Who Will Win in Mobile VoIP?

A lot to overcome

In Jajah’s case, investors are Deutsche Telekom (DT), an interesting choice, given Wi-Fi providers’ dislike of people using their spectrum to access free or low-cost VoIP (indeed, DT subsidiary T-Mobile USA actually counts calls made over Wi-Fi hotspots as part of users’ wireless minutes unless subscribers add a $10 plan to their bills); Intel Capital , which funded Clearwire Corp. (CLWR) before it went public; Sequoia Capital, whose successful exits include Apple Inc. (AAPL) and Cisco Systems Inc. (CSCO); and Globespan Capital Partners, which backed ShoreTel Inc. (SHOR) and also Clearwire.

Jajah seems to have made its way from suspect startup to perhaps the strongest mobile VoIP company standing. In 2005, GigaOM tech blogger Om Malik said he thought the so-called “Skype killer” was a hoax. But now, according to BusinessWeek, Jajah boasts millions of users – 10 million as of April 2008. That kind of growth had Jajah execs spouting IPO talk in 2007. The market couldn’t support another tiny tech company going public, however, and then the economy tanked altogether. Another axe has fallen in the form of private-equity layoffs; the credit crunch has hit so hard that even well-heeled private investors can’t finance deals, making IPO activity over the next several months a far-fetched prospect.

Skype, meanwhile, is the original P2P VoIP provider that has advanced into mobility. Before selling to eBay, Skype was funded by Draper Fisher Jurveston, Draper Richards, Mayfield Fund and Mangrove Capital. Draper Fisher Jurvetson also backed Yahoo! Inc. (YHOO); Draper Richards helped Jaxtr and ooma; Mayfield Fund is another Jaxtr investor; and Mangrove Capital funds a number of communications and wireless entrepreneurs.

That kind of clout helped get Skype off the ground and now the company is tackling the mobile market. But there’s a lot to overcome with such a venture.

Skype and its rivals have to address how to compete with operators’ inexpensive international calling plans. Mobile VoIP providers also must overcome the barriers wireless carriers place in handsets, such as blocking VoIP applications or, like T-Mobile, using wireless minutes for VoIP calls. Further, they must convince the masses that their technology is more user-friendly and otherwise appealing than traditional landline services, which have grown markedly cheaper in the last decade.

Boosting that effort, Jajah has landed some high-profile customers and partners. Earlier this year, the California-based company earlier this year secured Yahoo! Inc. as a customer – Jajah now powers Yahoo!’s premium voice service. And in August 2008, Jajah snared a deal with chipmaker Intel. Intel agreed to integrate Jajah’s VoIP technology into a new generation of its chips; that will put Jajah services within instant reach of millions of PC users.

Despite eBay Inc.’s admission that it paid too much – $2.6 billion – for Skype, under new ownership the company could make good on its promise as a premier IP telephony firm. Skype says many of its estimated 300 million users already pay for upgraded services. In fact, CNNMoney recently reported that Skype is profitable to the tune of $100 million in cash flow. And now that eBay executives have apparently given up on trying to make Skype a good fit with the online auction giant, another sale is rumored to be in the offing -- possibly to Microsoft Corp. or Google Inc.

So what are the prospects for mobile VoIP? Hard to say. The technology holds promise even though cheap minutes suffer from commoditization. But the provider has to thrive as well. Doing so requires a profitable business model, which Jajah, and perhaps Skype, stand a decent chance at achieving.