Adapt or Die: 8x8 is Living Proof that Change is Good

Cover Story

Adapt or Die: 8x8 is Living Proof that Change is Good

By Paula Bernier, Executive Editor, IP Communications Magazines  |  August 01, 2011

This article originally appeared in the August issue of INTERNET TELEPHONY

8x8 (News - Alert) Inc. has come a long way, baby. But this month it expects to unveil a cloud-based video service. And that, in effect, will bring the company full circle.

You see, the company, best known today as a voice over IP service provider, got its start in life as a visual communications organization.

The Back Story

Founded in 1987 as Integrated Information Technology Inc., the company arose at the hands of two graphics chip company execs. In 1990, 8x8’s current CEO, Bryan Martin (News - Alert), joined the company’s video compression semiconductor architecture group.

Compression Labs was among the graphics chip company’s first customers, and it provided the algorithm used by AT&T (News - Alert) for its Picturephone. So Integrated Information Technology, with its four-person staff and in business less than a year, already had AT&T using its technology, notes Martin.

Integrated Information Technology dominated its space throughout the 1990s, when the ITU had yet to set standards around videoconferencing (although it added MPEG when that came along), says Martin. Then, in 1996, the company introduced its own videophone, ViaTV. However, around that same time it became clear that customers were more interested in IP voice than two-way IP video, so the company turned its attentions to voice semiconductors. That ended up being a decent move, as the company in 2000 won a fair amount of business from Lucent, and life was good.

Then everything changed.

In October of 2000, the Lucent division for which the company was a supplier got slashed. Indeed, the communications industry as a whole took a major hit with the dotcom bust and the WorldCom debacle. The once-explosive communications space was now in the midst of the telecom nuclear winter.

Martin had been CTO of the company, but amidst the turmoil he assumed the title of CEO. Cost cutting was the order of the day, so he downsized the company’s workforce from 350 to 35 employees.

There were no OEMs left to sell to, so Martin and his colleagues needed to shift again with the winds of change.

Management decided to use the company’s technologies to appeal directly to end users. In late 2002, the company launched a voice service based on its own chips and software under the Packet8 brand.

It was slow going at first. The company had just eight customers in its first month of billing, and employees took their phones home with them at night to provide customer service. But things improved quickly. In mid 2003 they put together $1 million in funding, which included their own money and some dough from one outside investor. Over the next couple of years the company raised a total of about $60 million.

By 2004 hundreds of thousands of residential subscribers were using Packet8 services. To continue on its path of growth, 8x8 readied to address the business market. That same year it launched a simple hosted PBX (News - Alert) service that used terminal adapters to plug into business phones.

8x8 was bringing in $3 million in annual revenues from its business customers by around the end of 2006. This group of subscribers offered better margins, lower churn and fraud, and fewer customer service demands than 8x8’s residential customers, so the decision to expand to address business users was fortuitous. It was such a good move, in fact, that the board decided to focus the company’s limited resources on the business side almost exclusively.

Real Time

Today, residential users account for just 10 percent of the company’s annual revenues. By the end of May 2011, 8x8 had surpassed 25,000 businesses subscribing to its cloud VoIP, videoconferencing, unified communications, and managed hosting services.

 “We added more new businesses in the March quarter than we’ve ever added before,” says Martin, who adds that “business is very profitable these days”.

In fact, 8x8 has been profitable 13 of the past 14 quarters. The company ended its fiscal year on March 31 with annual revenues of $70 million;  $8.6 million in free cash flow from operators, $7.8 million of which the company used to buy back stock; and $18.4 million in cash (and no debt).

That has garnered the company acclaim by some financial watchers. Motley Fool in April 2011 named 8x8 as one of Wall Street’s best hidden stocks, praising the company for the way it “allows customers to feel they're calling users' offices, even when they're actually dialing into a cell phone.”

 “8x8 has been through a lot and survived,” says Martin. “Now we feel like we’re in the technological and financial position that’s better than it’s been in the history of the company, and we’re growing aggressively,”

The company just got new site a couple years ago, and already it’s bursting at the seams, he says. 8x8 employs 260 individuals, not counting 100 full-time equivalents that work at its call center doing customer support. It continues to add people in customer service, operations, sales and software development.

The Product

Virtual Office is the name of the company’s flagship offering, to which it’s added call center and UC functionality, call recording and presence management. Of course, mobility is also a component of the solution, which includes soft clients, web clients, and support for the iPhone and Android-based smartphones. 8x8 will support other mobile operating systems over time.

 “Our goal is to proliferate our services so our services can run on any platform that is prevalent in the business market,” he says.

Martin says Virtual Office is a great replacement for very high end business phone systems, although it’s also suitable for small companies. The company also offers for less than $10 a month a solution called Virtual Office Solo. This provides a full and sophisticated suite of UC capabilities via just a web client. It was designed for telecommuters, but Martin says Virtual Office Solo also is a good, low-risk way to enable potential business customers to get a feel for what 8x8 can offer.

Eight lines is the average buy of 8x8 customers today, although the average for new customers is 11.5 lines. Voice services for these customers are supported by data centers in Silicon Valley and Ashburn, Va., at which 8x8 servers and high-speed interconnects are located.

But that’s just the voice side of the house. The company also now plays in the data and video space.

Last year 8x8 acquired a managed hosting company called Central Host out of Los Gatos, Calif. The company manages servers in data centers on behalf of customers.

When they did deal, Central Host had a $1 million a year run rate; its average customer paid for management of about 10 dedicated servers; and each server only supported a single customer, Martin says.

In February 8x8 began offering virtualized servers, kind of like Amazon, says Martin. This summer it’ll start providing server resources by the minute or the hour, he says, adding that 8x8 managed services also include subscription-based firewalls, back-up server services, security/VPNs and even hosted Exchange. The company has almost tripled revenues for this business since it bought Central Host.

That may help explain why 8x8 continues to expand its efforts on this front through acquisition and the addition of more managed services.

8x8 on June 20 announced it had acquired Zerigo, a Littleton, Colo.-based company that provides virtual private servers, managed DNS services, and monitoring tools for cloud-based server operations. 8x8 says this deal, for which the terms were not disclosed, “aligns with 8x8's strategic plan to grow its cloud-based offerings through both organic and inorganic activities.”

Martin indicated in his June 14 interview with INTERNET TELEPHONY that 8x8 has been on the lookout for acquisition opportunities. From the sounds of it, there could be more such activity from 8x8 in the future. He notes that 8x8 sells back-up services as part of its cloud offer. Right now, he says, 8x8 resells a service from a company named Mozy, but 8x8 potentially could use M&A to bring that in house and, in the process, improve its margins. An acquisition related to call recording might also be attractive to 8x8, Martin adds, saying the company would like to improve upon its speech-to-text functionality and call recording search tools.

Eyes Forward

As noted at the top of this article, 8x8 earlier this summer was readying a cloud-based video service with an eye toward launching it this month.

Basically, this service outsources the management of videoconferencing equipment for business customers, Martin explains. It’s about managing disparate videoconferencing protocols like H.323 and SIP that are out there today to enable multiple endpoints to work together and to ensure a high-level user experience, he adds. NAT traversal, bandwidth management and control of the end-to-end solution from 8x8’s data center is all part of the turnkey videoconferencing solution. 8x8 also brings along for the ride Virtual Office Pro (its lightweight videoconferencing software client) and its $1,000 video phone, for those customers who want them.

“The idea really is to start introducing video communication back to the small business at a price they can afford,” he says.

Pricing for the solution varies depending on the number of participants involved and the resolution supported, but it’s somewhere between $250 and $1,000 per month per virtual room. Three are standard-definition, high-definition and gold HD (high-def with lots of participants) levels of service.

 

Go to Market

As it expands into new service areas, 8x8 also plans to make some changes to its sales approach. The company earlier this year hired on two Polycom (News - Alert) sales executives to lead that charge.

Kim Niederman is now 8x8’s senior vice president in charge of worldwide sales. Martin says Niederman is making changes to inside sales that include some adjustments to personnel and bringing in some of his own people.

Don Trimble, also a former Polycom guy, is heading up channel sales.

About 95 percent of 8x8’s sales are done direct today; however, it appears as if channel sales will play a growing role in the delivery of the company’s services in the future. Martin in mid June told INTERNET TELEPHONY that 8x8’s channel program hadn’t yet been officially unveiled, but that it has been working on the effort and had 15 resellers signed on that had resulted in nine new customers for 8x8.

Among 8x8’s channel partners is master agent World Telecom Group, which with 2,000 agents is the service provider’s largest channel partner. (WTG was a partner of 8x8’s when its focus was on residential services as well.) Martin says 8x8 will announce more partners over the next couple of months. He adds that a big push for 8x8 is to forge more partnerships with businesses in the data hardware space. That would include companies that sell power over Ethernet switches and traffic shapers into LANs, he says.

 

Martin adds that Niederman and Trimble also are retraining the sales force to stop selling on price and start talking more about the value 8x8 delivers. With savings of six to seven times in the first year of use compared to existing solutions, it’s not surprising that it’s price that usually closes deals for 8x8, says Martin. But focusing solely on price during the sales process has led 8x8 to commoditize its own product to some extent, he says. So the company wants to help potential customers understand the benefits of HD voice, unified communications and recording on demand.

“Unfortunately that [typically] happens post-sale,” says Martin. But, he adds, that may change with the introduction of business video.




Edited by Stefania Viscusi

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