies compete in. Basically, she's saying that Acme is still a good growth story, and Veraz is on it's way, but is definitely in a tougher environment.

Catharine has been nice enough to share her reports with those who are interested, and I'm nice enough to extend this to my readers. So, if you'd like to follow up, please contact Catharine directly by email, and she can take things from there. And if you do, I'd love to hear your thoughts on her coverage.

P.S. Look for another post in the next few days about something else I'll be doing with her firm...


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Posted by jonarnold at 08:35 PM | Comments (0)

October 05, 2007

Dialogic Acquires Cantata

I got a press release this morning announcing that Dialogic has acquired EAS Group, which in turn owns Cantata. That was news to me, and I haven't seen any commentary out there about this yet. Either people are busy with other things, or it's a non-event. Not sure.

Anyhow, you can read the release for yourself on Dialogic's website, or if you go to Cantata's site, there's a message directing you over to Dialogic's site, or a click-through to the same press release that's running on Dialogic's site. So, I guess it's official.

To be fair, I haven't followed Cantata as closely as I used to, but it's no secret they've had difficulty making their mashup of VoIP infrastructure companies work. Cantata is made up of three Massachusetts-based vendors - SnowShore, Excel Switching and Brooktrout. They've all had up and down rides, and at this point, it's clear that a better plan is needed. Consolidation has been a major trend this year in IP, and Dialogic's move is another step in that direction.

I can't really add much else right and will have to look into this a bit further. At first look, there are some parallels to what Radisys did by acquiring Convedia last year. Media servers are a common aspect to both moves, and this is an important nextgen building block, not just for everyday VoIP, but IMS as well.

Clearly Dialogic thinks there's a fit here, and maybe they're trying to become a consolidator now. That said, no financial details of the deal were provided, and it's not explained how Dialogic is funding the deal. The fact that not much is being said about this raises some questions, so it's hard to draw firm conclusions right now.

Of course, if you didn't know, Dialogic is based in Montreal, so it's worth noting that a Canadian company has come into the milieu and acquired an American company. Hate to say it, but it's probably a good time to be doing this given that the Canadian dollar is trading above the greenback. So, for a change, the economics are attractive for Canadian companies to do this.

Actually, with the US dollar being weak relative to other currencies, I wouldn't be surprised to see vendors from other parts of the world follow Dialogic to take advantage of their stronger currency. Time will tell. Meanwhile, it's Canadian Thanksgiving on Monday, so I'm sure the Dialogic execs will be enjoying their turkey. Gobble gobble.

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Posted by jonarnold at 12:44 PM | Comments (0)

July 03, 2007

BCE Privatization Story/Meeting Mr. Sabia

Without a doubt, the privatization of Bell Canada/BCE is the biggest story in Canadian telecom, and has many fascinating angles worth exploring. I've been very quiet about it, simply because it's so widely covered, and if I get started on this, I could be blogging for a long time. I gotta make a living, and have a backlog of other posts to get out from being away last week. Please be patient....

Well, I got my chance to speak my mind about BCE today on BNN - Business Network News. This is one of Canada's main financial news TV networks - it used to be called ROB TV (Report on Business TV), and was recently rebranded as BNN. Same studio, same people, same shows, and same owner - the Globe & Mail.

The studios are right downtown here in Toronto, and I was downtown anyway for a meeting, so the timing worked out well. This afternoon, I was on the After Hours show, hosted by Kim Parlee and Andy Bell. They wanted my take on the BCE deal, and what it means to Telus, as well as the rest of the Canadian communications landscape.

The segment runs about 7 minutes, and you can find the link on the BNN home page. You first need to get to the program listings for July 3, and then scroll down to the 4:40 pm time slot, and you'll see the link there.

If you can't find that, here's a direct link. However, they usually only leave these up on the site for a week, so don't wait too long if you want to view it.

So, what's the connection to Mr. Sabia? Michael Sabia is BCE's CEO, and figures prominently in most of the coverage of this story. Well, who do I run into as I'm leaving the studio? Mr. Sabia - he was on his way in to do the next BNN segment. If you want to hear his take on things, here's the link to the SqueezePlay show which follows After Hours. His interview starts at around the 13 minute mark. Strange, huh? Never met him before, and I may never meet him again - at least in his current role. You never know whose path you will cross - I wonder if he saw my segment?


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Posted by jonarnold at 10:50 PM | Comments (0)

June 28, 2007

Shoretel IPO Roadblock - Mitel Launches Lawsuit

I just got back from Mitel's customer/analyst conference this morning, and have not been able to blog until now. I've got a backlog of things to post, but this one has to be first. I got wind of this late yesterday - Las Vegas time - but wasn't able to post about it until now. This may well be the first you've heard about this story.

Basically, Mitel is suing Shoretel big time for patent infringement, and the news hit the wires late yesterday.

In the enterprise telephony vendor space, this is a big one. There's not much detail in the press release - no surprise there - but there's been some difficult history between these companies, and it looks like Mitel has strategically timed this release in advance of Shoretel's planned IPO.

Seems very similar to the tacks a number of service provider threw in the road just around Vonage's ill-fated IPO last year. It's another example of how tough it is to go public these days, and it's too early to know if Shoretel was blindsided here, or just felt these patents would never be an issue. More to come, for sure....


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Posted by jonarnold at 12:59 PM | Comments (8)

June 08, 2007

Espial Goes Public

Espial is a company I've been following for some time, and they had some great news today. This morning was the official announcement of their IPO on the Toronto exchange - the TSX - and their trading symbol will be ESP. How cool is that for a symbol?!?!

This may well be the first you've heard of the news, as the press release has not been made available yet over the U.S. PR wires. I suspect it will hit the wires first thing Monday, but you're reading about it here today.

In short, as reported in the release, the stock will list at $7.00, and if all goes well, Espial will raise $25 - $30 million, which will go a long way to fuel their growth plans. They have a good story to tell in the IPTV middleware space, which is going through its own consolidation phase. With this IPO, Espial should be in a great spot to emerge as one of the leading independent middleware vendors.

IPOs of Canadian vendors in the IP communications space are pretty hard to come by, and I expect Espial will be well received. So, congrats to Espial, and being Ottawa-based, this is probably the best feel-good story out there, since the Senators went out quietly this week!

If you're interested in Espial, I'll be doing a podcast with them soon about the IPO, and if you can't wait for that, I also did one with them about a year ago.

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Posted by jonarnold at 04:30 PM | Comments (0)

April 27, 2007

Mitel Acquires Inter-Tel for $723 Million

This story broke late yesterday, and I just wanted to draw attention to it. Not much public detail or blog coverage yet, but I think it's a good story. This is a $723 million deal, so it's not a small thing, and speaks loudly to Mitel's ambitions about becoming a bigger player in a rapidly growing market.

Mitel has long been a leading IP telephony vendor, especially in the small/mid size end of the enterprise market. Inter-Tel has a strong communications platform, and both companies are leading advocates of SIP and standards-based technologies.

It's another industry consolidation play, and will build two mid-tier players into a big, single mid-tier player who can dominate their space as well as better challenge the top tier vendors. Sounds like a good move for both companies, and it will be interesting to see how they combine their portfolios and manage joint customers.

Another angle to watch is how a private company absorbs a public company, especially with Mitel being Canadian and Inter-Tel being American. Also, Mitel has been on-again/off-again about going public, so this may be one way to address the issue, although my understanding is that Mitel will be remaining private.

For reference, I recently did a podcast with Don Smith, Mitel's CEO. He didn't tip his hand then about these plans, of course, but no doubt talks were underway at that time.

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Posted by jonarnold at 10:53 AM | Comments (0)

April 24, 2007

XConnect Raises $12 Million - Validation for Peering

Very nice press release that went public today, so it's ok to talk about it now. XC Global Networks just got its first major capital raise, and at $12 million, this gives them some space to really move VoIP peering forward. XConnect has been a leading advocate of VoIP peering, a space that is a bit like session border controllers. It's new, not well understood, not clearly defined, and not extensively deployed yet by carriers. There are a number of players taking different approaches to peering, with different models, settlement mechanisms, and solutions.

Anyone following this space would recognize the familiar faces, such as Stealth and Arbinet, and moving further afield, Nominum and Neustar, and on the SBC front, NexTone and Acme Packet. They all have a place in the ecosystem, but I think we're going to see consolidation as the peering space matures into a real market.

With this funding, XC is certainly in a good spot to be a key driver, and stepping back a bit, it's a very good sign of confidence that peering is being seen as a business opportunity. IPOs in the IP communications market have been dicey, and VCs are being selective about their investments, not just because IPOs are no sure thing, but also because it's hard to find good business models in this market.

That said, peering has nowhere to go but up, and no doubt the VCs see parallels in the market Acme Packet is addressing in terms of being at the beginning of the uptrend. On that front, it's a big day for XConnect, and for the health of VoIP peering in general, let's hope there will be more funding announcements to come.

Disclaimer - I am an Advisor to XConnect, so I'm personally happy about this news. However, I've tried to make this post as objective as possible, and hopefully that's how it comes across.


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Posted by jonarnold at 01:53 PM | Comments (1)

March 29, 2007

Will Bell Canada Be Taken Private?

Quite the story in today's Globe & Mail. The Globe reports that LBO heavyweight KKR is in preliminary discussions about taking BCE - Bell Canada Enterprises - the holding company for Bell Canada - private. This is being talked up as a $30 billion deal, which would make it the largest privatization in Canada's history.

A lot would have to happen for this to work, with two of the key issues being foreign ownership restrictions of Canadian telcos, and the large ownership stakes held by pension funds. The details are fascinating, and the article explores these pretty well, so I'm not going repeat things here.

The key thing for me is that Bell has been lagging its peers for far too long, and shareholders must be getting frustrated watching Telus and Roger deliver far better returns. Michael Sabia has been at the helm for a while now, and just can't seem to move fast enough to restore Bell to its pristine image as one of Canada's best companies. Mark Evans speculates further on what this deal may mean for Mr. Sabia in his post today.

With telecom reform looming here, and the Income Trust option now dead, there are many implications in this story for Bell Canada and their options moving forward. They have certainly made some good moves recently to stay focused on their core businesses, but the downside of being so big is the difficulty of moving quickly and responding to changing market conditions. It is not hard to argue that the Canadian telecom market lacks real competition, and this news will certainly highlight the holdback created by limited foreign investment. The pool of domestic alternatives to the incumbents is small, and not getting any bigger. Foreign entries or foreign investment will likely be the only way to change the status quo.

Stranger things have happened. Who would have expected SBC to take over AT&T? My view was that if AT&T could be taken out of the market, than anything was possible. In Canada, this could well be one of those scenarios. If the sentiment from the Globe's reader comments is any indication, then I'd say that many would welcome the change, but along with is a sense of futility that this is yet another sector of our economy that is falling in American hands.

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Posted by jonarnold at 09:23 PM | Comments (0)

March 16, 2007

Cisco Raises the Stakes with WebEx

The news of Cisco's $3.2 billion purchase of WebEx comes hot on the heels of Microsoft's acquisition of TellMe the other day for $800 million. While these deals are in different spaces, this is another step along the way to what's looking like an expensive showdown between these two giants.

While Cisco and Microsoft enjoy a close working relationship on a few fronts, it's clear that they both want to control the enterprise communications space, and their visions do not seem to allow for more than one of them to do that. Regardless, $3.2 billion is a lot of money, especially for a company that only does about 1/10th of that in sales. Of course, Cisco spent a lot more to acquire Scientific Atlanta, so we may not have seen the biggest deal yet.

It's hard to tell where this is all going or when it all ends. Both companies have money to burn, and at this stage of the game, time to market is everything, and it's simply more expedient to buy rather than build. Of course, there's the ongoing challenge of integrating these companies once acquired, and figuring out the details about branding, channels, R&D, staff retention, etc. However, this is the price you pay to get what you need, and perhaps more importantly, to keep it out of the hands of your competitors.

There won't be any shortage of media coverage today about this, although I'm surprised at how little blog coverage there has been so far.

Rather than re-hash the details, I'll steer you to Business Week Online. Their feature is out already, and it provides a good overview of Cisco's deal and the overall context for what's driving this. They were also nice enough to cite me, so I'm more than happy to share this with you.

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Posted by jonarnold at 12:12 AM | Comments (0)

March 09, 2007

Geosign Raises $160 Million - and Just Where is Guelph, Ontario?

So, who is Geosign, and how did they raise $160 million???

I'm asking the same questions myself. Geosign is a small, quiet company based in Guelph, Ontario - an hour or so from Toronto. Who knew???

It's a great Internet story for sure, and possibly a Web 2.0 story. They're an "Internet media" company, and it just shows how these success stories can truly come from anywhere. Guelph is in the middle of nowhere - a landlocked, agricultural town - barely big enough to be considered a city. I've been there a few times, and it's got a very interesting history. More importantly, though, it's in close proximity to Ontario's Technology Triangle, which is one of Canada's leading centers of tech innovation, most notably the home of RIM, and many others. More on that in a moment.

For the details, I'll steer you to today's Globe & Mail, which has a good writeup on Geosign and what they're going to do with all this money. As the article explains, Geosign has developed a network of 180 websites, all providing information for consumers on a wide range of goods and services. I'm not much for web surfing, so this is all news to me.

If you're curious, here's what one of their sites looks like - gizmocafe. Pretty plain, vanilla, mass market type of stuff. Nothing complicated, but hey, Geosign claims to attract some 35 million visitors a month to its sites. Can you imagine how many they'll be able to attract now? Gotta like their formula - dang, why didn't I think of that???

The item that really stood out for me in the article was the fact that this is the largest raise of private capital in Canada, and the largest in telecom/tech since Vonage raised $200 million in 2005. That's pretty impressive, and tells you that software and web-based businesses can still attract big money.

Mark Evans posted on this Wednesday, and his post includes a brief interview with their CEO, Ted Hastings.

I just wanted to add a brief comment about the size of this deal. Aside from its sheer scale, it says a lot about the potential that investors are starting to see in the Internet and online businesses. While it's surprising to see all of this coming from a low profile company based in a small city, it's not surprising that the funds are coming from the U.S. Followers of my blog may recall my visit to last year's Canadian Venture Forum. Canada may get its fair share of domestic VC placements, but the size of these deals is smaller than what U.S. companies get. It's hard to imagine any Canadian firm putting this amount of money into a company like this.

That said, you don't have to look far to see how hard it is to get funding up here, so in the IP communications space, there are still challenges for sure. I'm close to more than one startup here that has great technology, has done a lot of the right things, but still cannot get a deal. Makes you scratch your head and wonder how one company can get so much money, while so many others are hanging on by a thread. And to think how far these companies would get if they could just hive off 5% of Geosign's pot of gold. They're not going to spend that money Vonage-style, that's for sure. Geosign is bankrolled now to do some big things, and that's got to include acquisitions. I have no idea what their management structure or vision is like, but they're in a great position now.

On that note, I just may get to give Geosign some ideas about this myself. I'm in the process of organizing a mini-tour later this month of the Waterloo region, of which Guelph is part of, and Geosign is definitely on the list. Good timing!

This is coming as a result of my recent connection to Waterloo City Councillor, Mark Whaley, who has been encouraging me to this. It's in the works as we speak, and aside from my upcoming visit, I plan to do some podcasts about these companies afterwards.

Finally - just a small thing. You know what I like about this company? They spell their name Geosign, and not GeoSign. It's just so predictable the way companies concatenate two words with capitals. I'm old school that way, and am not a fan of forcing two words together that really don't belong together, and making it look right by using capitals. Enough. BackToWorkNow.


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Posted by jonarnold at 12:48 PM | Comments (5)

November 22, 2006

Natural Convergence Funding News

Very nice to hear yesterday that Natural Convergence just scored $10 million in funding, which is quite a lot for a Canadian startup.

Ottawa-based Natural Convergence is a Terry Matthews company, who just had a very successful exit in Convedia. There are many other well-known IP companies under his umbrella, including Mitel, Ubiquity, Newport Networks and NewHeights (who I recently did a podcast with).

Like these other companies, Natural Convergence has maintained a clear market focus, in this case, offering a hosted IP communications platform for service providers targeting the 40 line and under business market. One doesn't have to look far to see that SMB VoIP is hot these days, and Natural Convergence is well postioned to serve this market. There really are just a handful of players addressing this space in Canada, and their investors obviously have faith in their vision. So, congrats to David Cork and his team, and may you spend your money wisely! Maybe, just maybe this good vibe will rub off a bit on the Senators now...

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Posted by jonarnold at 04:52 PM | Comments (0)

October 13, 2006

Is Acme Packet Worth More than Vonage?

Very intriguing question, and it’s been on my mind since yesterday. From the looks of today’s IPO, it sure looks that way for Acme Packet. It’s a big day – and a good day – for anyone who has been in this space, or following it for the past few years. From what I’ve been told, this is the first IPO from a nextgen equipment vendor since 2000. Any guesses as to who that might have been? Sonus? AudioCodes? I’m not sure myself.

I’ve been close to Acme for some time, and have posted about them several times. One of their most public faces, Seamus Hourihan, is here at the ITExpo, and was on my FMC panel the other day, so we’ve had some time to reflect on Acme and what it means for the IP communications market.

So, with today’s opening, Acme’s market valuation is actually pretty darned close to Vonage – main difference being that Acme’s IPO price has held steady, whereas Vonage’s went south very quickly. Interestingly, Vonage’s IPO trading price isn’t far off from Acme’s, and you have to shake your head a bit and wonder – can these two companies really be comparable in value?

Of course, they’re in very different ends of the business, so it’s hard to compare. To me, the bottom line is you don’t have to be really big to have a viable business in the IP world. Vonage’s revenues are 10-15 times that of Acme’s, but look who’s making money, and look who’s been profitable for a while now, and look doesn’t have any debt, and look who’s coming out of their IPO with a dominant market position, at least among the Tier 1 carriers. Acme's opening price may be unsustainable, but it's a good story, and they've earned their stripes in my books.

Enough said, other than congrats to Acme – am sure they’re all smiles there today. And hopefully, the rest of the IP vendor space is breathing a little easier, especially the IPOs-in-waiting.

Quick coda - the Boston Globe was nice enough to cite me in their article on Acme today.

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Posted by jonarnold at 02:44 PM | Comments (0)

September 12, 2006

XConnect and iPeerX Join Forces

This is my first chance to blog at Fall VON, and just have time to cover this one. I'll be posting later about the keynotes from this morning by Jeff Pulver and Ted Leonsis of AOL.

Lots of interesting news releases at VON, and I wanted to comment on one I have had some history with. Today, the XConnect Alliance announced its acquisition of iPeerX. This is good news for the VoIP peering space, as XConnect moves further along the path to creating critical mass. VoIP peering has not yet become a necessary condition for carriers to succeed with IP, but slowly, the value proposition is becoming more relevant for carriers.

Both companies have had modest success signing up carriers to peer with them, but XConnect has been able to take their vision further, and are better positioned to become a consolidator. They have already shown this with an earlier acquisition of German-based e164.info in May.

Consolidation is happening across the board in the IP space, and peering is no exception. Peering is very much a volume business, and platforms such as the XConnect Alliance need to keep building their track record to demonstrate proof of concept especially for the Tier 1s, who will be the last to join the party. That’s when VoIP peering will really become exciting, but to get there, the foundation must be built among the willing and able, which for now, are primarily Tier 2/Tier 3 carriers with a strong commitment to IP.

The details of this deal are just as interesting as the bigger picture. XConnect founder and CEO Eli Katz announced the acquisition at a press conference this morning, and joining him was Kingsley Hill, who was President of iPeerX. Kingsley will now take on strategic business development for the multi-lateral peering federation XConnect is trying to build among it members. Between these companies, there are over 300 carriers on board, with the world’s largest VoIP ENUM registry – over 8.5 million active subscriber numbers. As such, there is definitely a strong base to build from here.

VON followers would know that iPeerX is a Jeff Pulver initiative that has been following its own course until now. This move makes sense for them, as it keeps them in the game, and it seems clear that the better route is to be part of a bigger pie than trying to keep a smaller slice to yourself – especially since there will only be room for a couple of players once this market goes mainstream. IPeerX hasn’t yet secured a large-scale win like the one XConnect achieved with the Dutch cable VoIP providers – so better to go with the flow, and help build this momentum. Jeff, who is never far from the center of where IP is going, will remain involved as a member of XConnect’s Advisory Board.

Disclosure – I am an Advisor to XConnect, and have tried to present this news as objectively as possible. If you feel I have overlooked or omitted anything of note, I welcome your comments.

Posted by jonarnold at 12:19 PM | Comments (0)

July 28, 2006

Convedia Acquired - Media Server Consolidation Next?

The VoIP infrastructure space continues to consolidate, with the latest news, which I found a bit surprising. Convedia has been acquired by RadiSys, a company not normally followed in this space, which is the main surprise element for me. RadiSys is leading vendor in embedded technologies, such as ATCA, but I'll stop there, as I don't follow that space very closely. Hat tip to Mark Evans with his late night post yesterday on the news. Good scoop!

In short, Convedia was acquired for $105 million, which sure looks good, considering how Netrake only went for $11 million to AudioCodes as recently as last week, and I commented about that in the context of how the session border controller market was consolidating. Netrake has raised WAY more money that Convedia, but didn't get nearly as much traction, so the math isn't hard to figure out here.

Convedia is a Terry Matthews company, so there must be some happy folks today over at Wesley Clover - his invesment management arm - including his son/EVP, Owen Matthews, who I just did a podcast with.

So, good news all around, and another validation that Canada is producing some real winners in the IP communications space. Congrats to Peter Briscoe and Grant Henderson! I've followed Convedia closely for many years, and have always admired them. Since evolving to become a media server company, they've maintained a singular focus to do nothing but this. That approach has really paid off as they've become the dominant player in this space, and now the payback has come. As it well should.

Just a quick comment on the news itself. The fit between the 2 companies isn't that evident, and it reminds me of Comverse's acquisition of NetCentrex in April. Very different businesses, but the strategy is sound. RadiSys is an embedded play, whereas Convedia is all about a hardware-based, purpose-built box. Where's the fit there? I suspect this has to do with the fact that so much of this space is becoming software based, and there is certainly a market opportunity for media servers here. To date, software-based media servers have not had much success, although SnowShore has continued to evolve this space under the Cantata umbrella. For Convedia, the embedded expertise of RadiSys may well provide a stronger base for them to develop a rich solution to complement their existing hardware-based product family.

Another key element would be the global market reach of RadiSys. Much like the Comverse deal, RadiSys can bring Convedia to a wider base of customers, especially for those looking for a strong IMS story. Also, both companies have a strong focus on Asia - RadiSys has a design center in China, and Convedia has done a great job of securing design wins with the major Asian vendors, which is critical for getting traction in that market.

So, the consolidation story continues. In the media server space, Convedia is gone now, both Excel and SnowShore are part of Cantata, and AudioCodes is itself becoming a consolidator, much like Tekelec. The only other pureplay that comes to mind, really, is IPUnity, and their Mereon product family. I'm sure the Convedia news is very much on their minds today...

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Posted by jonarnold at 08:42 AM | Comments (0)

July 19, 2006

Session Border Control Market Really Hurting

Just wanted to comment quickly on this space. I've been close to the session border controller (SBC) market from the beginning, and still feel an affinity for the vendors. It's not an established or clearly defined market segment, but we more or less know who the players are. There have been a couple of recent body blows to this space, and it's not getting a lot of attention from bloggers. So, for the record, I just want to draw attention to what's going on, as I believe it has wider implications for both vendors and the financial community.

Most recently - Monday - Juniper announced it was withdrawing its SBC offerings, which are based on their acquisiton of Kagoor last March. This was a well-received exit, as Kagoor got a decent valuation, and Juniper got a solution to give them a leg up on Cisco. Things were looking good for the other SBC vendors with similar exit aspirations.

Then we had Netrake's paltry acquisition by AudioCodes last week. Netrake had raised some $70 million, but wasn't coming up with the big wins to justify this kind of investment. Looks like the VCs had had enough, and AudioCodes probably got a good deal. They're continuing along the consolidation path, and if you ask me, are on their way to being in a league with Sonus, which not too many nextgen vendors get to. Tekelec also comes to mind - also via acquisition. In the present climate, it's becoming the norm for vendors to get big or go home. It's getting more difficult to remain small and independent, especially if you have aspirations of selling to Tier 2 carriers or higher.

Netrake may not have had much choice in taking the AudioCodes offer, and while it spares them a possibly worse fate, it's got to be cause for concern among those left standing in the SBC space. Way back, Jasomi got taken out by Ditech for a fairly small payout, and Netrake did not fare much better (but at least Jasomi was self funded, and nobody lost any money). And there's Newport Networks, who went public in the UK. They raised a lot of money - without any customers or revenues to speak of. Their valuation has gone down significantly since then (much worse than Vonage), and I really don't see things changing in a big way there.

So, on that level, the Netrake deal is a continuation of a scary trend that basically says the market doesn't value this space a whole lot. At the end of day, there's something to be said for exiting early like Kagoor. Translation - get out while the going's good.

That said - I still think the SBC segment has merit on its own, but it's looking like there may only be room for a couple of players. When I was at Frost & Sullivan, I wrote a report on this space when it was just getting hot, and concluded that the market for standalones would peak and then go down as exits and acquisitions occurred - and when vendors start integrating SBC functionality into other network elements. As it turns out - that's exactly what Juniper is doing with Kagoor. As I recall, my conclusions were not well received, at least by some vendors who felt the market had much more life in it. Well, I'd have to say those conclusions turned out to be very true - and if memory serves, a good year or two earlier than I had predicted. If I was Frost & Sullivan, I'd be thinking about re-issuing that report with an update!

So, this one-two knockout punch of Netrake and Kagoor basiclly leaves us with two strong SBC pureplays - Acme and NexTone. Yes, there are several other vendors who now offer SBC solutions and/or functionality, like MetaSwitch, Tekelec and Quintum - but these are not pureplays - SBC is not central to their business.

Acme and NextTone look to be the long-term winners in this space, which validates that there's room for both an integrated big box platform - Acme, and a dis-integrated solution like NexTone's. Both are doing well, and have fairly different customer sets. NexTone got a nice funding round last year, and look to be in good shape financially for some time to come. Acme, on the other hand, has not taken any rounds for almost 3 years, and have been able to sustain themselves nicely from organic growth.

Of the two, Acme should be the most worried in the wake of the Netrake and Kagoor news. The low valuation for Netrake can't be good news for Acme's recently announced IPO, especially with Vonage's dark cloud hanging over the IPO landscape for anyone in the IP communications space. That said, Acme is a healthier company, and deserves a successful IPO. I hope they get it, but geez, early in the game this market was an Acme vs. Netrake story for the Tier 1s. Clearly Acme is coming out on top, and for their sake, let's hope the market sees them in the same light.

In the name of transparency, I must state that NexTone is a current client of mine. However, they're not the only company I'm saying nice things about!


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Posted by jonarnold at 05:14 PM | Comments (3)

July 12, 2006

Bell Globemedia Set to Acquire CHUM

Just a quick item that may become fact in an hour or so. Bell Globemedia looks to be acquiring CHUM, and the news should come down later today.

This media convergence business sure is interesting. Bell Globemedia is basically the content arm of BCE, parent of Bell Canada. Technically, BCE owns roughly 2/3 of them - that's good enough for me. They own a lot of properties, including the Globe & Mail, the CTV television network (21 stations), and tons of specialty/digital channels.

CHUM has quite a legacy of its own - 33 radio stations, and lots of local TV stations and specialty channels. Most importantly, they pretty much defined cool TV for the youth market, especially the MTV crowd. If anyone knows how to build audiences with the youth market and the vast array of lifestyle niche markets that cable TV seems to be invented for, it's CHUM. On that point alone, Bell will be in a much stronger position to attract and keep the youth market in the fold, especially once IPTV comes along. Smart move if you ask me.

On paper, this is a relatively small deal for BCE, but it sure bulks up their content and distribution arms. This would make for one impressive force, and is another example how the big stay big. I don't know if this will raise any regulatory issues in terms of concentration of media ownership, much like what seems to be happening in the US.

Recently, I've been lauding Telus for its recent moves to stay ahead of Bell, and they all make sense. So, here we go, a day after Telus announces its Toronto office tower plans, Bell ups the ante by going after what is arguably the most desirable independent media/content property available. I'm not sure what Telus will have to do to keep pace in this department, so the ball falls back in their court - once again. The consolidation of our communications sector continues...


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Posted by jonarnold at 02:37 PM | Comments (1)

July 11, 2006

Consolidation - Not Unique to Telecom - Filene's Sold

This is a short, semi-sentimental posting, but it connects to telecom in a small way. I just read today that the Filene's department store - currently owned by giant Federated Department Stores - is being sold to a real estate trust. Any New Englander knows all about Filene's, and their Filene's Basement has been an institution forever, setting the tone for all the factory outlet/off-price stores that have become so commonplace now. I also understand that Marshall Fields is going the same route, and that store has the same significance for anyone living in the Chicago area.

Canada has gone through a similar purging of old-line department store names upon which our retail sector has been built for many generations - Eatons, Simpsons and now the Bay. Not much left up here any more in terms of home-grown retailers, which is really too bad.

A lot of this speaks to the passing of an era where the local general department store was the dominant form of retail - and so much more. This type of consolidation is happening of course in the telecom sector - and other industries - and it makes you wonder what the fate of our old-line RBOCs will be. Clearly, they have to re-invent themselves - in ways that Filene's and Marshall Fields could not.

The markets are very different of course, but in both cases, where choices exist, consumers vote with their feet and their wallets. Much of what works in retail works in telecom - convenience, quality, ease of doing business, choice, customer service, etc. I'd like to think that the RBOC strategy guys are smart enough to look outside their industry to see how the big players adapt in other sectors. I sure would be.

Posted by jonarnold at 10:38 PM | Comments (0)

July 06, 2006

Canadian IP Thought Leaders Podcast - Sean Wise, Wise Mentor Capital

This week's podcast was with Sean Wise, of Wise Mentor Capital. Sean is one of the most connected people helping startups become successful in Canada, and he knows the landscape as well as anyone. He wears a lot of hats, and wears them very well.

We talked about what he's seeing in the telecom startup space from both sides of the table, and for anyone interested in knowing why this is a good time to be a startup, you'll find this most useful. Also, Sean's website and blog are great resources for startups, and once you drop in for visit, you'll see that he's not hard to find.


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Posted by jonarnold at 09:54 AM | Comments (0)

July 04, 2006

Yak Communications - Another VoIP Casualty?

Been meaning to post about this one for a few days, and the fact that nobody seems to be paying any attention to this says a lot on its own. I only came across this because I spoke to a journalist about it last week - will let you know when the story runs.

Yak Communications has been in the long distance and calling card business for some time, and WorldCity is their more recent suite of offerings targeted at the residential VoIP market. I've never quite been able to figure out what business Yak is really in, and now I guess I'm not alone.

On June 20, Yak announced they were "exploring strategic alternatives to maximize shareholder value", which is a polite way of saying it's tough to make a go of things in this game. I second the motion there, and despite some nice marketing and brand building, Yak has obviously not caught on enough to justify the investment needed to continue. They even tried to spice things up with free video calling - which I blogged about last November - but that's not the ticket either.

To make things official, last Thursday, Yak announced the selection of their investment bank - Orion Securities - to get on with the business of finding a market exit.

You know things can't be going too well when this announcement is made just ahead of the long weekend, when people have other things on their minds. Furthermore, there's no evidence of this news on their website, which says they want to ease out of the market as quietly as possible.

In my view, none of this is surprising, especially given how badly things have gone with Vonage and their IPO. I've long felt pureplay retail VoIP offerings have a low probability of success, and unless you've built a brand the way Vonage has, I just don't see how you can create much residual value. Sure, the cost of entry is low in this business, but the exit price isn't usually very high either.

At this point, it doesn't look like Yak has much more than a modest base of VoIP subscribers and a fairly strong calling card business. The brand is pretty reputable, but is far from being a household name. There is some asset base there, but not much, and it's hard to see how Orion will get much in return beyond the $10 million they have in the bank. Am sorry to say, but for a change, this isn't a good news story about the Canadian market.

Anybody want to buy a VoIP company?


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Posted by jonarnold at 05:04 PM | Comments (8)

June 29, 2006

Canada's Top Tech 100 - IP Companies to Watch

The current issue of Canadian Business magazine was a good one. Aside from the IPTV article I just posted about, they also had their annual Tech 100 feature, which focuses on Canada's top 100 publicly traded tech companies.

Of course, the usual suspects from IP and telecom are there - Bell, Telus, Rogers, Shaw, Nortel, RIM, etc. - and it's good to see that these sectors make up a good chunk of the overall list of the top 100.

More interesting for me are some lesser-known companies in the list that I've been following, namely Aastra (ranked #16) and Ascalade (#35). I've blogged about each before - here and here - and it's great to see them getting this kind of recognition.

In addition, this issue had another cool section titled How Things Work. I love stuff like this, and one of the topics was mobile TV. There's a nice explanation there of how carriers transmit TV to cell phones, and the focus is on how a small company, QuickPlay, provides the enabling technology. QuickPlay is Toronto-based, and I've been following them for a while - with both postings and a recent podcast.

Finally, there was also a short piece about Dragon's Den, the new business reality TV show in production now for the Fall season on CBC television. I posted about this show last week, and hope you tune in - especially if you want to see startups who are seeking money grovel really well before a panel of hard-nosed investors with money to spend. Capitalism at it most entertaining --- short of The Apprentice!

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Posted by jonarnold at 04:46 PM | Comments (0)

June 26, 2006

Vonage IPO - One Month Later

Ugly is a pretty good way to describe Vonage's world just one month after going public. Was going public a mistake? Should they have waited? Did they really have any choice? More questions than answers for sure, but the overall sentiment is pretty bleak, if not nasty. Just take a quick tour around the blogosphere for starters - Russell Shaw, Andy Abramson's post about Bloomberg's article, and Mark Evans.

On Friday, I was interviewed by Bloomberg Radio about Vonage, and got to say my piece on the story. I basically reprised my thoughts that I had posted earlier in the week, with my basic take being that Vonage is oversold, and that it's not all bad.

So, maybe I'm being a contrarian here, with a touch of wishful thinking, but I also think the Vonage-bashing has gone on long enough. It's very easy to jump on the bandwagon and throw more logs on the fire, but even with all of Vonage's woes, there reaches a point where it's just unproductive. There's a healthy, happening IP market going on out there, and hopefully this gloom won't spread like a dark cloud over the whole space.


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Posted by jonarnold at 12:15 PM | Comments (0)

June 22, 2006

Attention Canadian Startups - Casting Call to Raise $$$

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If you're a fan of reality TV, you'll love this. Sean Wise provides all kinds of help for Canadian tech startups, and has built up a thriving practice around this. For reference, I've posted about Sean before.

We're in regular contact these days, and he just told me about a new business reality show called Dragon's Den. Lucky Sean - he's just landed a spot on the panel of experts who get to play Donald Trump and evaluate the pitches of these startups. Not only that, but the panelists can put their money on the table if they see something they like, announcing how much they're in for.

So, think of this as a cross between American/Canadian Idol, Deal/No Deal, and a touch of Texas Hold'em poker. I don't know who comes up with these reality show concepts, but you have to love it, since real money is in play here for aspiring entrepreneurs who can tell a good story (and of course have the chops to deliver).

The show debuts on CBC TV across Canada in October (and is based on a BBC show), but casting calls are NOW. For any startups in Toronto, auditions are this Saturday. Dates are set for other cities as well - it's all on the website.

Check out Sean's new blog, where he chronicles his involvement with the show, and how he's just landed a spot on the expert panel. Is that fun, or what? If you ever call in sick, Sean, I'm there!

On that note, I'd like to officially welcome Sean to the blogosphere. I've added his blog to my blog roll for future reference.


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Posted by jonarnold at 09:18 AM | Comments (1)

June 20, 2006

Is Vonage Oversold?

I think so!

Earlier today, I was speaking with colleague Neal Shact of Communitech Services about this, and his take led me to think along these lines as well. Of course, most evidence points to the contrary, with the following being some bona fide examples.....


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What a mess, right? This dollars and sense scenario of their IPO share price falling off a cliff is echoed by a market sentiment scenario, courtesy of TrendIQ.

This is a fascinating take on the market, and I've blogged about them before. If you're interested in tracking the VoIP market (and others like wireless and social networks), you should look into their services.

Check this out below. Look how much of a dip market sentiment towards Vonage has taken. The chart may be hard to read - Vonage is the green line that's all wavy. The black trend line with the boxes is the overall industry average. To me, this is just as telling as Vonage's share price erosion, and may be a better indicator of customer loyalty, which is absolutely critical to Vonage right now.

This chart only shows Vonage and a couple of other VoIP players with "V" names. Don't worry about their trend lines. There are several other charts showing the sentiment for the other providers, but I'm just focusing on Vonage right now. Vonage's trend line has clearly taken a big dip, and it's quickly dropping down to the overall industry average, which isn't good.


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And then there's popular opinion. Om Malik put a poll up on his blog asking what's the right price for Vonage's stock. Again, based on how a handful of readers voted, as well as their candid comments, the picture is pretty bleak.


It's very easy to kick someone when they're down, but I say let's look on the bright side, folks - and there IS a bright side (isn't there??). I'm not as bullish as Dan Berninger, but surely, all those subscribers have got to be attractive to someone, especially with the shares being basically half price. I see four things that you'd think would be of value to someone large enough to ride things out:

1. Upwards of 2 million subscribers - no other VoIP pureplay comes close. Sure, they'll lose a small piece of this in the fallout from the IPO, but I don't think it will be a tidal wave - provided they handle it properly, and start doing things right.

2. A healthy revenue base from these subscribers - over $400 million, annualized. Even if prices drop to keep pace with the market, this is a huge revenue stream for a VoIP company.

3. A ton of cash in the bank. It's not clear how much cash they actually raised, or how much they'll keep, pending all this litigation and other headaches, but they certainly haven't had much time to spend it all on advertising.

4. Huge accumulated losses. Wouldn't that be worth something to somebody who pays a lot of corporate tax?


It's hard to see the good when there's so much bad, but c'mon, where would VoIP be without Vonage? In my view, they've single-handedly built mass awareness of VoIP, and the product is good. It's not perfect, but certainly good enough for the mass market.

No doubt Verizon is in payback mode with their recent patent infringement allegations, and all the Tier 1s are doing their part to throw tacks in the road. Except AT&T. They've been quiet on this front, and I'm of two minds here. On one hand, maybe they're going to follow suit with Verizon, and find some way to add to the mix - maybe it's a price cut, or maybe it's another lawsuit. Or...maybe they'll take the high road, and just play by market rules. Perhaps they don't want to be seen as the big, bad AT&T who finally pushes Vonage over the cliff and forever kills any chance for real competition. Besides, don't they need to play nice with the FCC so as not to jeopardize their megadeals with SBC and BellSouth? Maybe they're just going to wait until that passes regulatory muster, at which point nobody can really stop them. So many scenarios, and all are possible.

All I know is that for better or worse, the market owes Vonage some gratitude, at least if you're a fan of VoIP. Does this make Vonage a buy now? I predicted a strong IPO, and look what happened. I'm not going to answer that one, but I suspect that if you even give Vonage half a chance for survival, there's more upside than downside at this point in time. Any takers?


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Posted by jonarnold at 12:06 PM | Comments (0)

Mortel or Notorola - or Something Else?

Is it just me, or are you finding interesting parallels with the World Cup and the urge to merge going on with the big telecom vendors? So much history with some of these national matchups - when you get Poland playing Germany - in Germany - it's hard to just think about this just being a soccer match.

So, we get the news yesterday about Nokia and Siemens. In telecom terms, it's probably a good deal, but I'm just having a hard time in my head with the idea of a Finnish company hooking up with a German company. Then there's Lucent and Alcatel. Aside from their corporate colors clashing horribly - orange and red - it's not hard to find Americans these days who would be uncomfortable with the idea of joining forces with the French. I'm being very simplistic here, of course, but the World Cup is such a wonderful event, and reminds us that when there's a common passion or interest - whether it be soccer or business - you have to live in the present and work around current realities.

That brings us to Nortel. Predictably, the market is focusing on them now, worried that when the music stops, there won't be any dance partners left. It's starting to get expensive for Nortel decide whether it can make it alone, as their valuation dropped a billion dollars yesterday on the sell-off. I'm not a financial analyst, but if the market is that worried about Nortel's prospects, they can't sit idle - or quiet - too long. All fingers point to Motorola as the best suitor, hence the title of this posting. That's a topic unto itself, but I'm not close enough to Moto to add much to the conversation.

Geographically, the move would fit the storyline I'm weaving here - an American company taking on a Canadian company. We've sure seen that one a few times before, and is achingly familiar to Canadians who have this patten ingrained into their psyche. Wasn't that long ago, of course, when the reverse was true. When Nortel was flying high, they were the ones doing the buying, taking on Americans, or anyone else they felt would help their growth.

Am not seeing anyone talking much about Cisco, with their open door for Nortel, but I suspect Cisco likes their growth prospects they way they are now - unless the price is right. I have long felt that Huawei was the one for Nortel, and it was looking that way earlier in the year when they announced a partnership for broadband equipment. That barely lasted 4 months, with the breakup news coming earlier this month. So, I don't know what to think any more.

Geez, we can't even keep the Stanley Cup in Canada, so wherever Nortel ends up, it really won't be much of a surprise. On that note, I just can't help mention the irony connecting my Nortel story to the Cup. The Carolina Hurricanes are based in Raleigh, which is home to a major Nortel facility in RTP, and their arena is named the RBC Center - Royal Bank of Canada - our largest bank, eh!

So, an American team may have won the Cup, but we still have some tenous connections to bask in the Canes's glory. Of course, most of the players are Canadian, but that's a given - more or less. Hockey is becoming a global sport, just like soccer, and we all know how much players from outside North America are contributing to the game. Like how I tied all those threads together? Is there a takeaway in here for Nortel? Probably this - think like the NHL or FIFA - the world's a big stage, and it pays to be big, but it doesn't really matter where you're from.

Posted by jonarnold at 10:00 AM | Comments (0)

June 03, 2006

Telio - Day 1 - So Far, So Good

I feel like I'm carving out a niche here for being a Telio watcher, but I just had to close the loop a bit here. While no new shares were issued on opening day, the sky did not fall, which can only be seen as good news. The news doesn't exactly come to me thick and fast from Norway - nor in a language I can understand - but from what I can tell, there are no red flags, or any ultimatums demanding shares be paid for in full regardless of market price.

As per my earlier post, a tale of two cities, for sure....


Ring those bells...Alan Duric, co-founder/CTO, Telio, and Jeff Citron of Vonage (apologies for the poor quality, esp of the Vonage photo)


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Day 1 trading, at 30 NOK, as per the Oslo Bourse site....


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Vonage sidebar - on Friday, they announced the hiring of Bryan DiGiorgio as their SVP of Customer Care. I suspect he's going to be one busy guy.


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Posted by jonarnold at 04:51 PM | Comments (0)

Acme Packet - IPO On The Way

I've been expressing concern about how the Vonage IPO will impact the appetite for others who have been waiting for the right time to make their move. One could argue that Vonage's poor showing would spell doom and gloom, and scare all the bankers away from VoIP. Or one could say the bankers are smarter than you think, and are not letting one IPO based on a broken business model - albeit a BIG IPO for this space - cloud their judgment about smaller gems that are right at their feet.

Acme Packetis one such gem, and on Friday, they filed the news about their S-1 and plans to go public. The press release doesn't say much, but indicates that Goldman Sachs is the lead banker, with Credit Suisse and J.P. Morgan co-managing the offering.

I've followed Acme for quite a while, and when you talk about leaders within a vertical, you have to look at them for their space. The session border controller market is not as well defined as other nextgen network elements such as media gateways or media servers, but there's no doubt that Acme has had the most success in this space with Tier 1 carriers. Other session border controller vendors have strengths as well, but when it comes to landing the big ones, Acme has done the best job.

They're also in a great position because among all the main vendors in this space, I believe they've taken the least amount of venture funding - $31 million, only 2 rounds - and haven't taken any since September 2003. Wow! Compare that to Vonage and you tell me where you'd rather put your money. Slow and steady wins the race. So, their early backers - Menlo Ventures and Canaan Partners- will do quite well, and if the IPO flies, they'll be in great shape.

Personally, I think Acme will do just fine, and will show the market that the vendor space may be a better bet for IPO than the operator side. No need to comment further on Vonage, but Packet8 (another virtual operator) has been public for a long time, and hasn't done that well (down from about $2.50 to about $1.40 in the past 6 months).

Back to the session border space, it's worth noting that Newport Networks, who is gunning for the same class of carriers that Acme is serving, went public over a year ago on the LSE, and raised quite a bit of money - without revenues or any name customers to speak of. Their value has long since declined - and almost 10-fold (!!) in the past 12 months - for good reason, and you'd have to think that Acme has nowhere to go but up.

Looking ahead, this space has seen a few exits already, most notably Kagoor going to Juniper and Jasomi going to Ditech. Who's left? Well, NexTone and Netrake are the biggest and strongest pureplays in this space. Both are doing well for different reasons, but if I had to hedge my bets, I'd say NexTone is next up in this space to go public.

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Posted by jonarnold at 03:40 PM | Comments (6)

June 01, 2006

Telio - a Better Way to do a VoIP IPO

Tomorrow is the IPO launch for Norway-based Telio. While not a household name in North America, Telio has a following among those who attend VON events, and in my view, are the Vonage of Europe . They have been quietly building up a great voice over broadband business – primarily in Norway – and are ready to share it with the world. This in itself is not a big story, but in the wake (literally) of Vonage’s IPO, Telio stands in stark contrast to how one can go about building a profitable business in a market that is rapidly becoming commoditized.

To cite sources first, James Enck, who’s always on top of things, esp in Europe had a good post about Telio yesterday. There are two stories here, one micro and one macro. The micro story, which is what James discusses, centers on the pricing of their IPO and the unusual scenario in terms making shares available for sale. He points to the press release from the Oslo Bourse, which explains that the market makers were only able to generate strong support for the stock at a price of 30 NOK.

Noting that the market there has been volatile, the press release seems worded in a way to make you wonder why Telio's management has elected to stick to the price range they think the stock is worth, namely 31 - 37 NOK. As a result, the stock will be listed at 30 NOK, but no new shares will be issued. They'll take their chances and hope the market proves them right, in which case, the share price will move up into their target zone, and only then will the public get a shot at the float.

To some, this might look haughty and short-sighted, especially coming from a tiny company, and it could be argued they should be grateful to take 30 and go with the flow. Telio isn't that way, and they sure aren't like Vonage.

Their management's position says a lot about the character of this company and how radically different their bargaining position is compared to Vonage. In their view, they have cash in the bank and don't need this money for immediate operations, so they don't have to give the stock away, and they're not desperate to take whatever comes their way. Good thing Vonage didn't do that! Telio is in a much stronger market position relative to Vonage, and it's highly unlikey their offering will follow Vonage's course. If it does, then, sure, you can say "I told you so", but I don't see that happening.

For those of you not familiar with Telio, you can study their Investor Presentation here - it's well done and easy to follow. Otherwise, I'll give you the Readers Digest version, straight from the source. I've been speaking with Telio's founders today, and have been following them closely from the beginning.

This is the macro story I'm trying to get to, and I briefly want to talk about how Telio differs from Vonage, and why they are enroute to a successful IPO. This really is a tale of two cities, and I want to get the point across that mass marketing spending is not the only way build a business, and in some ways, it's so Business 1.0.

Telio has built up a residential VoIP subscriber base of over 90,000, and guess what - they're profitable, and they have money in the bank. Their future doesn't ride on an IPO. They can make it without it, and it wasn't a fallback position because nobody came along to buy them. Compared to Telio, Vonage is very Business 1.0 in the sense that they didn't fully exploit the power of the Internet. They've spent most of their money on traditional advertising to build a business in a traditional - and very American - way. The more you spend, the more subs you get - but that's a treadmill you can never get off.

Telio - very much like Skype - is Business 2.0 (not really Web 2.0, but that will come). I have learned that 75% of their customers come from referrals and friends - pure organic growth and viral marketing. Not as dramatic as Skype, who has zero marketing spend - but pretty darned close. Not only are their customer acquisition costs much lower than Vonage, but they do a better job of retaining those customers. They won't reveal their precise churn level, but it's below 1%, which is terrific. Vonage's churn is respectable for the market it is in, but it's quite a bit higher than Telio. These two simple metrics go a long way to explaining why these companies are on divergent paths.

Telio has done a great job leveraging the Internet to build its customer base, and they've built a more efficient organization to support growth. On top of having lower overhead, they also claim a higher ARPU than Vonage (despite having more free calling zones than Vonage) - two more factors that make the difference between profits and losses. The higher ARPU comes from the fact that their target customer is a bit different than Vonage. They focus more on people who "communicate a lot" - power users, so to speak. Vonage is more lowest common denominator, which means less likelihood of adopting premium services.

In short, Telio wants to "grow smart and not burn our capital". Very different philosphy to Vonage, isn't it? Another way Telio has leveraged the Internet - and IP economics in particular - is the simple notion that small is beautiful. One of the trump cards of any virtual provider is not having the burden of a costly network infrastructure. You don't need millions of subs to make money!!!

The US market is about 70 times the size of Norway. On a per capita basis, Telio's 90,000+ subs translates to over 6 million in the US. That would make them far and away the market leader there. But they don't need to be that big. Being profitable with less than 100,000 subs gives hope to dozens or hundreds of other startups that with the right business model, they can make money. Of course, most of them don't and won't, but Telio is proving that it can be done. This is how you build a successful Internet business. It's not just a matter of doing one or two big things right or differently. It's a lot of little things that add up to viable business model.

That said, the future is far from certain. Telio holds a comparable market share position to Vonage in the US - about 35% of the rez VoIP market. As with Vonage, there are dozens of other VoIP pureplays in Norway, but they're all hopelessly behind Telio. Their main competition is the big telcos, who aren't doing much yet with VoIP. The Investor document shows PTT Telenor being #2 with 13% share. It's pretty safe to say those numbers will climb once they get busy - much like what is happening now in the US with CallVantage and VoiceWing. The big difference for Telio is that cable has low penetration in Norway, so it's all DSL for broadband, and there are no Time Warners or Cablevisions there to give them a run for their money.

Although competition will intensify, VoIP is really the first stage of growth. Telio keeps developing applications and is well along the path to offering FMC and MVNO services - not just in Norway, but across Europe. These plans are pretty clearly laid out in part 4 of their Investor document. So, will they be able to keep growing virally - or have they simply captured all the early adopters? How will they hold up when the market gets more competitive? Can their technology - and organization - scale to keep pace with growth?

It's too early to tell, but it seems to me they have a much better handle on how to migrate to wireless services than Vonage, and in Europe, that really opens things up for them. Is this the little engine that could? I think so.

Which company would you rather invest in? One that has publicly stated their IPO funds would be used to maintain marketing spend to continue acquiring customers? Or one that is cash flow positive already and will reinvest into the business to fund growth into new markets and new services? It's a no brainer for me.

Before I sign off, I just have to come back to a comment I made last week about how Vonage and Mastercard went IPO on the same day. Talk about going in opposite directions. Vonage opened at $17, and is now down aroud $12, while Mastercard opened at $39, and is up at $47. I know I get philosophical at times, but it just strikes me as so odd that the market rewards companies that help us spend money we don't have, and they punish those who try to save consumers a few bucks. To twist things a bit further, Mastercard actually profits from Vonage since they are one of the credit cards that subscribers can use to pay for their Vonage subscription......

Final thought - whether you're in the Vonage camp or Telio, I can think of one guy who comes out a winner both ways. Who else? Jeff Pulver. He's the Von in Vonage, and is also an advisor to Telio. Smile Jeff!

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Posted by jonarnold at 12:08 PM | Comments (10)

May 31, 2006

Vonage - The Saga Continues

I mentioned it would be a light blogging week, and I just wanted to share a couple of Vonage posts that continue show how hard a road they have to make a go of things.

First, Andy Abramson - and others - have picked up on today's New York Times article about how things seem to be going from bad to worse. Unless you're a NYT subscriber, this link won't get you to the article, but the story has been widely covered in the blogs.

The basic idea is that Vonage is getting into hot water with its share purchase program for existing subscribers. With the stock down some 25% from issue date, Vonage is offering to make up the difference to brokers whose clients balk at paying $17 when it's trading way lower and no end in sight. It's a really messy situation on many levels, and the bottom line is that it's not good business to think of customers as shareholders. If/when things go bad, this is a disastrous recipe for giving customers a really good reason to leave. In essence, this puts Vonage on the ropes, and if the competition wants to do the rope-a-dope, they'll keep slugging away with price cuts, making it an even easier choice for borderline subscribers to leave. I really want to see Vonage succeed, but this share purchase program seems to be backfiring, and adding fuel to the fire. And we're not even talking about the potential legal and SEC implications. There are so many ways this can go wrong, and it's starting to look like these problems will keep compounding. Not good.

The fun part of the NYT article is the end - which is what Andy's post fixes on - that Vonage is looking more and more like an acquisition target. It's a provocative comment, but certainly not out of line based on how things are unfolding. I said something to similar effect on my guest post that ran on Om Malik's blog last week.


The second item come from a post Mark Evans ran last week. He did some nice digging through Vonage's S1 filing, and concludes that Vonage Canada has only about 52,000 subscribers. It's always been a closely guarded number, and if correct, confirms what most people suspect - for all their marketing efforts, Vonage Canada hasn't grabbed much market share. Andy wisely picked up on this post a few days back, and I'm glad he's helping get the word out. Thanks for paying attention to Canada, eh!

So, this isn't newsworthy, but I wanted to bring into the mix here as another example of the challenges Vonage faces in building a sustainable business.


And now for the teaser... I have another motive here. Tomorrow I'll be posting about another Vonage-like operator who's just going IPO. It's a great story, esp in the wake of how Vonage's IPO went. There's more than one way to do a VoIP IPO, and this is one that's going to work. Hang in there...


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Posted by jonarnold at 11:08 PM | Comments (5)

May 26, 2006

Vonage Wrapup

Am sure you've been Vonage'd to death at this point, but for completeness, I just wanted to tie up some loose ends on coverage from various sources and voices.

First, my guest post just started running on Om Malik's blog , and there are comments there already. You can read it here. Thanks, Om! Gotta get to those comments now...


Second, three Vonage IPO stories I was cited in since my last post...

National Post Mark Evans and I are both wondering why this went so wrong. Still are. Maybe the market is just plain right, and wants no part of a business based on a business model they don't think can ever work. On that note, Mark makes a great comparison to satellite radio, which is a very similar situation. Lots of hype, cool service, affordable, but a money pit. And their ARPUs are way lower than Vonage, with little room to grow, esp since most alternatives are free. For them, it's even more of a numbers game. Imagine Vonage trying to enter the market 5 years from now, when voice calls will probably all be free, and it will be a lot like how radio is today.

TheStreet.com - what traders think. Two articles:

Today - a very interesting piece from Jonathan Berr about how AOL customers cannot get Vonage, and some of the issues around that. A good read, and another interesting angle on how life is not easy for Vonage. Am not sure what the issues really are there, but would welcome comments from those who do.

Yesterday - wrapup from Jonathan of Vonage's day 1


Of course, there has been lots of commentary elsewhere. Aside from the blogs related to the above items, Jim Courtney has a nice wrap up of interesting posting on yesterday's Skype Journal. I particularly like his reference to Andy Abramson's thoughts, esp his view that Vonage's poor showing does not sink the VoIP market for future IPOs. I've been very concerned about this, and I sure hope Andy is right. So, hopefully the market will look at other companies differently, especially those with very different business models and expectations. On the vendor side, several companies seem ready for IPO, such as BroadSoft, Sylantro, Acme Packet, NexTone and Veraz. These aren't household names of course, but anyone following this space knows these are quality companies going in the right direction.

Another tangent is the Jeff Pulver connection. Jeff is a Vonage founder, so has a lot at stake here, albeit just as an investor now. It was nice to see some posts recognizing his contribution and vision here, as Vonage is just one of many, many things Jeff has had a beneficial hand in. Alec Saunders has a nice wrap up here, with the gist being that Vonage may have turned out differently has Jeff had remained more involved. How's that for a "what if?" Well said Alec - and Andy.


As a last word, I just wanted to note the irony for Vonage going public the same time as MasterCard. Their IPOs have gone in different directions, and it really makes you wonder. Vonage is in a business that is delivering cheaper, faster, better service to consumers, who stand to benefit from all the wonderful things that IP has to offer. It's a good news story. I'm suspending disbelief for a moment here about the bad stuff, but it's a bit troubling to see them tank while the market rewards a company that helps consumers go even deeper into debt as our economy bumbles along on out of control debt and deficits. Is it just me?

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Posted by jonarnold at 09:43 AM | Comments (1)

May 24, 2006

Vonage IPO - On Second Thought....

Well, I never said I was a good stock picker. I really thought demand would have been stronger for Vonage. On the other hand, I wouldn't say it's a total disaster, and there could well be a bounce tomorrow or in the days ahead. So many variables here, and there's no one right answer.

Just wanted to share some links about my media encounters today. More are coming, including a post as a guest blogger on Om Malik's blog.

First, this morning's spot on Bloomberg Radio. It's in two files - runs around 12 minutes or so. You access it here for Part 1, and here for Part 2. Mr. Citron - if you're out there, you'll be glad to know I did this interview over Vonage, and pointed this out to the interviewer, Charlie Stein. I loved his response - "well, you sold me".

Second, a print story from Bloomberg News. Among other places, this story was picked up in the globally-read International Herald Tribune.


Third, ROB TV. I was on Pat Bolland's afternoon program. The link is active for a week, so have a look now before it's gone! Scroll down to the 3:15pm time slot, and you'll see the link there.


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Posted by jonarnold at 11:51 PM | Comments (1)