Bryan R. Martin is chairman and CEO of 8x8 (News - Alert), Inc., the VoIP and videophone service provider that brings us the amazingly popular Packet8 Broadband Phone Service.

“We are once again the second largest stand-alone VoIP provider in this market space,” Martin said during his keynote address during TMC’s (News - Alert) ITEXPO West 2007, held this week in Los Angeles. “We deliver both voice and video service to residential customers, and there are now a growing number of businesses that use us as a replacement for their PBXs. We develop all of our own technologies in-house, and we’ve been awarded a number of patents. Our sales last year were about $53 million.”

“We had a very busy summer,” continued Martin. “July is usually our slowest period, since we sell to business customers who go on vacation around that time. But this year there was an event in the industry that led us to suddenly garner quite a few customers; namely, the SunRocket (News - Alert) debacle that occurred in July and August. SunRocket is not the only company having problems. We know of about three or four major players in the space that have significant customer bases, they’re all into both business and residential applications, and we’ve heard rumors that they’re interested in exiting the market as VoIP service providers. There’s a list on the web of more than 100 companies that either have full-fledged services or at least websites offering VoIP services that have announced that they’ve shut down and no longer offer services, or else they’ve announced plans to do that within the next six months.”

“It’s amazing,” said Martin, “and it begins to remind me of the 2001-2002 era following the dot com bust. It’s being driven and fueled to a certain extent by some of these ‘grow-at-any-cost’ business models out there that pay no attention to the underlying economics of the situation. We know how that dot com bust period of consolidation and mass-exodus from the market ended. We have to ask ourselves as stewards of this industry going through a period of rapid growth, ‘Are we entering a 2007 version of what might be looked upon in five or six years as the dot VoIP era?’ I would say that Wall Street certainly thinks so. The market caps of seven major companies over the past 15 months have changed dramatically, losing $1.1 billion. That’s a return of negative 39 percent over those 15 months. If you’re a fund manager, and you invested in VoIP in June of 2006 as a result of the run-up related to the Vonage (News - Alert) IPO, then you’ve had a really bad year. VoIP at the moment is really a four-letter word for investors. Packet8 had a positive return during this time, I’m happy to say.”

“Packet8 has had increasing revenues, increasing margins and low churn, but the Street doesn’t really care because we’re one of those ‘dot VoIP’ companies,” said Martin. “So, are we actually entering a dot VoIP meltdown? Will things shut down next year? I don’t think so. In fact, I think there’s a big opportunity out there and let me tell you why.”

“One of the things that we look at in this space is price elasticity,” said Martin. “From about 2003 to the end of 2004, there was a very aggressive discounting of VoIP services in the market. We also had a service come on in a big way called Skype (News - Alert). It was a world-wide success in terms of the number of users. Everyone said that Skype would take the price of voice to zero. In that time frame there was ample evidence that that could be a possible outcome. Prices were in fact falling at the time. We were all competing with each other and trying to get under the prices that the cable companies were establishing.”

“But I think what you’re seeing right now,” said Martin, “is two new realizations, at least within the industry if not on Wall Street. First, there’s the fact that a service such as Skype doesn’t actually replace the telephony service completely. Everybody uses Skype, but it’s not a complete replacement. Second, when you add in the fact that you must interconnect to the PSTN and that the PSTN is going to be around for a long time, and mobile phones are going to be around forever, then the cost of the interconnection to a carrier such as ourselves at 8x8/Packet8 is going up. It’s going the other way. So the whole market has been forced to react to that. We raised prices across the board in March by about 25 percent. So that’s a very new dynamic. It just happened this year. The price elasticity is finally improving, and I think the business models will improve as well.”

“As the provider shakeout continues,” said Martin, “you’ll see things strengthen, since we all do things for money. We just introduced a business service last month that actually costs about $150 per seat per month. So we are moving up the value scale with these types of services. These services are differentiating. They are evolving. Differentiating services are finally starting to go mainstream. At the $150 price point we’re also extending PBX feature sets to include Boomerang, voicemail functions and all sorts of interesting new features that people love to use. There are now things such as the autoattendant-type of accessibility services that are improving and we’re starting to charge for components of that. And they are being used by these companies. We just have 1,000 new companies sign up for our services in the last three months. These are big numbers and big companies.”

“Differentiating services is key because it contradicts all of the metrics that Wall Street is complaining about right now about why VoIP is a four-letter word,” said Martin. “Differentiated services gives us decreasing churn and provides for much better customer acquisition metrics because you can earn the cost to get those customers on your service quicker. They even improve the value of customer calculations, which is something Wall Street likes to do quite a bit. So I think that, as an industry, we’re actually in quite a good spot right now. I hope Wall Street will wake up to that fact quickly. But we’re not out of the woods entirely, and most of the current challenges have to do with the interconnection back to the PSTN.”

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Richard Grigonis is an internationally-known technology editor and writer. Prior to joining TMC as Executive Editor of its IP Communications Group, he was the Editor-in-Chief of VON Magazine from its founding in 2003 to August 2006. He also served as the Chief Technical Editor of CMP Media’s Computer Telephony magazine, later called CommunicationsConvergence, from its first year of operation in 1994 until 2003. In addition, he has written five books on computers and telecom (including the Computer Telephony Encyclopedia and Dictionary of IP Communications). To see more of his articles, please visit his columnist page.