Push-to-talk service ringing up millions
FRIDAY AUGUST 23 12:00AM
THE DAILY DEAL
COPYRIGHT 2002 THE DEAL L.L.C.
Could walkie-talkies possibly be the next killer app in telecommunications?
A handful of startups, backed by tens of millions of venture capital dollars,
believe so, and are taking aim at Nextel Communications Inc.'s dominance in
the so called push-to-talk communications sector - developing technologies that
would allow telecommunications providers to compete with Nextel in providing the
popular walkie-talkie-like feature for cellular phones.
At a time when telecom demand has slackened, the service is desirable for
providers because it yields far higher revenue per customer. "There is definitely a
demand for this technology and carriers are looking into this right now," said
Rajeev Chand, a wireless analyst with Rutberg & Co., a San Francisco-based
investment bank.
On Monday, San Mateo, Calif.-based Sonim Technologies Inc. announced that it
has become the latest startup focused on the sector to receive venture backing.
It closed on a $ 18.6 million round of funding at a post-round valuation of about
$ 33 million co-led by Apax Partners and 3i Group plc, both of London. The
company provides software for wireless data networks that enables a
push-to-talk service.
Other startups developing similar push-to-talk technology include East Hanover,
N.J.-based Dynamicsoft Inc., which most recently received $ 40 million in funding
from UBS Capital, Sprout Group and VantagePoint Venture Partners; Richardson,
Texas-based Spatial Wireless, which has landed $ 20.6 million from Sequoia
Capital and Austin Ventures; and Tewksbury, Mass.-based Winphoira Networks
Inc. which received $ 42 million in funding from Matrix Partners and Norwest
Venture Partners. All provide a range of network services to carriers.
Push-to-talk allows cell phone users to instantly converse with each other close
by or long-distance without dialing or waiting. Its boosters tend to compare it to
the Internet "instant messaging" services.
Until now, the service has been dominated by Reston, Va.-based Nextel, though
carriers including San Diego-based Qualcomm Inc. and Schaumburg, Ill.-based
Motorola Corp. have said they plan to enter the market in a partnership with
Nextel. Westwood, Kan.-based Sprint Corp. has shown interest in the market as
well.
Unlike most wireless carriers, Nextel has seen revenue soar, something analysts
attribute in part to its proprietary push-to-talk service. Its average revenue per
user, a benchmark measurement, is $ 71 per month compared to an industry
average of $ 45. The company reported a 15% revenue gain to $ 2.15 billion in
the second quarter.
"Numbers like that have certainly gained the notice of their competitors in the
carrier market who would like to duplicate them," said Dan Geiman, a wireless
analyst with McAdams Wright Ragen in Seattle.
Some analysts are less upbeat about the outlook for young startups offering
push-to-talk technology and caution that the road to adoption will not be swift.
"I would disagree with the idea that push-to-talk will actually become a killer
app," said Alex Trofimoff, a wireless analyst with Sanford C. Bernstein & Co. in
New York. "I think that push-to-talk is very useful for short bursts of
conversations - the sort of conversations we see among Nextel's
business-oriented customer base - but I think that the average consumer is
going to prefer a more traditional phone service."
Rutberg's Chand said that impediments to the new technology include the need
for new hand-set designs on the market that can accommodate the service, the
need to upgrade network infrastructure to handle the increased traffic and the
challenge of matching the speed of the Nextel's service, referred to as latency,
on the targeted CDMA and GSM network standards.
"Getting the latency down to a reasonable number is not going to be easy on
these networks," Chand said. He noted that the Nextel, Quaalcom and Motorola
consortium has already built its own version of the service for CDMA, presenting
formidable competition for newcomers.
Kevin Calabrese, an analyst at Argus Research in New York, questions the ability
of any newcomer to successfully compete with Nextel. "The problem with building
this type of network is the challenge of making it attractive to corporate users.
And then you have to ask, 'Why do it when Nextel is already dominating the
market?' I mean, it's like investing in a whole new computer operating system.
Why try it when you are going to have to compete with Microsoft?"
Nonetheless, VCs said the potential for a multibillion-dollar market is too big to
ignore. Robb Wilmot, an investor in Sonim Technologies who is also its chairman,
calls push-to-talk "the killer app for cell phones" and said that its repeated daily
use by cell phone owners makes it attractive.
Richard Wilson, director of the London office of Sonim investor Apax Partners,
said he expects push-to-talk to become as widely used as the short-message
services highly popular among European youth. "We see push-to-talk growing
into an impressive market ... with appeal to all sorts of demographics," Wilson
said.
Vab Goel, a venture partner with Norwest Venture Partners, said push-to-talk
software is the first service Winphoria has sold to a carrier, one he wouldn't name
though industry speculation points to Sprint, adding that "We expect that
push-to-talk will have a big impact on Winphoria Network's success." His fund
expects to reinvest in Winphoria's third round, currently being raised.
Venture capitalists said they are also drawn to this sector by the difficult barriers
to entry. Only a handful of companies are able to offer the technology.
"The technology is really quite complex, it requires you to have expertise not just
in the data arena but in the manipulation of voice packets and there are few
companies that actually have these skills," Wilson said.
Added Robin Murray, a partner with 3i in Menlo Park, Calif., "Carriers are only
now waking up to the fact that push-to-talk will be a multibillion-dollar market
opportunity, and we expect to be part of this evolution."
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