Archive for May, 2011


Saturday, May 21st, 2011

The free video calling service

is growing faster than Skype did.

Eric Setton looks at his phone and sees $60 billion in revenue via low-cost video calling. “Smartphones, advanced cell networks, Skype, app stores–this is the best time to have built a new communications platform,” he says. “We’ll be on PCs, tablets, you name it.”

With the aforementioned Skype soon to be bought by Microsoft for $8.5 billion, or ten times 2010 revenue, we’ll forgive Setton for his enthusiasm. In September he and cofounder Uri Raz released an app called Tango, which allows you to make video calls for free. It already has 13 million users in 190 countries and is adding another 1 million every two weeks. Skype, which began offering desktop peer-to-peer video in August 2003, achieved 9.5 million in its first year. Go, mobile world.

Tango calls are good, not great, and can be done with or without looking at yourself as you talk. You can switch from a front to a back camera to show things as you talk. By this summer Tango will likely start charging for enhanced features. Setton won’t say what, but think video voicemail or add-ons like the hearts subscribers could put inside their videos last Valentine’s Day. Those items would show up on a cellphone bill, saving Tango a lot of hassle.

Video calls are hard to do well on a cellular network. The inevitable dropped data packets and congestion show more immediately in video than in voice calls. Developers also have to juggle the requirements of different phone models and the two very different dominant operating systems, Apple iOS and Google Android.

One secret of Tango’s success is clever software. Skype’s so-called peer-to-peer technique involves the trick of distributing data packets to relatively precise ports on the network. Tango has to figure out, during the couple of seconds that a call is dialed and set up, which of several million ports inside a mobile router is the right one. Setton says they have 80% to 85% success and are getting better. During a call the service monitors how fast data are going through the air and adjusts call quality so the video doesn’t cut off when a network’s load changes or someone roams to a new cellular tower.

Tango’s other strength is ubiquity. While Apple’s Facetime video service works only on iPhones, Tango works on iPhones and Android and will be on Microsoft Windows Phone 7 when it is released. Tango arrived functional on 25 phones and now works on some 70 models, including tablets. “We’re getting support requests from the Congo, Botswana,” says Setton, a Ph.D. who serves as chief technical officer. About 55% of Tango users are in the U.S. Korea is the second-largest market, with 2 million users. Not bad for a company funded with only $15 million, most of it from five private investors.

There are lots of applications, but the founders think the biggest market is spontaneous consumer calls. “Shopping, when the kids are doing something cute–the best-use case is close family, the people you talk to when you don’t care what you look like,” Setton says. He figures this group is between 10% and 20% of the worldwide communications market, valued at $600 billion to $700 billion. Hence, $60 billion for Tango–nothing like a startup that thinks big.

Rivals abound, including other startups such as Fring and Jajah. Skype bought a video-sharing service called Qik, which has taken lumps over call quality; Microsoft may do something about that. Android’s video ser vice hasn’t caught on in a big way. Apple’s Facetime, if it hopes to gain share, needs to operate on other phones. “It’s a race right now,” says Setton, “but anybody who tries to start now has to be on the 70 phones we’re doing, plus whatever comes next.”

Sourced & published by Henry Sapiecha


Saturday, May 21st, 2011

Think Microsoft’s biggest deal ever

is a mistake? Think again. Skype me…

On the surface Microsoft’s $8.5 billion deal to buy the Internet phone company Skype sounds loopy. But don’t be deceived: This just might be the smartest move Chief Executive Steve Ballmer has ever made.

It isn’t hard to see why you might think otherwise. In 2005 eBay acquired Skype for $2.6 billion. Failing to integrate the service into its e-tailing business, eBay in 2009 sold 70% of Skype for a little over $2 billion to a group made up of Marc Andreessen’s venture firm, the Canada Pension Plan system and Skype’s founders, among others; the valuation was little changed from the first time it sold. Ergo, the idea that Microsoft would pay $8.5 billion for the same company less than two years later sounds, uh, startling.

It doesn’t help that the company has a mediocre track record when it comes to acquisitions. Microsoft has closed just a handful of major deals–aQuantive, Great Plains Software, Navision, Hotmail–and none has changed the face of the company. Microsoft lacks a clear Internet strategy, and its online business operates in the red. Bing is gaining share, but even counting its venture with Yahoo it has only 30% of the domestic search business. Not least, Microsoft’s share price is unchanged over the last decade (despite impressive revenue growth), thanks to concerns that Windows and Office are threatened by mobile devices and Internet-based applications. With that backdrop, Microsoft’s willingness to pay nearly ten times 2010 revenues for Skype appears illogical or worse.

But I think it will prove to be genius. Here are three reasons this deal should turn out to be a huge success:

– It uses some of Microsoft’s mountain of offshore cash. Microsoft finished the March quarter with $50 billion in cash and short-term investments–$ 42 billion of that held outside the U.S. Like many American technology companies, Microsoft generates most of its revenues outside the country. Bringing it home would mean handing Uncle Sam a 35% cut. So the cash sits offshore, where it can’t be used to buy back stock, pay dividends, hire American workers or acquire U.S. startups. Apply a 35% discount to the $8.5 billion price tag–that’s what would happen if it sent the cash to Redmond–and the deal looks a lot more reasonable, at around $5.5 billion posttax. And Microsoft still has a lot more cash overseas than it does at home; expect more non-U.S. acquisitions in the months ahead.

– Microsoft gets one of the truly dominant Internet brands. There are only a handful–Google, Facebook, Netflix, Craigslist, Wikipedia, Twitter–but most aren’t for sale, and none belongs to Microsoft. Skype is the dominant player in Internet audio and video communications–people use “Skype” as a verb–and now Microsoft owns it.

– Ignore the pundits; this is an enterprise- software play. The knee-jerk reaction has been that Microsoft will need to up the revenue generated by Skype via more aggressive use of advertising and integration with gaming. But the deal is really about “unified communications,” in which Microsoft is competing with Cisco and others. The theory is that by adding Skype’s audio, video, conferencing and telepresence features to the mix Microsoft will offer an unbeatable combination of features that every enterprise will want. Microsoft sees unified communications as a multibillion-dollar business. Don’t be surprised to see Microsoft abandon its current unified communications branding–Microsoft Lync–and rechristen the product Skype for the Enterprise.

In one brilliant stroke Microsoft dipped into its growing overseas cash pile, bought an iconic brand and set the stage for another multibillion-dollar business. Worth every penny.

Sourced & published by Henry Sapiecha