July 27, 2005

Shrinking the Lab

Continued from page 1

By Andrew Madden

Calling All Computers
Newcomer PhoneGnome is joining Vonage and Skype in the wide-open voice-over-Internet market  -- and other alarm:clock news from the land of private venture funding.

Loyal readers of our blog, alarm:clock, know that we have little sympathy for the traditional telephone companies. Quaintly known as Regional Bell Operating Companies (RBOCs), they've been fumbling around with Internet opportunities for years now, particularly as they try to preserve their dwindling core business: offering telephone service over copper wires. Because of this defensive position, we believe RBOCs stifle innovation and have yet to react adequately to the impact the Internet is having on basic telephone services, such as in voice-over-Internet Protocol (VOIP).

The emergence of Vonage, a well-marketed VOIP service, whose basic fee is only $15 a month, has added to the pressure on RBOCs, as has the runaway success of Skype, the free Internet service that turns a PC into a phone. If one doubts that basic phone service is becoming a free commodity, consider that Skype has been downloaded at no charge by more than 140 million people worldwide; from Boston to Bangalore, phone calls can now be free.

And now Skype isn't the only such game in town. Just last week, Danville, CA-based TelEvolution launched the latest entrant into the low-cost communications market -- and we suspect it's making the RBOCs squirm again. The company sells a VOIP device called PhoneGnome, a small box that costs $120 -- with no monthly services or charges.

Aside from its low price, a key selling point of PhoneGnome is its simple installation; instead of switching to a new service and getting a new phone number or transferring an existing number, PhoneGnome automatically configures itself once attached to a phone line and broadband connection. Vonage requires the installation of new modem (admittedly, not exactly rocket science).

PhoneGnome users can keep their existing phone numbers, and calls to other PhoneGnome users are free. Calls to non-PhoneGnome users revert to the existing land-line service. The equipment also has VOIP features such as email notification of voice mails and online call logs.

However, the fact that PhoneGnome calls are free only if placed to other PhoneGnome users could limit TelEvolution's growth. Skype, which also requires that two callers both use Skype software, has benefited from making its software application is instantly downloaded and installed. (Skype users can even send email invitations to one another to join.)

Without a massive, spontaneous adoption of its box, TelEvolution will need to consider a sizable marketing campaign. Indeed, although PhoneGnome may offer significant ease-of-use advantages over the likes of Vonage, the VOIP market is being won on marketing. Vonage has raised a staggering $408 million and its promotions are ubiquitous on the Web and TV.

On this front, TelEvolution does have a management team with impressive experience. David Beckemeyer, the company's founder and CEO, was a cofounder of Earthlink, as well as its vice president of Engineering and CTO. Back then, Earthlink was a little-known ISP trying to grab some scraps from another company with enormous marketing resources and market share -- AOL. No doubt, Beckemeyer will put his previous experience to good use in trying to establish PhoneGnome as a major player in this emerging market.