Packet 8 Does Europe

There is a pretty amazing thing happening in VoIP. Vonage is spending oodles of money on marketing and other service providers are reeling when trying to go head-to-head with them. Two of the other major players in VoIP are AT&T and Packet8. One would imagine AT&T could keep up with Vonage on the marketing front but alas the New Jersey-based telecom giant has gone dark for a long while and their pending merger with SBC as a new parent will eventually give us some idea of where they are headed. Packet8 is another major player in VoIP services and has been in the Voice over IP market since the late nineties as 8×8.

I recently caught up with the management of the company and learned a great deal about how they market. While Vonage seems to spend first and ask questions later Packet8 takes a slow and deliberate approach to customer acquisition. Is this smart? Well yes and no. Yes because they are a public company and as the company’s spokesman Huw Rees likes to say, he has to spend his company’s money wisely. He selects where in the US he markets to extremely judiciously.

The reason for this careful spending is that Packet8’s stock price is low and selling any shares now to raise money doesn’t make sense for them. So while Vonage has some sort of exit strategy in mind Packet8 has already exited.

When you have limited marketing dollars you have to do things a bit differently. First off the company has to support all its equipment on its own. You see 8×8 was a hardware company converted to a service provider. In the post-bubble world no service providers were spending money to buy equipment so 8×8 went it alone. Now they are in charge of the equipment, marketing and just about everything else.

As Tom Keating reported about a month or so ago, Packet8 is looking for new ways to generate revenue that minimize risk. Recently they partnered with Britain’s DSG International PLC one of the largest retailers in Europe.

The service will start off in 1,100 stores and can expand to 300 more stores the company operates. Moreover DSG seems to be acquiring new stores all the time so we can see Packet8 potentially traveling with the retailer around Europe and wherever else they go. The service will be sold under the Freetalk name and customers will not know they are using Packet8 service.

DSG says they think they can attain 500,000 subscribers in the next twelve months. I think they have the pricing down as for £79 pounds for a full year of service including a TA or £6.99 pounds per month and a TA for £19 pounds.

Packet8 seems very excited about this opportunity and I can’t blame them as they explained to me the margins aren’t as high as they would be if they sold themselves but their risk is very low and this allows them to get a strong foothold in Europe. Other important Packet8 statistics are that their videophone is about 5% of their sales and their virtual office service is about 10% going on 15% in the next 12 months.

Their service seems to do very well on unmanaged networks and if they have problems with voice quality a Cyberguard router generally alleviates any problems. The business service starts with a minimum of 3 $90 phones that look pretty sharp by the way. The largest customer they have has 220 extensions but there should be no limit to how many subscribers they can support.

Packet8 was one of the first companies to have 911 support in the world of VoIP. They do however charge for the service and plan on continuing to do so. According to Rees, they just pass on their costs for the service. One a separate but related note, nomadic VoIP continues to plague our industry at the moment as you need to enter your address in a web browser as GPS doesn’t work well indoors.

If the rumors of Vonage being acquired by BellSouth or some other company are indeed true Packet8 will be in the enviable position of being the leading pure-play VoIP provider and possibly one of the few public pure-VoIP service providers in the US. Either prospect is good news for the company. It is nice to see a company that was so technologically superior over the years finally harness all their patents and start selling service successfully. Their stock isn’t setting the world on fire but if Vonage sells or has a successful IPO all eyes may be focused on Packet8 to see what they will be able to pull off. Doing some back of the napkin arithmetic tells me the company could have about 150,000* subscribers in total in the next twelve months. Add that to the DSG numbers and you have 650,000 subscribers in total. Not a bad number at all on a shoestring budget.


The 150,000 number I used here is a conservative estimate. A Rich Tehrani estimate. It was not meant to be something that aids you in investing. I used a conservative number. I would rather come up low than high.

It was not based on statistical analysis or what the company says so it could be low. At the same time Packet8 has a great service but doesn’t have the marketing funds to compete with Vonage or some other players in the market.

While we can surmise the market for VoIP service will grow over the next twelve months we must also take into account how many new entrants are coming into it.

There is also the chance that other service providers will lower price to gain share.

Most of these new entrants are better funded than Packet8. For this reason I think it is better to be conservative when I estimate how the company will grow.

I received two comments from people that were surprised at my low estimates. One was from someone who seemed angry which leads me to believe they are a shareholder.

Hopefully this clears it up for all. I will be more liberal with my disclaimers in the future.

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