Thursday, June 24, 2004

Daiwa EuroTelcoblog No. 52: Thursday, 24th June. 2004 - Learning more about Peerio

Today I finally had a chance to speak with Dmitry Goroshevsky, CEO of Popular Telephony, developers of the Peerio P2P telephony platform which we have written about a couple of times recently. A couple of days ago at the Supercomm show in Chicago, Popular Telephony announced three deals for deployment of Peerio as embedded software on IP phones from Vontel and Adtech, as well as in the CRM portals of clients of Atemis. My conversation with Mr. Goroshevsky highlighted a couple of more interesting developments, as well as giving more insight into Peerio's highly differentiated product strategy.

Firstly, there is a fourth contract in place with a hardware maker, which the company was not in a position to announce at Supercomm. This is with Logicom, France's No. 2 manufacturer of residential phones, with an estimated 30% market share, and prominent shelf space in major retail chains throughout France. The product will be a DECT (that's cordless, for our non-European readers) unit, will allow both conventional PSTN calling as well as via Peerio, and should be available by late Q3/early Q4. This was interesting to me, as the previous announcements from the company seemed to have an enterprise market bias. Mr. Goroshevsky conceded that from a short-term revenue generation perspective, the enterprise is necessarily the focus, but that the long-term strategy for the company was about much more than short term revenue generation, and that the residential strategy is key to this, and will become clearer to the market over time.

It is in these initial hardware partnerships that Popular Telephony's strategy is clearly distinguished from others we have seen in the space, where Skype has been very successful at creating a consumer phenomenon which must now be leveraged into the enterprise/embedded products space, or where Voipster has taken the approach of delivering a package of applications directly to enterprises but via white label arrangements to the service provider space. It appears to me that Peerio may be doing things in a reverse order to the others - getting itself embedded primarily in the enterprise and the hardware, proving the technology, and building a wider consumer brand on top of that. By putting hardware partners through a certification program before Peerio is embedded on their devices, Popular Telephony secures a prominent place for its logo on the device (which reads "C'est Peerio" and can be viewed in the company's publication "Peeriodica" which I downloaded from the Supercomm press release section after registering) - think "Intel Inside". Peerio also receives a EUR15 one time license payment on a per unit basis for embedded systems.

On first glance this looks to me more like IP in the sense of Intellectual Property than service provision as such, but it is also an essential step in establishing the brand and the concept within the enterprise space. It also involves a much closer working relationship (and undoubtedly a fairly labor-intensive one) with the hardware/software partners, which again makes it not directly comparable with anything else we have seen so far. The pay-off, as I see it, is that Peerio can get in the door via the equipment makers' relationships with enterprise customers and/or IP-PBX vendors, and then have a venue to demonstrate the cost advantages of P2P, which it believes will cut the IP-PBX vendor out of the frame altogether (my previous piece on this issue speculated that the market has so far focused exclusively on service providers and perhaps has not yet clocked the implications of such a system for Nortel/Cisco/Avaya). Peerio claims that it eliminates around 80% of hardware and maintenance expenses associated with corporate PBXs, and can reduce the total cost of ownership of corporate telephony over ten years by 99.75%, compared with conventional centralized systems.

On the issue of firewall/NAT traversal, which has been so widely identified as an ingredient in Skype's success to date, Mr. Goroshevsky clarified for me that Peerio in the corporate space will consciously avoid this functionality, as it raises obvious security questions from systems administrators looking to deploy the system in the enterprise. For a Peerio client to communicate with another Peerio client from outside the corporate environment, the system administrator must permission such transactions in order to maintain security. However, in the example of corporate/customer communications, this will also allow the corporate to offer a secure and free communication channel for customers to use. This is another area in which Popular Telephony is taking a novel approach, by segmenting its product into consumer (Peerio444) and enterprise (Peerio) versions, and actively advising enterprises against deploying the consumer version in the enterprise to avoid the kinds of security issues which have caused anxiety around public instant messaging clients and which appear to be lurking beneath applications which can traverse firewalls.

One other exciting element of the Peerio product is that it is Popular Telephony's aim to have PSTN breakout from day one in both the consumer and enterprise products, and it has termination partners in place already to do so. PSTN termination does not form a material part of the company's revenue model, and it is committed to passing on discounts from termination partners to consumers, to ensure that it remains the lowest cost alternative. The company also claims to be seeing strong interest from the service provider space globally. I was unsuccessful in gaining any insight into whether this was primarily incumbents, alternative operators, cablecos or ISPs, but was left with the impression that all of the above are represented to some extent.

The really interesting thing here is that, in pursuing any negotiations with a service provider, it is Popular Telephony's position that the service provider must effectively cede its role to Popular Telephony, thereby relegating itself to the provision and management of access and transport infrastructure - the classic "dumb pipe" scenario which we and many others have explored so many times. This is the uncomfortable scenario in which telcos wake up to the realization that they must carry on without 80 - 85% of their existing headcount onboard, and content themselves with a more limited role from the one they have played in the past. The real measure of the power of the IP revolution will be when a large service provider agrees to such terms and voluntarily moves from consumer service to infrastructure company. On that day, the whole telecoms paradigm will have indeed shifted.

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