Why O2 Wants to Buy Jajah

3332409432_7c43cfced3_m.jpegO2, a division of Telefonica, a Spanish telecommunications company, is in talks to acquire Jajah, a VoIP startup, for about $200 million, Reuters reported today. The company had raised $35 million from various investors including Deutsche Telekom, Intel Capital and Sequoia Capital. According to some rumors, Microsoft (s MSFT) and Cisco Systems (s CSCO) were also bidding for Jajah, which has had its shares of ups and downs.

The company is over 4 years old and started out as a wannabe Skype killer that offered cheap calls. It tried to do everything — partners with media companies offer cheaper plans, but it never really got the traction it needed to kill Skype. Even today Jajah has only about 25 million subscribers who use its Internet phone service for placing dirt-cheap calls across the globe. In comparison, Skype has over half a billion users.

However, Jajah’s struggles didn’t prevent it from building its own virtual network with special VoIP servers across the planet, connected through leased fiber connections. It also connects with various PSTN networks (see map). Think of it as a virtual global phone company that allows it to route calls from one place, say New York, to another like Shanghai, at ultra-low prices.

Jajah also has built a software layer that can be used to offer add-on applications such as click-to-call to wholesale customers. The company’s platform not only marries web with voice, but also provides vital features such as real-time billing. This approach struck a chord both with tiny startups and large companies like Yahoo (s YHOO) and AOL.

For O2/Telefonica, it makes perfect sense to buy a service such as Jajah. Some reasons I can think of just off the bat:

  • Cheap international calling plans are a way to retain/attract new customers. Telefonica has a strong presence in Latin America, and Jajah’s network can be a good way to increase its share of voice minutes.
  • Jajah’s VoIP platform can be used to essentially turn O2 into a long-distance voice company.
  • Like BT which bought Ribbit, O2 could rethink its approach to the voice business and start focusing on how it can marry voice with web/mobile apps.
  • These mobile applications could then leverage not only Jajah’s platform but also O2’s next-generation wireless broadband networks that use Long-Term Evolution (LTE) technology.

If you have additional thoughts on why O2 should buy this company, let us know. I obviously think it’s a good idea, but if you have a counterargument, I’d love to hear it.

Photo of Jajah at eComm 09 by James Duncan Davidson for Jajah via Flickr