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***RAGAS SPEAKS FOR THE WEEK***
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Battle of the faxes
The evolution of the Web from being primarily a
desktop-computing medium to a
widely accessible entity across multiple
electronic devices has only begun.
Clearly, this newfound "portability" of the Web
will allow the Net to wrap
itself around almost every facet of our everyday
lives. The Web truly will be
everywhere. Already, there are signs of this
groundbreaking transformation.
Look around. Internet access is already
available in primitive stages on
devices ranging from set-top boxes, Web phones,
and interactive pagers to PDAs
like the wildly popular Palm Pilot, and digital
cell phones like the innovative
NeoPoint 1000. Think the Net won't follow you
everywhere? Household appliance
manufacturers are even experimenting with
developing Web-enabled refrigerators.
It is this likelihood of the Internet marrying
multiple devices over the next
few years that makes the entire instant messaging
interoperability battle
between Microsoft (MSFT) and America Online (AOL)
so particularly interesting.
The stakes are much higher than simply AOL
protecting their desktop dominance,
or Microsoft, out of the goodness of their heart,
fighting to allow users of
different instant messaging programs to chat with
each other. The fact of the
matter is that instant messengers will be ideal
"sticky applications" for
porting over to handheld devices, set-top boxes,
cell phones, and other portable
devices in the coming months. Already, AOL has
developed a Windows CE and Palm
Pilot version of its popular ICQ messaging
program. In addition, portal giant
Yahoo! (YHOO) has also developed a version of its
Yahoo! Messenger for the Palm
OS. Microsoft would have a nice leg up in its
quest to expand its applications
and operating system beyond the desktop if MSN
Messenger users were able to
seamlessly communicate with the millions of AOL
Instant Messenger and ICQ users.
Souping up IMs
Why is this so important? Because Microsoft, as
well as Yahoo!, AOL, and other
portals intend to build their instant messengers
into much more than simple chat
applications. AOL has so far taken the most
aggressive steps in making this
vision a reality. Back in June, America Online
acquired online radio service
Spinner.com and a company called Nullsoft,
creators of the popular WinAmp MP3
music player software. AOL is now working on
integrating these online radio and
music capabilities into the interface of upcoming
versions of ICQ. In addition,
last month, AOL announced a multimillion-dollar
agreement with Net2Phone (NTOP)
that will provide ICQ members with a variety of
Internet telephony services.
It's only a matter of time before AOL raises the
bar in the instant messenging
space yet again.
Other portals will undoubtedly soon follow with
greatly enhanced products. So
far, other first-tier portals such as AltaVista
and Excite have thrown their
hats into the ring by developing downloadable
"desktop toolbars" that allow
users to receive email alerts, personalized news,
and conduct searches all from
one floating toolbar. The goal of all of these
portals, with their instant
messengers and extra toolbars, is to not only
capture desktop mind share, but to
also build user loyalty and increase "stickiness"
to their sites. I can think
of nothing better that would accomplish this than
an application that can sit
open on a user's desktop for eight to ten hours
each day.
Super sticky
As I sit and watch the evolution of these instant
messenging applications, I
have to believe that we are on the verge of
seeing a drastic increase in the
popularity of "unified messaging" by Internet
users. With Web users
increasingly accessing the Net from multiple
devices, the need for having one
"portable" online location to service all
communication needs becomes even more
pronounced. Will these chat applications
eventually build unified messaging
features into their interfaces? I believe they
will. Think about it. What
better way to roll out unified messaging on a
widespread basis online than for
portals to build these features into upcoming
versions of their desktop toolbars
and instant messaging applications? Users could
then be sent "instant
messenging alerts" throughout the day notifying
them of new faxes, emails, and
voice mails that they have received. ExciteAtHome
(ATHM) is already taking a
step in this direction with the launch of Excite
Voicemail in June through a
partnership with General Magic (GMGC). Users can
retrieve all of their
communications from one Excite email account.
So far, the great expectations for unified
messaging have not lived up to the
hype. One needs to look only at the stormy past
of General Magic to see what I
mean. However, International Data Corp. predicts
the market for unified
messaging products will grow from approximately
90,000 mailboxes in 1998 to over
12.9 million mailboxes in the U.S. alone by 2002.
In addition, IDC estimates
that each mailbox will generate $20 in revenue
per month, which suggests a $3
billion market opportunity by 2002. Two publicly
traded players worth looking
at that are attacking two different segments of
this nascent space include
eFax.com (EFAX) and jFax.com (JFAX). Both
companies have the odds largely
stacked up against them for the long term, but
also the hold promise of being
useful components for the top-tier portals and
many national ISPs in the future.
jFax.com: battling upstream
The Internet stock gods have not taken kindly to
jFax.com. The unified
messaging player came public at 9 1/2 on July 23,
raising $106 million, and
closed even on its first day of trading. This
cool reception came even after
the company's underwriters decreased its price
from a range of $9 to $11 to $8
to $10. The last four weeks of trading have not
proven any better for jFax.com.
As of today's closing price of 6 13/32, the
company sports a market cap of $210
million, and is down 33% from its first day's
closing price. Clearly, Internet
investors seem like they would be unaware if
unified messaging players like
jFax.com fell off the face of the earth at this
point.
However, there are good reasons for investors'
lack of interest. Total revenue
is still small, losses are rising, and the
company is trying to stake a foothold
in an unproven market. Last year, the company
racked up $3.5 million in sales,
and posted a loss of $17.7 million. Two weeks
ago, the company reported second
quarter revenue of $1.6 million, a 110% increase
in revenue over the comparable
period last year, and a 17% increase in
sequential revenue growth. Losses rose
to $3.3 million, or $0.14 per basic and diluted
share, compared to a loss of
$1.8 million, or $0.08 per basic and diluted
share for the same quarter last
year. Most encouraging was the fact that gross
margins more than doubled to
over 28% for the quarter, compared to the same
period last year, and increased
over 3 percentage points from the first quarter.
Misunderstanding the Web psyche
I remain skeptical that jFax.com will be able to
maintain their current margins.
The company originally structured its revenue
model on the mistaken belief that
their unified messaging services would all be
priced as premium subscription
based services. Wrong model, guys. Try again.
The Web community screams,
"free!" eFax.com did just that in February when
it announced the launch of a
free unlimited fax-to-email service for Web
users. One would think that
jFax.com's executives would have realized from
the get-go that the Web is an
environment where everything "free" almost always
wins, as in free e-mail, free
home pages, free content, free online calendars -
need I go on? In response, in
April, jFax.com launched its own free
fax-to-email and voice mail-to-email
services. Undoubtedly, this shift by jFax.com,
as well as the emergence of
eFax.com and related competitors, will bleed a
number of jFax.com's premium
customers over to these free services. On the
plus side, jFax.com was still
able to not only maintain its existing customers,
but to actually grow its paid
subscriber base to 36,425 users, a 16% increase
over first quarter numbers.
The strongest strategic advantage for jFax.com in
this market is that the
company has been aggressive in forming marketing
alliances with a number of top
portals, telcos, and outsourced email providers.
These portal and telco
partners include Ameritech (AMTD), BellSouth
(BLS), Yahoo!, America Online, and
Prodigy. The unified messaging startup has also
cut marketing partnerships with
outsourced e-mail providers CommTouch, Mail.com
(MAIL), and Critical Path
(CPTH), which are all ideal resellers of
jFax.com's services. These companies
are big in the corporate e-mail box market, and
unified messaging services are a
logical add-on suite of services for busy mobile
professionals. These marketing
alliances will likely play an increasingly
important role in the future for
jFax.com as valuable acquisition vehicles and
re-sellers of its services.
Already, these strategic alliances accounted for
approximately 31% of the
company's total revenues for the first quarter of
this year.
eFax.com: re-inventing itself
Net companies are famous for re-inventing their
business models in a matter of
days. In February of this year, an offline
document communications company
called JetFax set out to pull off the same trick.
The company changed its name
from JetFax to eFax.com, and embarked on an
entirely new focus: to become the
leading free fax-to-email service on the
Internet. So far, the results have
been stunning. Before eFax.com's shift in
long-term strategy, the company had
been selling its own JetFax-branded multifunction
products and licensing its
proprietary hardware and software technology to
office equipment manufacturers
for over a decade. OEM partners include
heavyweights like Hewlett Packard
(HWP), Konica, and Oki Data. Investors initially
loved the Internet-centric
news, and sent the company's stock soaring from
around 5 in early February to
over 30 on April 9. Shortly after this
announcement, savvy Internet venture
capitalist Tim Draper, who coined the Net phrase
"viral marketing," increased
his minority stake in the company. With smart
money pouring into the company,
all appeared rosy for the rejuvenated eFax.com.
However, all too often, Internet investors'
attention span for investing in a
particular Internet stock is shorter than their
fascination with the company's
underlying technology. Needless to say,
eFax.com's high-flying stock price has
once again re-entered the earth's atmosphere. As
of today's closing price of 9
13/16, eFax.com now has a market cap of only $122
million. The most likely
reason for the recent decline in the company's
stock is that investors and
analysts are having trouble coming to grips with
how to value eFax.com's two
very different existing businesses: a thriving
free fax-to-email service, and a
declining offline hardware and licensing
business.
Digging through financials
In addition, the financial picture remains cloudy
for eFax.com as the company
undergoes its transition from offline to online
entity. Although yearly
comparisons are almost meaningless, revenues
declined 18% from the year-ago
period to $6.3 million in the second quarter. In
addition, the company posted a
loss of $6.4 million in the second quarter, or
$0.51 per share, compared to a
gain of $0.1 million, or $0.01 per share, in the
year-ago quarter. A large
portion of this loss is attributable to the
roughly $3.3 million in sales and
marketing expenditures associated with the launch
of the eFax.com service. The
company has also decided to exit the hardware
side of the highly competitive
multi-function printer business, and will
discontinue its JetFax branded
products. This move will likely cause a decline
in the company's revenue totals
for the next few quarters, but it will also allow
the company to free up cash
and focus its efforts entirely on growing its
Internet faxing business and OEM
software licensing business for as long as
possible. For Internet investors who
can wade through this transition, it means that
eFax.com will be resembling much
more of a pure play Internet company within the
next three to four months.
On the plus side, eFax.com has now attracted over
1 million subscribers in only
six months, demonstrating a very Hotmail-esque
growth pattern. Unlike
jFax.com's management team, eFax.com understood
from the beginning that it would
take a free offering to really build up critical
mass. With over a million
users, eFax.com is now in the enviable position
to add on a variety of
higher-margin unified messaging services over the
next few months. So far, the
company has concentrated more on building its
customer base than drilling
revenue out of this group. However, a little
over two months ago, the company
unveiled two moderately priced premium service
packages that had already
attracted over 9,000 customers as of mid-July. I
would not be surprised if
eFax.com could sign up 85,000 paying customers by
the end of this year. The
company is also poised to jump into the
e-commerce and direct marketing game via
partnerships with XOOM.com (XOOM) and
yesmail.com, respectively.
Ripe for acquisition
While it remains to be seen if eFax.com really
has the firepower to monetize
these eyeballs, I am still surprised by the
Street's current valuation of
eFax.com. Let's assume that the demographics of
its business-oriented users are
similar to business and financial news site CBS
MarketWatch (MKTW), which I
suspect they are. This financial news site
attracted an average of 3.8 million
unique visitors in the second quarter. With
MarketWatch's current market cap of
$392 million, this implies a value of a little
over $100 per eyeball.
Therefore, it's not outlandish to believe that
eFax.com's 1 million registered
users are worth at least $100 per pop, suggesting
a $100 million market cap just
for the Internet side of its business. However,
it is likely that the true user
values for both eFax.com and jFax.com will not be
realized until they are sucked
into a much larger Web entity with substantially
more marketing firepower. Put
simply, the company with the biggest arsenal on
the Net wins. Viral marketing
can only go so far. While firms like eFax.com
and jFax.com are blazing the
trail online for unified messaging, it will be
the familiar online consumer
brand names like AOL and Yahoo! that really break
this space out into the
spotlight.
Copyright 1999, RagingBull.Com
regards
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