[qi:004] Updated: A few years ago we saw a gaggle of VoIP start-ups pop-up, each claiming to have their unique twist on cheap phone calls. Some offered anonymous calling services as their signature feature. Others labeled themselves as social voice apps. Some of them tried both and other features. Most jumped on the social networking bandwagon. And many of them – Jangl, TalkPlus and EQO for example — went bust, because they learned the harsh lesson — selling cheap minutes or offering free calls isn’t really a business. One such company – Menlo Park, Calif.-based Jaxtr – apparently hasn’t learnt that lesson.
It is still hanging around, thanks to $10 million venture capital infusion it received in June 2008 from Lehman Venture Partners. They fell from my active-coverage list. Today they sent over a press release touting Freeconnect, their free member-to-member calling service, that has been tried unsuccessfully by other VoIP start-ups.
FreeConnect is easy-to-use. Jaxtr members simply enter the number of the jaxtr member they wish to call. Jaxtr will then give them a local number to reach that person. Once they initiate the call, jaxtr notifies the person they are calling, and will give that person a local number to call, too – allowing the parties to connect directly. They can then talk for as long as they like, free of any charge from jaxtr. These assigned local phone numbers can also be used again by the same parties on an ongoing basis.
That announcement made me feel like Rip Van Winkle who just woke up. If my memory serves me right, this is just another variation on Rebtel’s initial model, one they launched with back in 2006. After realizing that they weren’t going anywhere, Rebtel (somewhat) re-focused and now (supposedly) makes a decent living. The whole process of using Jaxtr to make free phone calls seems so cumbersome and in this day of increasingly cheap wireless plans – almost pointless.
Now even if Jaxtr’s new offering does become popular — odds of that happening are lower than chances of baseball slugger Manny Ramirez returning to Boston — how is Jaxtr going to make money? Free calls don’t make money but they surely incur costs. Advertising isn’t going to cover the costs — at least not while this deep recession lasts.
“We believe a big portion of the free callers will convert to paid calling… The number of people who do that can make up for the people who only do free calls,” Bahman Koohestani, chief executive of the company told VentureBeat.
Maybe I should offer to sell him an investment opportunity in Bernie Madoff’s fund!
You should check out my twitter conversation with Jaxtr co-founder. 1. 2. 3. 4.
What is your current evaluation of OOMA? I followed the heated discussions about OOMA from last year and earlier this year but wondering if OOMA still has a business model to survive?
Thanks!
There’s a service in Germany that has figured out a good solution to ad-sponsored calls (kind of like free 411) — but my guess why this doesn’t work in the US is simply that most Americans just don’t call other people (outside of the USA).
Alex from Rebtel here.
First off, thanks for the mention Om (even if it’s in a post dedicated to Jaxtr 🙂
Just to clarify. We started out with the unlimited calling for $1 per week. Shortly after, we slightly shifted focus from the $1/ week model to settke with our current “pay-as-you-go” without the subscription fee. The latter has proven to work out really well for us.
Alex
Its trivial to add a software enforced cap at a later date ( example: IF x number of calls already made between two Jaxtr members, THEN enforce paid subscription ) so there isn’t much financial risk. Read the ToS, is that stipulation already in there?
Also,
Jaxtr and every other web VoIP company better hurry up and figure out how to make money…Adhearsion is about to make it possible for anyone to have their own VoIP.
http://radar.oreilly.com/2008/08/adhearsion-next-killer-app-for.html
Hi Om, I disagree with you on this. The Free-mium VoIP model is alive and well, in some astute cases. Jaxtr is minimizing cost by having users dial to incoming DID’s and patching the calls in the VoIP cloud – hence not incurring termination costs. It should especially work nicely if Jaxtr has a deal with the backend carrier/s for unlimited inbound minutes.
At Phonevite, we are also continuing to offer free calls, because even though we are incurring termination costs, a good number of our free users are converting to Premium and generating healthy margins, even after factoring the cost of all the free minutes.
I hope that a few rotten apples won’t destine us all to the coffin, and that the survival of a few of us will regain you as a believer in good-old-fashioned VoIP. Thanks.
The “free” business model in telecoms has lined the streets with billions of dollars lost in bankruptcy. Customers do not perceive “free” as having any value. Have you ever noticed the difference in a child or teen that pays for something with their own money versus yours? A perceived value occurs when its not other peoples money.
“Free” does not generate profits. Does anyone who builds a “free” based business model work for free?
As the adage goes, why buy the cow if the milk is free ….
Om
This model as you know is dead in the water, just a last gasp attempt by Jaxtr to try hype their numbers before the cash runs out.
This is a dumb model attempted by numerous companies and makes me want to “party like its 1999” , time for a “broadbandits” follow-up on the amount of these guys that will go pop.
On another matter hope you have a restful Christmas and I would like to wish everyone at Gigaom a very happy 2009.
I read often, although rarely comment.
I think OM is being overly critical here in the sense that this is no way Free Calls (in the ‘Free’ as free beer sense).
If anything Jaxtr can be blamed for a ‘Me Too’ mentality.
What they currently offer:
-Local Number for International Calls on pay per minute basis(similar to Rebtel, MobiVoX)
-Click to Call on a pay per minute basis (similar to Jajah)
-FreeCallConnect is free between members (but just like Rebtel and Talkster it requires the other member to also call into an access number…hence since both sides are calling in, there is no cost to Jaxtr short of bandwith)
If Jaxtr is doing anything, they are copying the models that have managed to stay afloat (Rebtel, Talkster, MobiVoX, Jajah) so it may not be as doom and gloom as OM notes above.
All that said, I’d be much happier with something new, rather than a ‘me too’ offer
the problem is with the valley VC’s , They were forcing most companies to go after the cheap calling business because of quick revenue traction. Jajah had some revenue traction and they thought thats the right way to build a business.
i think the idea of social voice apps is dead. there are no clear visible revenue models – unless you work with carriers.
any idea whats jajah revenues?
a few random thoughts from my side:
– there are half a million developers worldwide that can get a cheap internet calling service running in less than a week. so where are the entry barriers?
– the mantra seems to be this: a fancy little twist + some marketing dollars + scale
– scale is needed because you are essentially running a low margin game. and that is where things go wrong. a startup cannot rely on scale+low margin game.
– startups prosper ONLY if they are able to command high margins
– in most countries, agriculture is one of the safest low-volume-high-margin segments. better than a voip business for sure.
John,
Very interesting that you are getting your free users getting converting to paid customers. That has not happened for a handful other startups which either sold for a paltry sum or went under. I have seen what you folks offer and have intend of belittling it, but come on. Can’t believe that people will actually pay for this type of a service. Even if they do, it is a one of two times a year, maybe? This is not a business, How do you forecast revenues and growth in this type of a whim.
Again, I am an avid follower of VoIP and have worked in this segment and do believe their is money in it but not like this. With free you cannot make up in volume. There are applications of VoIP that have revenues streams associated with it and granted you will have some revenues with you model but nothing that an actual investor will ever write a check for. Have you raised money from investors? See what they say!
VoIP has great potentials and I do love this technology but nobody has addressed the real business associated with it. VoIP is a means to an end, a catalyst, it can’t be a business on its own. There are value added services that can be driven via VoIP and people will pay for these services but I have not seen any out their which are good enough to build a business.
SG
I am a Rebtel customer since 2 years. I guess I am not the atypical customer as in I use the free calling a lot (where else apart from now Jaxtr do you get mobiles all over the world for free?) In Europe and South America calling mobiles internationally without the means of Rebtel is very expensive unlike in the US. You cannot get by by using calling cards since the rates will always be expensive as the called persons telco receives some nice revenue for receiving the call.
However I use the free service as well as the paid service. Why? When calling a mobile and someone who understands Rebtel I ask the person to call me back to save anything from 10 cent per minute to USD 2 per minute. If only calling a land line I figure what the heck I can pay one or two cents per minute for a long distance call so I only use the local number and do not ask the friend for callback…. I talk a lot and spend money with Rebtel. I have a lot of expat friends who also use Rebtel and their friends etc.. My guess is that Rebtel is doing quite well.
Like any service business, it comes down to customer acquisition costs and lifetime value. Low margins play into this — and you can’t get much lower margin than phone minutes. There are other higher margin telephony services that can be offered, but minutes are the popular one, so you almost have to offer it as a loss-leader, if nothing else.
There is another little VOIP company that is still quietly growing, that isn’t mention above: PhoneGnome. We use the “free” calls as our marketing costs. We don’t spend any other marketing money, so that’s probably one reason why we didn’t get mentioned here. This makes our customer acquisition costs very very low. Even paid minutes are almost like free – it’s almost like a community service – but customers demand an integrated/branded option, so you’re compelled to offer minutes to attract and retain customers in hopes that they will subscribe to more profitable services. As I said, it’s almost like a loss-leader to improve customer acquisition costs – but it’s at the expense of lifetime value due to the poor margins. So not only do customers have to convert to paid minutes, you better hope enough convert to paid higher margin services too. Even if a large percentage convert to paid minutes, there’s still just not enough lifetime value in these customers to make it a viable business. So PhoneGnome’s answer for now is slower growth, extremely low marketing expenses, and then leveraging the platform for white-label and other services in addition to using the free service to build brand and attract customers. As a result we’re not burning through cash – but we’re also not high on the web 2.0 buzz list.
PhoneGnome Dude (Since I don’t know your name),
I am extremely glad to see such a realistic post from another struggling (but making lemonade out of lemon) business person. Things are quite tough as it is with this business and then the ailing economy (kinda a double whammy).
Hope you guys do well mate.
Regards
SG
Free is a very dubious/high-risk business strategy and advertising if it works might be too late coming to the rescue. But low cost as a business model even for relatively small operations is alive and well. Take for example the hundreds (yes hundreds) of fixed line alternative calling services in the competitive UK market and many have been around a long time (according to statistics published by the UK regulator). For a line up of international alternative mobile calling including jaxtr see http://www.lowcostmob.com
I want 2 make free calls, how will i do it
I agree with the author and most of these “anti-free” comments in this blog. A company can’t possibly offer consumers quality product for free and be financially viable long term. Google taught us that – right?
They are thieves for sure.. I had a jaxtr premium account ($50 per month) which promised good minutes. My account was always zero-ed at the end of the month (even if I didn’t talk) and $50 was actually being deducted twice a month from my account! The quality sucks. I was charged even after disabling my plan. They don’t even have a customer support number to call (only email) and they have stopped responding to my emails about reimbursement.