Hi Evan,
You note:
"There will be consolidation in this sector, and it
will be interesting to see the combinations of seemingly
diverse companies to form very powerful grips on certain
elements of the market."
You're absolutely correct, IMO, about the fact that it will be
interesting, at the very least. Let me answer this with a treatment
of sorts, Evan, which is in no way directed at you or any of
your invested companies. In general, tho...
-------
...I sometimes have a hard time dampening, much less
raining on, peoples parades. Unless they are screwing around
with my money. But I have to say a few things on this topic of
consolidations and future mergers in the VoIP ITSP sector.
It's still too early for me to tell with certainty, but this word,
'consolidation,' may once again be a term used as a convenient
euphemism, IMHO.
To the extent that the survivors of the Titanic were
'consolidated' by the ships that came to consolidate them,
then I suppose that one could, accordingly, predict that
there will be a similar 'consolidation' in this sector.
I think I have good reasons for stating this.
For every announced startup in the race right now, there
are untold scores who are still learning about the vagaries
of EBITDA and cash flow analyses, not to mention the usual,
albeit seemingly arcane, carrier performance metrics. And
for each of these neophytes, I'm convinced that there is at
least another score who don't even care, except for the need
to prepare the mandatory show-and-tell documentation that the
VCs need to see. Sometimes.
As you sit reading this, there are hundreds of wannabe startups
all over the country, the world, 'backing into' numbers of minutes
of use (MoUs), pricing matrices and settlement objectives, on the
bases of opaque expectations and overly-optimistic assumptions.
With regards to competition and other adverse forces that will
eventually come to pass for them, the greed-denial curve is still
very steep.
I do not argue with the fact that VoIP will foster new voice and
fax traffic where none existed, and I fully believe that it will
come down in cost to the extent that the line facilities costs can
'almost' be nullified, in comparative terms. But startups need to
look forward to more than giving away telephony for near free,
in some cases 'for' free, unless they have sufficient grounds for
believing that their value-add revenues can overcome the losses
incurred by their give-away Voice operations.
The notion that Voice on its own may be a necessary evil for
providers to offer, and at times nothing more than a loss leader,
is a valid one by many measures. Especially if holding on to
large corporate Voice accounts makes a difference to them.
Even for the existing ITSPs who are running up good numbers right
now, there is only a narrow window of opportunity before they must
face the narrowing spreads between their rates and the falling
international rates, not to mention the increasing number of
domestic entries who will pressing downward on 4 cpm soon.
A major factor contributing to the problem is this: Many
startups are failing to see over (or should I say under?) the
current pricing wall.
There is a prevailing notion that the 5 cpm to 7 cpm range is
the target to beat for the moment, and seen as justification
for going forward with the venture. Where, in fact, current
pricing is in an unabated downtrend, and cheap voice offerings
will not be sufficient on their own to allow these companies to
sustain themselves. Here's another potential future gotcha: In
order to then offer the value-added services that will be required,
these entities will have to make large investments in technologies
that they never even seriously considered, previously, due to
either (1) straight-out ignorance over what was needed, or (2) the
above-referenced greed-denial curve. I'm finding equal shares of
(1) and (2) with each passing day. More on this point below.
For the existing ITSP entities who have maintained that pre-
existing carrier architectures no longer matter in VoIP... well,
they are now learning that those platforms actually 'do' matter, and
they are scampering to do some last minute cross-pollenization in
order to correct the shortcomings.
The rub is, those platforms that suddenly matter happen to cost
big, they usually take months or years to bring up and shake out,
and they were never planned for or shown in any of the flows in
the business plan. And until recently, the initial purveyors of
this model were genuinely convinced, I believe, that the tie-line
business they were espousing was all that would be required of
them until the 'next' generation of the technology came along.
The irony of this, of course, is that they were actually correct
in this thinking, only they had not figured on the next generations
of VoIP outpacing Moore's Law!
And, in all fariness, there are those who actually know or knew that
the platforms were required, but were out for an easy, fast kill,
and would build the necessary systems later. Maybe.
What I find intriguing is that due to all of the hype surrounding
Internet Telephony, there are many sources of funding that have
relaxed their usual tests and measures for deal acceptance, and
are willing to throw large sums of cash into the 'cloud' on little
more than gut, or on the basis or whose brother-in-law may happen
to know this guru or that icon. That's how powerful the hype is at
this stage.
There's some pretty reckless deal-making going on right
now. Some startups are making dubious, and in certain
instances, outrageously-premature announcements of current
availablity and features (more so, that is, than the vaporous
norm), via press releases and claims at industry shows. Before
I get any unwarranted replies for that statement, I'm not
referring to a specific company. The condition is more
widespread than that.
A few years back we saw similar 'excitement' take
place in the Cellular, and then the PCS arenas, where,
at first, VC funding was a no-brainer for those who were
able to show the five year flows, POP/demographic justi-
fications, and a cross-over to profitability somewhere
in the mix. At one point, however, the iceberg syndrome
kicked in (see the EDS White Paper on the subject in BCR
Mag, which I think is still searchable at bcr.com),
and Capital was suddenly less likely to come across with
those second and third rounders as freely as previously thought.
Hence, there were distressed ventures with pressures to exit, sell,
merge, or otherwise come out of it whole any way they could.
As a convenience, I'm sure, <g>, Francis Gaskins has
provided us with an example of this in his link, where he
that speaks briefly to the strategies being used by
Verio, the emerging Tier-1 ISP. Verio is on an acquisition
trail gobbling up business class ISPs, many of whom,
he reports, have not been able to turn a profit on their own.
redherring.com
In any event, I think we'll see another Darwinian
manifestation here... what else is new? as it should be.
Among other things, scale of operations will be a crucial
factor for survival, if it is obtained the right way,
as will excellence in service delivery and customer care.
The latter is something that strikes me as interesting, since
we are coming from a world of live, warm-blooded service
attendants to one which is based on browser interaction
rapidly. Indeed, this, along with the pre-paid paradigm which
cuts out the need for human interaction, is a key productivity
factor which is clearly spelled out in many a business plan,
highlighted as a means to quicker and better ROIs.
How much tolerance will the average telephone user, from all
walks of life, have, for this derivative of the digerati milieu
over the next couple of years remains to be seen, IMO. While
it may prove to be an enabling factor in garnering the growing
numbers who are keyboard literate and keen to the ways of the
Internet, how does it impact the remaining masses over the
shorter term, who, I might add, are probably among the higher
paying IXC subscribers due to the same reasons? The answers
will lie in pre-subscription to carriers who can deliver stable
services with predictability, while providing customer care,
and who can withstand hair-raising levels of subscriber churn,
while turning a profit. In the end, the winning VoIP carriers
will be those who most unobtrusively roll out their service to
an undisturbed and satisfied customer base.
Will there be 'consolidation?" You betcha.
I don't mean to make this sound like an indictment against the
sector. Forsooth! Heavens No!
I think that VoIP is a truly marvelous adaptation of new
and existing technologies. Rather, what I've stated should be
viewed as an informed opinion, hopefully, and as a warning to
those who would dive into VoIP without doing their own due
diligence.
Good Luck To All!
Frank Coluccio
p.s.- I recall reading accounts like this some thirty years
ago, when T-1 carrier first came onto the scene.
At the time, there was a religious war waging between the Voice-
heads (FDM) and the Data-heads (PCM/TDM). It was all about, guess
what? It was about analog versus digital!
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