An Idiot's Guide to Cloud Telephony

When I read something like "VoIP telephony provider," I ask myself, "What the heck is that?"

If you already know the answer, this article may not be for you. But if, like me, you're left scratching your head, then you're in luck. Here's a quick idiot's guide to VoIP telephony, with the pick I'm watching in the sector and a special free report at the end.

What, exactly, is it?
VoIP stands for voice over Internet protocol. In laymen's terms, this means placing and receiving telephone calls that travel over the Internet -- instead of through the landlines and satellites that normal service providers have constructed.


If that sounds a lot like Microsoft's (NAS: MSFT) Skype, it should. When you use Skype to make a call to someone's phone, that's an example on VoIP. When it comes to other forms, the two biggest consumer-facing options are Vonage (NYS: VG) and majicJack (NAS: CALL) . Because these companies are able to store your data -- like contacts and/or messages -- remotely, they're a type of cloud play on telephony.

Historically, Vonage has been the dominant force here, with revenue last year topping $870 million. To use the company's product -- as the picture below shows -- you simply plug a Vonage box into your Internet, and then plug your phone into the Vonage box.

anImage

Source: Vonage.

Typically, majicJack was running a distant second. In 2011, revenue came in at about one-eighth of Vonage's. This was mostly because to use its product, users plugged their phone directly into their computer. If the computer was off or on standby, calls couldn't be made or received.

But with the release of majicJack Plus, the company now allows users the same convenience of Vonage -- plus the ability to use the phone on the run, as it can hook up to Wi-Fi networks if it is plugged into a computer.

A valuable proposition?
In all, these products provide quite a value proposition over standard landlines. Vonage users can get unlimited calls to the U.S. and Canada for $25 per month, while majicJack comes in at just $30 per year after start-up costs -- or just $2.50 per month!

Without a doubt, there's a serious value proposition here. And yet, I simply don't believe that either one of these companies will be long-term winners.

Though landlines will certainly be around for a while, and it's nice to be able to use majicJack while on the move -- mobile phones are the wave of the future. No one will want to lug their computer with them everywhere to place phone calls in 20 years, and unless there are technological developments that will allow convenient use of VoIP on the move, the consumer use of this technology is headed the way of the dodo bird.

Here's where the money is
When it comes to VoIP, however, I do believe there is one company poised to profit: 8X8 (NAS: EGHT) . The most basic way to think about the company is that it offers products and a valuable proposition similar to majicJack and Vonage, but with a laser focus on the business community.

While I can rationally imagine a future when household landlines are a thing of the past, I think integrated landline systems -- on some scale -- will exist in the business community for the foreseeable future. And it's not just standard telephone service 8X8 offers, it has a whole suite of products to offer customers, from voice mail to a virtual office suite.

The company was able to grow revenue by an impressive 10.6% last year, but the story gets even better when you zoom in on the last quarter, where it grew by 30.9% year on year. Over the past two years, churn has dropped from 2.7% to 2%, and service revenue per customer has gone up 19% in just the past six months.

Backing up my pick
I won't beat around the bush -- this isn't a "sure thing" pick. An innovator -- on a moment's notice -- can disrupt the field of telephony. But for the time being, I'm excited about 8X8's value proposition and focus on business customers. That's why I'll be making a bullish CAPScall on the company in my All-Star profile.

In the meantime, if you're focused on the even bigger future for telephony, I suggest you check out our special free report: "The Next Trillion Dollar Revolution." Inside, you'll find out about a company poised to profit from the legions of people quickly converting to mobile phones worldwide. To find out what the company is, get your copy of the report today, absolutely free!

At the time this article was published Fool contributor Brian Stoffel does not own shares in any of the companies mentioned. You can follow him on Twitter, where he goes by TMFStoffel.The Motley Fool owns shares of Microsoft. Motley Fool newsletter services have recommended buying shares of Microsoft and Vodafone Group, and creating a bull call spread position in Microsoft. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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bps163

It's going to take years for 8 to get really setup but. Magic jack is the over all winner, it's plunged into home and cell phones + lap tops. All of witch are on the items, this is where Magic Jack has cornered the market. Let's not forget Magic Jack owns Wi Max as a kicker for more support. And the cash flow that it has right now and growing by the truck loads everyday, makes Magic Jack the ( CALL ) of the stock picks for the next five years easily.

March 27 2012 at 10:45 PM Report abuse rate up rate down Reply