Telio - a Better Way to do a VoIP IPO

Tomorrow is the IPO launch for Norway-based Telio. While not a household name in North America, Telio has a following among those who attend VON events, and in my view, are the Vonage of Europe . They have been quietly building up a great voice over broadband business � primarily in Norway � and are ready to share it with the world. This in itself is not a big story, but in the wake (literally) of Vonage�s IPO, Telio stands in stark contrast to how one can go about building a profitable business in a market that is rapidly becoming commoditized.

To cite sources first, James Enck, who�s always on top of things, esp in Europe had a good post about Telio yesterday. There are two stories here, one micro and one macro. The micro story, which is what James discusses, centers on the pricing of their IPO and the unusual scenario in terms making shares available for sale. He points to the press release from the Oslo Bourse, which explains that the market makers were only able to generate strong support for the stock at a price of 30 NOK.

Noting that the market there has been volatile, the press release seems worded in a way to make you wonder why Telio's management has elected to stick to the price range they think the stock is worth, namely 31 - 37 NOK. As a result, the stock will be listed at 30 NOK, but no new shares will be issued. They'll take their chances and hope the market proves them right, in which case, the share price will move up into their target zone, and only then will the public get a shot at the float.

To some, this might look haughty and short-sighted, especially coming from a tiny company, and it could be argued they should be grateful to take 30 and go with the flow. Telio isn't that way, and they sure aren't like Vonage.

Their management's position says a lot about the character of this company and how radically different their bargaining position is compared to Vonage. In their view, they have cash in the bank and don't need this money for immediate operations, so they don't have to give the stock away, and they're not desperate to take whatever comes their way. Good thing Vonage didn't do that! Telio is in a much stronger market position relative to Vonage, and it's highly unlikey their offering will follow Vonage's course. If it does, then, sure, you can say "I told you so", but I don't see that happening.

For those of you not familiar with Telio, you can study their Investor Presentation here - it's well done and easy to follow. Otherwise, I'll give you the Readers Digest version, straight from the source. I've been speaking with Telio's founders today, and have been following them closely from the beginning.

This is the macro story I'm trying to get to, and I briefly want to talk about how Telio differs from Vonage, and why they are enroute to a successful IPO. This really is a tale of two cities, and I want to get the point across that mass marketing spending is not the only way build a business, and in some ways, it's so Business 1.0.

Telio has built up a residential VoIP subscriber base of over 90,000, and guess what - they're profitable, and they have money in the bank. Their future doesn't ride on an IPO. They can make it without it, and it wasn't a fallback position because nobody came along to buy them. Compared to Telio, Vonage is very Business 1.0 in the sense that they didn't fully exploit the power of the Internet. They've spent most of their money on traditional advertising to build a business in a traditional - and very American - way. The more you spend, the more subs you get - but that's a treadmill you can never get off.

Telio - very much like Skype - is Business 2.0 (not really Web 2.0, but that will come). I have learned that 75% of their customers come from referrals and friends - pure organic growth and viral marketing. Not as dramatic as Skype, who has zero marketing spend - but pretty darned close. Not only are their customer acquisition costs much lower than Vonage, but they do a better job of retaining those customers. They won't reveal their precise churn level, but it's below 1%, which is terrific. Vonage's churn is respectable for the market it is in, but it's quite a bit higher than Telio. These two simple metrics go a long way to explaining why these companies are on divergent paths.

Telio has done a great job leveraging the Internet to build its customer base, and they've built a more efficient organization to support growth. On top of having lower overhead, they also claim a higher ARPU than Vonage (despite having more free calling zones than Vonage) - two more factors that make the difference between profits and losses. The higher ARPU comes from the fact that their target customer is a bit different than Vonage. They focus more on people who "communicate a lot" - power users, so to speak. Vonage is more lowest common denominator, which means less likelihood of adopting premium services.

In short, Telio wants to "grow smart and not burn our capital". Very different philosphy to Vonage, isn't it? Another way Telio has leveraged the Internet - and IP economics in particular - is the simple notion that small is beautiful. One of the trump cards of any virtual provider is not having the burden of a costly network infrastructure. You don't need millions of subs to make money!!!

The US market is about 70 times the size of Norway. On a per capita basis, Telio's 90,000+ subs translates to over 6 million in the US. That would make them far and away the market leader there. But they don't need to be that big. Being profitable with less than 100,000 subs gives hope to dozens or hundreds of other startups that with the right business model, they can make money. Of course, most of them don't and won't, but Telio is proving that it can be done. This is how you build a successful Internet business. It's not just a matter of doing one or two big things right or differently. It's a lot of little things that add up to viable business model.

That said, the future is far from certain. Telio holds a comparable market share position to Vonage in the US - about 35% of the rez VoIP market. As with Vonage, there are dozens of other VoIP pureplays in Norway, but they're all hopelessly behind Telio. Their main competition is the big telcos, who aren't doing much yet with VoIP. The Investor document shows PTT Telenor being #2 with 13% share. It's pretty safe to say those numbers will climb once they get busy - much like what is happening now in the US with CallVantage and VoiceWing. The big difference for Telio is that cable has low penetration in Norway, so it's all DSL for broadband, and there are no Time Warners or Cablevisions there to give them a run for their money.

Although competition will intensify, VoIP is really the first stage of growth. Telio keeps developing applications and is well along the path to offering FMC and MVNO services - not just in Norway, but across Europe. These plans are pretty clearly laid out in part 4 of their Investor document. So, will they be able to keep growing virally - or have they simply captured all the early adopters? How will they hold up when the market gets more competitive? Can their technology - and organization - scale to keep pace with growth?

It's too early to tell, but it seems to me they have a much better handle on how to migrate to wireless services than Vonage, and in Europe, that really opens things up for them. Is this the little engine that could? I think so.

Which company would you rather invest in? One that has publicly stated their IPO funds would be used to maintain marketing spend to continue acquiring customers? Or one that is cash flow positive already and will reinvest into the business to fund growth into new markets and new services? It's a no brainer for me.

Before I sign off, I just have to come back to a comment I made last week about how Vonage and Mastercard went IPO on the same day. Talk about going in opposite directions. Vonage opened at $17, and is now down aroud $12, while Mastercard opened at $39, and is up at $47. I know I get philosophical at times, but it just strikes me as so odd that the market rewards companies that help us spend money we don't have, and they punish those who try to save consumers a few bucks. To twist things a bit further, Mastercard actually profits from Vonage since they are one of the credit cards that subscribers can use to pay for their Vonage subscription......

Final thought - whether you're in the Vonage camp or Telio, I can think of one guy who comes out a winner both ways. Who else? Jeff Pulver. He's the Von in Vonage, and is also an advisor to Telio. Smile Jeff!

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