The Android Arrives

It’s about time. I haven’t written here in some time. Partly because I took most of the summer off and didn’t feel much like focusing on anything that felt like work. And partly because there really wasn’t all that much to talk about. We’ve entered what I think is a “war of attrition” phase on communications. The bloom is off the rose on VoIP. Microsoft and Cisco have enterprises buying into unified communications visions that are neat but can’t actually be implemented. Nothing major has happened on the wireless side. Until finally, something of real meaning: an open source mobile development platform that might actually have some legs.

In fact, with all due apologies to Apple and their nifty iPhone, the Open Handset Alliance is probably the most important development in wireless in the last 10 years. For all the iPhones coolness, it actually furthered most of the things that suck so bad about wireless: locked hardware, phone tied to a netwrok, applications that even when cool are still separate and unequal from what you use on your desktop every day, and an unnatural wall between voice calling and other apps. In fact, the more I think about it, unless Apple can get out of their 5 year deal with AT&T, the iPhone should soon be relegated to the graveyard of “missed it by that much” devices like the Newton.

The reality is that your portable phone-like thing is just way too much of a phone-like thing than it should be. My 12 year old daughter could care less about whether she can talk on her phone; just don’t take away her ability to text, her camera, and games. Ask her what would be really cool to add on and she’d say access to MySpace. The talking part is just a bonus. She and millions of her generation are as tied to their cell phone and provider as their grandfathers were to their wallets – yet they don’t care about talking. And they can only do what their provider lets them do. It’s pretty bizarre. We all know it shouldn’t be that way. I think Android is the first step to changing it.

The Sunrocket Explosion

It was sad to see Sunrocket go under. But realistically, it was probably inevitable regardless of how well they did or didn’t execute. Those who know me have heard me say a thousand times that there really isn’t a long term market for consumer VoIP as a standalone product.  Realistically, why do you even need a home number? In my case we keep one partly because of inertia and the desire to allow calls to our location rather than us as individuals, and mainly to have a power-independent backup and access to 911 in case of some sort of dire emergency. The latter requires us to keep the POTS line, and so we do.

 

So is consumer VoIP dead? No. Not exactly anyway.  While offering a cheaper alternative to POTS wirelines has limited appeal and lifespan (and the appeal shrinks every day), the market is massive enough and the angst for the phone and cable companies massive enough that many millions of households will happily make the move. The problem is that there’s a paradox – on the one hand, delivering VoIP is one of the more trivial applications there is. Until you have to touch the PSTN; then on the other hand it becomes incredibly operationally intense and all-consuming.

 

In Apocalypse Now, at the end of his famous “napalm” soliloquy, Robert Duvall says “Some day this war’s gonna end.” And so it is with consumer voice. Someday, Ma Bell will have exhausted all the regulation, litigation and obfuscation that have conspired to sap the ability to innovate from companies that dare to tread in the space. When that happens, there will still be an opportunity in delivering innovative voice-centric products to consumers. And we all know they’re not going to come from Ma Bell or the cable companies, nor from the wireless providers.

 

The question is when and who. It didn’t work out this way, but the Sunrocket (and Vonage) updated LD arbitrage model could and maybe should have been an excellent “loss leader” transition product – the thin edge of a wedge that lets you establish a customer base that you can start moving up the value chain with, or as an alternate medium to attract eyeballs to leverage via other business models. Obviously Sunrocket is out of the game, which leaves only Vonage. Thus chances are this opportunity won’t be captured by a “VoIP” provider, but rather by Google, Yahoo, eBay, Amazon, and other large web -centric companies that can extend their relationships into the voice space rather than the other way around. The good news for innovators is that each of these firms has historically embraced entrepreneurial third party innovators to create a vibrant value added ecosystem around their core offerings. So yes there will be opportunities. The VoIP market didn’t die with Sunrocket. The LD arbitrage probably did, and that was inevitable and overdue anyway.

Patents protect innovation again!

Sarcasm off.

Now, I’m not an attorney and don’t even play one on TV, but the Vonage-Verizon verdict is one more example of how twisted the patent system has become. I won’t get into the merits of software patents which I think is a very worthy debate. I won’t even debate the merits of the particular patents in question in this case which as far as I can tell are pretty dubious; one appears to be for using a database to authenticate callers and billing information over IP; another for call controlling voicemail or call forwarding over IP. This harks back to the early days of the ‘Net and business process patents. Bar tabs have been around since the beginning of man, but online its’ one-click shopping and it’s protected via patent. Argggggh.

But as I said, I won’t debate that. What I will debate is time. The applications for patents listed above were filed in 1997 and 1999. They were granted in 2000 and 2002. A typical software product development cycle these days is 6 months, and often shorter. Unfettered, innovative companies can go from conception to critical mass to exit in under 36 months. Yet a patent stays in force for 20 years from filing. The concept of protecting any software or business process for 20 years in the modern world is, in a word, ludicrous. By definition, anything that could reasonably stand 20 years of protection in the world of software is something that is so abstract and broad that it should never receive protection in the first place.

As far as I can tell, nobody without a serious vested interest in patent trolling or protecting monopolies thinks the current system makes sense. The problem is there is an industry where it probably does, one in which there’s a far clearer case that innovation and the public good are served by patents: pharmaceuticals. Not that there isn’t trolling and abuse there. But the numbers I’ve seen suggest average cost to develop a new prescription drug is nearly a billion dollars, and the typical time between patent and selling the first pill is over 10 years. Given that cost and time structure, 20 years seems like a low number (that’s why patent extension was introduced).

So, even if you buy the concept of software and business process patents (as I said, a worthy debate in and of itself) the root problem here is one of time. The length of protection is what allows software and business process patents to transmogrify from shield to sword, and what stifles innovation rather than protects it. The combination of a protection period that far outlasts the innovation and typical return cycle, and the cost pf litigation, holds companies hostage to ludicrous claims and makes patent trolling far more profitable than actually bringing a technology to market.

So how about this? Keep the concept of software patents if you like, but lower the protection period drastically – say to 7 years. That will give an “inventor” more than ample time to figure out how to monetize his invention. And it will still allow a nice secondary market for patent trolls. They will just make a lot fewer frivolous claims, and allow settlements that are far more reasonable and don’t encourage extortion under the guise of the law.

A clash of ideologies

The stuff here at eTel gives me mixed emotions. On the one hand, I say welcome to the party. Aptela and a small handful of firms have been delivering “Phone 2.0″ with a “Web 2.0″ philosophy since before they coined the Web 2.0 buzzword. The old telco’s aren’t going to educate the market to the real benefits of __________ (what’s the right buzzphrase? Next Gen Communications? Phone 2.0? Phone 3.0? We need something better!). So the more people who come to the party, the better.

Then again, callback buttons as cool and new? Damn, we built one of those at Proxicom 10 years ago! But then I think of the old telco curmudgeons who told me how they tried to market unified communications in the early 90’s and nobody cared. Well duh! When about 10% of the world used email or cell phones, and you only got that email at work, and you got those messages via green screens, who the hell would need or care about unified messaging? Times change, and it’s not the concept but timing, execution and the usability. So, cool, easy to implement callback buttons? Rock on!

On the other hand, there is a serious clash of ideology here that will need to be reconciled and navigated for “Phone 2.0″ (I’ll use this for now) to be successful. Web 2.o is about open and accessible and widely released extended betas that morph into next generation betas. Phone 1.0 is about closed and and secure and beating things up in a lab for 6 months before they even get to beta and then 6 months more after that. We’re web guys too, and we used to scoff at the Phone 1.0 ways. Figured it was monopolistic thinking. Some of it is. But then we actually started selling the stuff. And once you have thousands of customers, you realize alot of that thinking is about reliability. We’d like to think that cell changed the equation and people will deal with a dropped or crappy sounding call here and there. Consumers do. Particularly when its cheap or free.

But I’m just not seeing it with businesses. The concept that goes hand in hand with Web 2.0 in the Valley is “consumerization” of businesses – that decision makers in Enterprises will start using consumer technology and then integrate it into their business environments. I buy that. But I don’t any evidence of relaxing demand for the pinnacle of Phone 1.0 fabulosity – 5 9’s. I wish it wasn’t the case. We have a product roadmap a mile long that we could roll out in 1/3 the time if businesses would put up cell-like availability, and the pace of change. But businesses used to Phone 1.0 won’t. So who wins the clash of ideologies.

Pissing on Vonage – A Popular Pastime

In Saturday’s WSJ there was a brief writeup forecasting gloom for them on the grounds of a) the patent litigation they’re in with Verizon and b) increasing competition, specifically from Skype which is they say charging $29/year (that’s not really true of course). Combined with Vonage’s amazing marketing spend of $575 per new subscriber, this all does seem rather gloomy, doesn’t it?

Personally I give those guys a ton of credit for creating a market that would otherwise never have gotten off the ground. What else? Well, on the patent front, who knows. I won’t comment.

On the competition side, I never thought there was a viable long-term business model for consumer VoIP. We have a couple of old telecom industry angels who invested in Aptela in ‘04 and screamed for us to get a consumer product in place. We all knew that paying for the privilege of talking over a wire has a limited shelf-life, and with it the business model of arbitrage on telecom costs. Still though, Vonage did a great job of sealing off the space from any viable challenger (other than perhaps Sunrocket which got in under the wire). Who says you can’t make a go of that model while it’s still viable and ride it to the ground while they come up with new revenue streams. It’s exactly what Verizon and AT&T want to do, and they have the pockets and political clout to extend the life of that business model indefinitely. So if you can get yourself into the party along with those guys and ride it out, more power to you. People love to scoff at Vonage but the folks at NEA are pretty happy with their early investment. Vonage has 3-4 thousand new customers a day signing up for their service! And while $575 per is way too much to spend on acquiring new customers, people are losing sight of 2 things. One, while their per subscriber acquisition cost is rising the % of their total revenue marketing consumes is down from over 70% a year ago to just over 50%. Their revenue is skyrocketing. They can probably get profitable within 18 months, with $200 million left in the bank. And, they can ratchet down their marketing costs at any time – there’s no law that says they have to keep spending $100 million a quarter.

I think it’s funny that people who scoff at Vonage always seem to love Skype. Now Skype has happier early investors that Vonage (or just about any other company on earth for that matter). But it’s not like Skype ever had a viable business model. They just sold out for amazing dollars to someone who could maybe figure one out. Personally I think it was a justifiable acquisition for one and only one buyer – and they happened to get them to do it at an insane price! (remember, markets are conversations and 50 million people in a self-organizing community talking to each other on a computer was one of the few legitimate threats to eBay’s core business).  Sure, Skype will get their share of gearheads who want to wring every last dollar out of their budgets and go through whatever pain and suffering it takes to pay $67 a year for what Vonage charges $300 for. And at some point Vonage will have to respond both to them and to – more importantly – to the RBOCs and cable guys who will bundle voice in their “triple play” packages. But when they do they’ll be a $1 billion + company with over 3 million subscribers and very healthy margins once you rip out their over-the-top marketing costs. Existing customers are far easier and cheaper to sell new services to, and telco and cable guys aren’t going to be coming up with anything particularly innovative or exciting. So yes Vonage will have to figure out their Act II. But  they’ll have a hell of a customer base and deep pockets to do it with.