About 18 months ago 8x8 shifted their focus from residential VoIP services to business VoIP services, and the company has seen an improvement in their financial results since then, due to greater revenue per sale and lower cost of sales. It wasn’t such a radical change, though, because 8x8’s business customer base is concentrated in the ultra-small segment of the business market, averaging between 4 and 5 employees. If you are going to move into business VoIP services, this about a small a step as you can take.
The company has an interesting chart in their investor presentation from last week, showing the parts of the business market on which they are focused:
This is a typical investor presentation slide, designed to convince the reader that the target market is really big, so the company has great prospects for growth. There's just one problem: If 8x8 is targeting companies with up to 99 employees, why does their average Virtual Office customer have less than five employees?
There are two related causes:
1. The Virtual Office product is designed to appeal to very cost-conscious buyers, and these buyers are concentrated on the small end of the small business size scale. More on this in a minute.
2. The Virtual Office product is distributed primarily through an "inside sales" approach that relies on a call center of sales representatives taking calls and emails from small busineses that are responding to online advertising and other advertising networks. More on this tomorrow.
Today, let's look at the Virtual Office product. The product has decent business-grade PBX features and seems to rely on 8x8's extensive technology and patent portfolio. It's got all the usual forwarding/transferring/extension dialing/voicemail things you expect from a PBX, plus an autoattendant, a conference bridge, and even some video conferencing. So, from a feature list point of view it compares pretty well to what you might get from a customer premise IP PBX, or from a competing hosted IP PBX platform such as Broadsoft.
So, how is it that Virtual Office is focused down-market? The main issue is that 8x8 sells Virtual Office as an over-the-top service, on top of somebody else's broadband service, such as DSL, cable Internet, or third-party T1 services. It makes Virtual Office orders easier for 8x8 to fulfill, since 8x8 doesn't have to install and manage the Internet access part of the service, but it does have its downsides.
In particular, 8x8 doesn't control the quality of service provided for the VoIP calls on their Virtual Office product. So, the quality experienced by the customer is outside of 8x8's control, and sometimes the quality can be pretty atrocious on an unmanaged Internet connection. So, a certain percentage of 8x8's sales result in unhappy customers, due to factors outside of 8x8's control. That's part of why 8x8's churn rate for the Virtual Office is at an estimated 3.3%.
The good news for 8x8: for folks who do have a good Internet connection, the Virtual Office service can be a good value for the customer, and an inexpensive sale and installation for 8x8. The bad news is that 8x8 has to churn through some customers to find the ones that are happy with the service.
One other problem with selling an over-the-top VoIP service to businesses: your sales force is competing with alternatives that do bundle the hosted VoIP services with managed Internet access services. Example competitors are M5 Networks, Unity Business Networks, LightEdge Solutions, and CBeyond. Cable companies are starting to make inroads into this market as well. These competitors make it hard for 8x8 to compete effectively for a customer with a larger number of employees, for whom managed quality of service may be of greater interest.
So, 8x8 has done a great job of finding a niche in the business VoIP services market, a niche that is a close relative to the residential voice services market where the company had some earlier success. However, 8x8 might find stiffer competition if they try to climb higher on the VoIP pyramid.
Having spoke with M5's new CFO in Chicago a few weeks ago, M5 does NOT offer to manage the Internet connection - yet. SmoothStone and Broadview Networks are also examples of companies that sell the complete solution -- pipe and VO.
Posted by: Peter Radizeski | May 26, 2008 at 10:40 PM