blogging.vc

I don’t necessarily like to post very critical reviews of European start-ups because I am very glad to see more activity again and I have a lot of respect for all the entrepreneurs here, whether I personally believe in their particular business or not.
That’s why I originally chose not to write about Jajah when in February Der Spiegel published an article titled “Silicon Valley bets on the Alp’s Skypers” (excuse my poor translation), talking about Jajah getting funded by Sequoia. However, many people have now asked me what I think of it so I thought it’s time for a public answer. And given the fact that they are backed by the Sequoia Capital, my criticism will not hurt them I am sure.

Quite frankly, I wasn’t able to see the big deal here, and I felt the comparisons to Skype (or even the ominous “Skype 2.0″) that keep popping up to be unfit to say the least. So here are my thoughts and how I’d compare it to Skype:

What I like:

• The clean interface. While people have voiced concerns over their privacy policy, I do think the page is intuitive and a welcome change from the world of calling cards and similar discount offers that tend to be the virtual counterpart of your calling shop filled with cigarette smoke and bathed in cold neon light. And you can argue that sometimes it’s not the core innovation, but the user-friendly presentation that provides the breakthrough for something that has been available before.

Now, here’s what I don’t like from a user perspective:

• I need to be online to initiate a call. If I am a price conscious user, which I would assume to be the target market, I would probably not mind the trouble of a headset to use Skype or use a callback solution. A callback provider works from any mobile or landline phone without internet (you dial a number, the provider recognizes your caller ID, you hang up and the provider calls you back to connect your call). Using the Internet to initiate a landline call doesn’t seem like a huge value add to me.

Here’s what I don’t like from an investor’s perspective:

• No inherent virality. Communications applications are typically inherently viral because they require your counterpart to also use the application. While this can be a barrier at the beginning, if your application is compelling enough for people it’s a great way to drive adoption. This is why Skype grew so fast. Here, the other user doesn’t even know that you are using Jajah, so there is no inherent viral effect.
• No network effect or switching barrier. With any buddy-list type applications, you build a network effect, i.e. the value of your network grows over-proportionally with the number of users. And once a user has 20 people on his buddy list he’ll be unlikely to switch to another product because he needs to motivate his 20 buddies to also move in order to retain the communications value. In Jajah, other than maybe a call history/address book there is nothing that prevents me from using another service tomorrow if it’s a tad cheaper, nicer or cooler. I’ll have the same utility right off the bat with any other service.
• No presence. Other than cost savings, there is no increased value compared to a regular phone. Presence, privacy etc are all features that applications like Skype and IM can offer but jajah doesn’t - although they may add this. However, this is generally harder to do with a web-based service than with an app.
• No strong technical innovation. While I don’t know the guts of the service, it looks like plain callback to me. This has been around for many years and you can probably buy the required software off the shelf. Wholesale call termination is a commodity, and there is nothing you can do as a startup to do this cheaper than others - it’s a scale game. Hooking this up to a web interface is in my mind not a major hurdle for competitors.
• Economics. Jajah always needs to pay for two phone calls that it interconnects at its server. While it pays wholesale rates, it always has to pay TWO call termination fees. Skype, however, only pays for one leg since the call origination is always VoIP and hence free. Therefore, I don’t see how structurally the cost of such a service could be lower than that of a Skype-Out type offering, and the only reason why it is today is probably the fact that Skype likes to have a margin that’s not as thin as a razor blade on a diet. And if you really hunt for each cent, callback has the disadvantage that you always need to call your customer back before you initiate the call to the target party. While the phone is ringing on the target party’s side, Jajah already has to pay termination fees for the leg to the originating caller, even if the target side never picks up.
• The market and business model. Telephony is a market that’s dominated by brand and price. Venture investments in such markets are tough, because you’ll typically witness eroding margin as competition emerges while your customer acquisition cost goes up and you face hefty marketing expenses. Unless you have a new, powerful pitch that resonates with the mass market (like Skype did with it’s “Telephone the world for free”, with which it broke free from the industry-typical “my service is $2 cheaper than yours so come swith to me…”), it often becomes a steep uphill battle. Based on all of the above I am not sure whether there is a really compelling business model for this company - let’s see if they come up with premium services, innovative advertising or similar.

I could probably go on with other points, but I guess this is more than enough already. So you can tell, to me it looks more like Skype 0.2 than 2.0. Yet, I’ll track them carefully - after all, there may well be much more to them than what meets the eye today, and that could have well warranted an investment. Maybe the current solution is only an interim one. It’s either that, or I am completely missing the point in with my analysis (and yes, that’s happened before…)