So much has been written this week about the hard landing of SunRocket. People who were bullish on VoIP were stunned to see the effective Number 2 player in the space go belly up with little or no leading indicators of problems. I feel bad for the customers scrambling to try to port their phone numbers to other providers, trying to minimize the time they are “off the air”. I wonder how many of these victims will be gun shy to go with another VoIP provider, and either opt back to a phone company or cable company-vended solution, or become one of the growing community of folk using their mobile phone as their primary line (lots, I would guess).

In the aftermath of the sunsetting of SunRocket, there are lots of acrimonious comments from employees of the company blaming this on senior management and execution problems. I think this is Stage 1 of their healing process, and understand that discretionary decisions may have had a role in the timing of SunRocket’s demise, but believe me, it was on a path to oblivion much earlier than that. The reason: the whole primary line replacement business is the absolutely wrong target for any VoIP player. Let me quickly define what I meant by primary line. It is that line/phone number you use as your main telephone “identity” with the external world.

Why do I feel this way? Let me set some context. When I started the AOL Digital Services business, one of the in-flight commitments I assumed was to launch a Vonage-like competitor to the market by 3Q/2005. Luckily, I had a really talented team and a passionate leader (Gil Weigand) running the effort. In an 8 month period, they build a carrier-grade telephony company. This went well beyond the base technology development. It meant establishing a call center, building a fulfillment solution for the product, and navigating a litany of regulatory issues (including the new E911 requirement imposed by the FCC). Lots of 90+ hour weeks and cases of Red Bull later, they launched a product called TotalTalk, which was a really elegant solution (and the first fully E911-compliant solution in the market). Was it a solid market offering? You bet – great features, neat softphone integration with AIM, etc.. It even won a couple of industry awards for some of the neat things they accomplished with the switching architecture the team established.

AOL was always a great marketing machine, and it seemed obvious that they could add this product into the mix and be competitive with the incumbents (e.g., Vonage). We launched, and several things became immediately apparent:

• Customer acquisition costs were really high ($250-300), and nothing was happening to change that dynamic
• The major cable players were beginning to become real juggernauts, acquiring phone customers at low costs through really compelling double and triple play bundles
• The regulators were no fans of the alternate carriers (VoIP players), and that attitude was not going to change anytime soon
• The traditional phone companies were going to fight back, offering their own “all you can drink” calling plans at competitive monthly prices ($39-$49/mo), more to fight the attack by the cable industry that the VoIP industry, but there was material collateral damage to the VoIP sector as well
• There was inherent channel conflict in having a cable company and AOL under the same roof wanting to sell alternate versions of primary line service in the market at the same time, and due to the importance of Time Warner Cable’s growth to the stock price, any issues were logically going to go the cable company’s way (a painful but pragmatic reality).

We ran our market trials, and 3 months after launch, I made that long walk down to hall to our CEO and CFO and told them I was shuttering the operation. It was both painful and funny. The pain came from seeing such a passionate team’s effort not succeed in the market (although we had a path already launched that would leverage lots of the platform development). The funny part came from seeing the reaction by our CFO, who was floored that I was actually wanting less time than I originally requested for our initial launch program, since all of his prior interactions were by business heads looking for more time on life support for their effort – he looked like he was having an out-of-body experience. I took both execs through my rationale, laid out our new path forward (build upon a strategy of creating complementary services to primary line customers of the incumbents), and we made the tough call.

Did it mean I didn’t think there was an important role for VoIP-based solutions? Heck no. You only had to look at the impact Skype had to understand that this traditionally static market was in the process of reinventing itself.

The fundamental truth continues to be this: the primary line market is the purview of the phone companies, the cable companies and the cellphone companies. VoIP-based alternate carriers are at too much of a disadvantage to ever succeed there. Ah, but now the Vonage fanboys will all vehemently disagree with me. OK, let’s just look at Vonage’s key metrics: customer acquisition costs are increasing , and are now North of $300 – they are seeing no real momentum for all their brand spending. When their ads go off the air, their customer acquisition engine stalls. Their stock closed today at 2.78 – that’s a 78% fall from the IPO. They are burning through their cash at $50+MM per quarter, and they still have the Verizon patent violation resolution in front of them (a potential death sentence). That’s our market LEADER.

SunRocket was competing in the same primary line replacement market with essentially the same financial dynamics. The only secret sauce they attempted was to trade off lower monthly revenue and sign folk up to one and two year commits, hoping to mitigate churn and make the math work. Unfortunately, it didn’t, and they struggled unsuccessfully for the last six months to circle more funding.

Do I love VoIP? Yes, and I love it best when it created new, complementary products to the primary line market. When you see Skype, AIM Phoneline (the development of which we started in parallel to TotalTalk, as a more obvious complement to our great AIM franchise), Jajah and others, you see how great VoIP can be as an enabler of next-gen voice products.

With other network enablers soon to hit the market (municipal wifi, national wimax fabrics), the innovation cycle is still really in its infancy. We just need to understand that there will be more roadkill (Vonage et al) we will pass on the journey forward.

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