Tuesday, March 30, 2004

Daiwa EuroTelcoblog No. 25, Wednesday 25th February: glophone - another global troublemaker/Gush - IM meets RSS, what's next? (original email blast 5:19 PM Wednesday, 25th February, 2004)

Our recent sector piece (EuroTelcorama No. 5, 30th January, 2004) attempted to bring together some diverse strands of the IP world - access-independent VoIP, darknets and invitation-only networks, blogging, social networking - in arguing that the avenues of communication, and the technologies enabling it, are broadening for the consumer, with potentially serious impacts on traditional revenue streams for telcos, who we think are poorly-positioned for this transition. With each passing day we discover further developments which strengthen our conviction. This longer-than-usual edition seeks to delve into a couple of recent discoveries worthy of consideration.

glophone - another global trouble maker

We think there has been a fair level of investor frustration over the fact that the two best-known proponents of access-independent VoIP, Vonage and Skype, are unlisted companies, and we expect that some of the enthusiasm for the broader VoIP theme in Europe has been channeled into Iliad SA, as a kind of proxy (though the influence of the Yahoo! BB story is undoubtedly significant as well). In the maelstrom of information coming out of the sector recently, and particularly around VoIP regulation in the States and now in Europe, we think a potentially very significant product launch has gone largely unnoticed, from a listed company called theglobe.com (TGLO US). (Careful readers of our Global Telecom Monthly may note that we have this company in our global model portfolio.)

On 12th February, theglobe.com, which trades under the name voiceglo (www.voiceglo.com) in the US, released a new product called glophone, in a clear departure from its original product strategy, which is very similar to that of Vonage. The glophone is a patent-pending browser-based SIP client which can be accessed from any internet-connected computer without an additional software download, beyond the initial 300KB download to to the user's "home base" PC in order to configure the service. Once the account is configured for mobility, it functions more or less like a webmail account (think Hotmail or Yahoo! Mail), though the user receives a North American Number Plan (NANPA) phone number with four digit extension. The user only needs access to a microphone and speakers, or to a USB headset available from voiceglo for free. The voice codecs apparently are robust enough to function in a narrowband environment (Company president Ed Cespedes told us he used the product over narrowband recently while visiting his ancestral home in Peru), and full PSTN connectivity is possible. Calls to other glophone users are free, and the registration for the product is free for "P2P" usage.

For a $20 upfront deposit and $1.99 per month, the subscriber can make calls to US and Canada numbers for 3.9 cents per minute, and receive standard voiceglo discounts on international calling. For $3.99 per month, the user receives the same rates, but also added features such as voicemail, voice2email, caller ID, call waiting, call forwarding, 3-way calling and conference calling. For $24.99, there is unlimited calling to US and Canadian numbers.

To date, voiceglo has seen a few tens-of-thousands of downloads, with a conversion rate to paying customers of around 7%. As with Vonage and similar products, billing is done via credit card, and the upfront deposit also hedges credit risk. We think that the gross margin on subscription is around 70% (let's say $2.00 on an average subscription rate of $3.00 per month), and similarly high for calls billed at 3.9 cents per minute (based on an estimated termination cost of 1.9 cents and falling). At an average monthly ARPU of $7.00 (subscription and calls combined), we think the glophone may generate a gross profit of around $4.00 per month per sub, and management indicated to us that the product would be cash positive at around 300,000 subscribers.

How reasonable an assumption is 300,000 subcribers, when Vonage may have better brand recognition in the US market? We think the answer is that we're talking about completely different markets. President Ed Cespedes cites a high level of USB headset orders originating from Central and Eastern Europe, indicating that there is significant uptake outside the US. The fact that this is a browser-based, rather than a hardware or softphone based application, which interfaces with the PSTN using standard numbering, is what we believe makes the glophone such a potentially significant step forward in the VoIP challenge to the traditional telco business model. Let's think about this for a moment:

glophone allows anyone, anywhere in the world with the financial means to cover the nominal deposit and monthly fee, to have a NANPA phone number, and to make calls to the US or Canada as though the calls were made "within" the US and Canada. Accordingly, users can benefit from the relatively economical outbound international rates to other countries, because the call is "originating" from North America. Theoretically, an Argentinian glophone user should be able to call Brazil from his "American" number for a fraction of what a direct call between the two countries would cost.

The above are classic examples of international SIP location/pricing arbitrage, but with no client software on a dedicated device or cumbersome ATA to carry around, and apparently possible from a narrowband connection. (In practice, we think there may be users of Vonage or similar services who are achieving the same thing, though this is at odds with the strictest interpretation of their terms and conditions. Vonage requires a US or Canadian mailing address for registration to its US and Canadian services.)

Most of the commercial SIP products we have witnessed and written about to date have been marketed on a single country basis, and we are in the early stages of some regional and pan-European product developments. However, the glophone is arguably a global product from day one. As such, it may have more in common with Skype or Free World Dialup than Vonage, yet being browser-based (or device independent is perhaps a better way to look at it), it is arguably another thing entirely. Of particular interest to us is the fact that the pricing and technical specs seem suited to the less-than-ideal telecoms environments of developing nations, where the user may not have a phone or consistent access to a computer, but where internet cafes may be prevalent. Don't take my word for it, consider the experience of one of America's pre-eminent internet commentators here (http://boingboing.net/2004_01_01_archive.html#107419881980805870).

The ability to have a US phone number with voicemail for $3.99 must have significant appeal for individuals in similar circumstances. Fully tapping this market may be somewhat challenging given low penetration rates for credit cards, though we believe voiceglo is investigating alternative payment mechanisms (perhaps a pre-paid mechanism using local partners in key markets is one option, or a PayPal-type solution). Regardless, given the company's projection of cash breakeven at 300,000 subs, glophone may need only gain a small fraction of the developing world's population as paying customers to become a highly profitable business. Keep in mind that Hotmail and Yahoo! Mail have a combined 37m users in the US alone.

Lastly we think the adoption of a browser-based interface must have implications far beyond glophone itself. It is interesting to note that at least four of the major global web-based businesses (eBay, Google, Yahoo! and KaZaA) are gradually straying into one anothers' turf in search of incremental revenues and service differentiation - Google into eBay's territory via sponsored search, Yahoo! into Google's territory via its own search/sponsored search technology, KaZaA into Yahoo!'s territory via a joint venture in dating/personals. For such businesses, seeking to provide a range of unique and essential services, we think the lure of incorporating voice as an incremental revenue stream must be increasing in the wake of what glophone has already achieved. Yahoo! is already partly there with its voice/video IM, but what of Google, as it faces confrontation in the search market from Yahoo! and Microsoft? What sort of boost would a low-priced, high-margin, browser-based voice product give its IPO valuation in the current climate?

On top of the various SIP service providers, Skype, enhanced IM, and whatever W.A.S.T.E./P2P darknets may morph into, the glophone is another piece of a picture which looks increasingly scary for the telcos. glophone may cause significant disruption of certain segments of the global market all on its own (international calling for a start), but if a global portal-based business takes this concept and runs with it, then the game has changed dramatically yet again, and not in the favor of incumbent telcos.

Gush - IM meets RSS, what's next?

Last week we held a conference call with the management of 2entwine (www.2entwine.com) about their very interesting and unique development known as "Gush." Gush combines Jabber instant messaging with RSS (Really Simple Syndication), the protocol which drives information exchange and distribution for weblogs, and which is also being used by Disney to push "on-demand" content to set-top boxes during late night hours. Using Gush, a blogger can incorporate Flash-based content and photos (http://2entwine.com/screenshots/) into his/her site, aggregate news from other blogs through a tabbed news reader, and also engage with others in instant messaging sessions. The choice of Jabber, an open source IM protocol, allows some interesting features such as split-chat, a unique feature where the text inputs of two participants in an IM session each appear side-by-side in separate columns, which seems to scan more easily. The application also fuses elements of RSS and IM together, in functions such as Gush Announcements, which allows the user to "blog" to defined members of his/her contact list simultaneously. Future features should include file-sharing capabilities, and management indicate strong interest in voice/video features, which should be technically straightforward given that Macromedia has incorporated these elements in its multimedia servers. Gush has seen 5,000 downloads in the past couple of weeks, and is currently free for non-commercial use.

As a business application, where Gush hopes to build its business model, we can envisage a number of applications in collaboration and information sharing/dissemanation. Choosing a scenario close to home, an analyst at Brokerage A has recently returned from a visit to Company X to see its new cutting edge product. Normally, he would sit down and begin the thankless task of churning out a standard, one dimensional report, possibly including some poor-quality bitmap images of the new product and some links to various parts of the corporate website. Employing Gush in such a setting would enable the analyst to publish his text in RSS, updated to all users linked into his RSS feed in real time, display high quality photos of Company X's new product taken with his own digital camera, engage in real time feedback with clients via IM, and link into product reviews, tech journals, or supplementary sources of information or expert opinion related to the technology. With the addition of video and voice, the analyst could post a video of the new product in action, or an interview with the CEO. We think the possibilities of such a product could revolutionize information distribution and the way in which consumers/producers of that information interact. For the securities analyst and his compliance department, this may give rise to a number of difficult issues, but overall we think the information flow could be richer, more open, more interactive and ultimately more democratic. We think these benefits map well across a number of industries, and may spell trouble for traditional information gatekeepers (be they securities firms or media conglomerates). At a more basic level, the implications of bringing voice/video into such an already-rich setting may be an additional negative for telcos.

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