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Written by Brian McConnell
I have been designing phone services and starting phone companies for about 15 years, since I was in college. But I recently retired from telecom, concluding after all this time that it is not a good industry for entrepreneurs, especially those who don’t have access to vast amounts of capital or who don’t want to take on institutional financing.
There was a brief period in the mid-to-late 1990s when garage-based phone companies really were possible. The last remnants of Ma Bell had been deregulated, and there was an explosion of new technologies (VoIP, new switch architectures, the web as a distribution channel, etc). Big companies were disoriented by this, and had little clue as to how to deal with the rapid change. As a result, there were lots of big and small opportunities for startups to exploit new and rapidly growing niches.
Most of the profitable niches in telecom are now gone. Home phone service, long distance, small business phone service, conference calling, mobile — all have become low-margin commodity markets dominated by established companies. The capital costs of prototyping new phone services have declined, but not nearly as much as retail pricing, and hence, the margins are near zero. The liquidity and exit opportunities for small telecom companies are also not good. You either need massive amounts of capital, or you need to be bought by a phone company (the stereotypes about phone companies exist for a reason). There are exceptions, of course, but they are rare.
Mobile should be a huge opportunity for developers, but unless and until the carriers open their platforms and create something like Ad Sense for developers, it’s a rotten business to be in. The mobile operators micromanage application developers, and they do not share revenue freely. They often charge for network access when they should be rewarding you for stimulating usage.
The industry is currently clogged with VoIP services whose main offering is cheap phone service, because as a commodity product the only thing that matters is the price. Services like Jaxtr and Jahjah may get a lot of hype locally, but I don’t see how what they’re doing is all that different from what all those prepaid card vendors have been doing for years. The prices seem about the same, and the prepaid cards work from any phone.
Where does this leave today’s better-known telecom startups? Unfortunately, some combination of distribution problems and consumer apathy will kill most of them. Ooma is a good example. They make an appliance that allows you to make free calls by rerouting calls between their hubs over the Internet.
It sounds neat, but most consumers don’t spend enough time on the phone to make it worth using. For the majority of users, phone service is “cheap enough,” and once a product reaches that threshold, convenience outweighs price – which is the main reason mobile operators can charge a premium for essentially the same product. I think it’s only a matter of time before companies like Metro PCS set the norm with flat-rate pricing for mobile. But then where does that leave VoIP?
There are a few standouts that I think will find success, but these are mostly platform companies that are doing serious R&D. In VoIP, Gizmo is a favorite. I don’t think the economics of Gizmo as a service by itself are great, but they have been steadily developing a broad platform that enables standards-based VoIP on almost any device — not a trivial task. Someone will eventually buy them for their service plus this technology base.
When I compare telecom to the web, the big difference I see is that the web is both a destination and a distribution channel. This really makes it a unique medium. Telephone services, on the other hand, are products that are only loosely coupled to the web, if it all. A cool web site attracts users because it is clever or interesting. A phone service, at the end of the day, is just a dial tone. I think Skype was a hit because it was really a clever instant messaging client that happened to allow free/cheap phone calls. There were many VoIP services before Skype — Delta Three, Net2Phone and Dialpad, to name just a few.
What’s the message in all of this for entrepreneurs? Telecom seems like a great industry. After all, billions of people use cell phones. The problem is that there is nothing like the web for mobile, and by that I mean the entire set of standards and business practices that have grown around it. It’s hard to see this changing significantly in the near future. It’s also important to learn from history. If you’re building a phone product, spend some time on the former site for PhoneZone, the first company I started in California before selling it to Helio Direct in 1999. Some of my favorite products from that time, such as the Internet PhoneJACK (the first low-cost VoIP peripheral) and the Jetstream FrontDesk (great SoHo phone system), are also all long gone.
This is why I decided to quit telecom and focus on completely different projects. I am spending the next several years working on the Worldwide Lexicon, which aims to do for translation what Wikipedia did for encyclopedias. It may or may not turn out to be a good business, but it’s an interesting project, and it’s something new, whereas if I stayed in telecom, I’d be spending the next several years designing more bad IVR systems for banks and airlines.