Will Popular Telephony Scare Skype?

Message to Skype Technologies SA: You’ve got competition.

A French startup called Popular Telephony Inc. next month will introduce itself and two peer-to-peer, voice-over-IP (VOIP) software programs, Peerio and Peerio444, at the Supercomm 2004 tradeshow in Chicago, Light Reading has learned. The company’s consumer application, Peerio444, will compete directly with Skype, the highly publicized, free VOIP program from Luxembourg-based Skype Technologies (see Skype Me? Skype You! and VCs Pump $18.8M Into Skype ). But Popular Telephony’s true ambitions lie with Peerio, which is aimed at corporate customers and original equipment manufacturers (OEMs). Peerio444 runs on Windows-based PCs and lets users make free, unlimited calls over the Internet to other PCs. In addition, the software will let users make inexpensive calls to phones on the public switched telephone network (PSTN), including mobile phones, 800 numbers, and international numbers. Free features include voice mail, call waiting, call hold, and call transfer. The product will not contain spyware, adware, or other technologies that have raised concerns about privacy in peer-to-peer file-sharing programs. Popular Telephony plans to release versions for Linux and Macintosh later this year.

Popular Telephony does not expect to distribute Peerio444 as widely as Skype, which has been downloaded over 12 million times and has attracted more than 1 million regular users in eight months, according to Skype Technologies. “We don’t have any plans like we want to conquer the world with [Peerio444],” says Dmitry Goroshevsky, CEO of Popular Telephony. “I’m not saying we have a plan here for 100 million downloads.” The company will offer the program for free through popular download sites and make portions of the source code open for users to modify and redistribute. But it will not spend a lot of money on marketing the product.

Instead, the company hopes Peerio444 will help fuel interest in Peerio, which is based on the same class library as the consumer product. Described as “middleware,” Peerio can be embedded in IP phones, handheld organizers, or other terminal devices used for VOIP calling. Popular Telephony will make money by licensing Peerio to OEM customers, the first of which it will announce at Supercomm (see Mobile Skype: Quality Issues?).

Popular Telephony is betting that devices equipped with Peerio will appeal to corporate customers because the gadgets can communicate directly with each other over IP networks in P2P fashion, eliminating the need for costly central servers. “You won’t need to pay for the expensive enterprise IP PBX infrastructure to get exactly the same level of services,” Goroshevsky says.

Goroshevsky claims Peerio will scale to support the large numbers of users typically found in corporations, though he won’t explain how, promising more details at Supercomm. He adds that Popular Telephony is addressing the security problems inherent in P2P VOIP software. One of Skype’s most valuable features is its ability to pass calls through firewalls and Network Address Translation (NAT) systems. “This is great for users because they don’t need to configure anything, but it is a tremendous security threat,” Goroshevsky says. Popular Telephony is debating whether to include similar technology in Peerio.

Popular Telephony’s pitch to the corporate market “sounds like a tough sell,” says Daryl Schoolar, an analyst at In-Stat/MDR. “Peer-to-peer sounds like too much of a hobbyist, consumer application. They have to do a good job selling quality of service and security. Even with that, you can’t totally replace all of a company’s phone systems.”

Competition will be tough, too. Long-distance providers and regional Bell operating companies already provide VOIP services to businesses by using server-based equipment from vendors like Cisco Systems Inc. (Nasdaq: CSCO) and Nortel Networks Ltd. (NYSE/Toronto: NT). The potential savings from Popular Telephony’s “serverless” peer-to-peer approach may spark interest among businesses, but Skype Technologies is likely to make the same appeal to them, and it can point to its million active users. “I don’t see how someone else starting from scratch is going to get that kind of traction,” says Jon Arnold, an analyst at Frost & Sullivan.

Popular Telephony is incorporated in the U.S. but maintains headquarters in Sophia Antipolis, France, and an engineering team in Israel. The company was started in 2001 with $4 million in seed funding from its founders and angel investors. Originally named CrossOptix, the company had intended to develop ultra-high-speed optical interconnect technology but changed its name and its focus as the telecom industry bottomed out.

Before starting Popular Telephony, Goroshevsky founded Internet Telecom Ltd., a Jerusalem-based maker of VOIP software. In 2000, Internet Telecom sold its assets to Terayon Communication Systems Inc. (Nasdaq: TERN) for $40 million in stock. New York-based investment banker Stewart Rauner arranged the deal and is now an investor in, and a director of, Popular Telephony. In 2001, Terayon management changed its mind about the acquisition, shut down Internet Telecom’s development efforts, and took a $44 million charge.

— Justin Hibbard, Senior Editor, Light Reading