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August 27, 2008

Ribbit - Why BT's $105 Million Was Well Spent

By Jon Arnold, Principal, J Arnold & Associates


In my last Service Provider Views column, I updated the progress of some platform play companies that I’ve been following for a while. Having just been acquired by British Telecom for $105 million, Ribbit’s (News - Alert) news was by far the most dramatic, and this column has been written to probe things a bit further. My intention was to prepare a Q&A with the co-founders of Ribbit, Ted Griggs and Crick Waters (News - Alert). Their scheduling didn’t allow for this, but I’ve got a pretty good proxy. Last week I interviewed them by phone, and am sharing my impressions and key takeaways from our conversation here.

 
Where’s the fit between these companies?
I touched on this at a high level in the last column, but following my conversation with Ted and Crick, I saw three themes in particular — company vision, the developer community and innovation. Starting with vision, both companies share a common view in terms of where voice is going. They stressed how Ribbit stayed away from being a “VoIP company” and focused on building a business around what made voice valuable for customers.
 
BT’s commitment to 21CN and building an application-centric network resonated for them, and they could see how BT was working hard to break out of the traditional mindset of a telco. Like any good 2.0 company, Ribbit sees voice as one feature in the data network rather than being THE application that the business is built around. They could see that BT has moved away from that model and was thinking more as a software and services company rather than a phone company.
 
They also found common ground on a meta level — BT is truly a global operator, and they emphasized Ribbit’s global ambitions, which BT is well suited to support. BT was in fact, the best suited of all the companies they talked to in making this deal. None were identified by name, and all they would say was that the “usual suspects” were in the mix. I’ll take that to mean the likes of Google, Microsoft, maybe Apple (News - Alert) or carriers like DT.
 
There is a strong complement between the developer communities that also makes this deal a good one. BT has about 10,000 developers and Ribbit has about 5,000, but they are largely in different spaces. BT’s are more “machine-level”, focused on the network and back end systems, whereas Ribbit’s are “client side” focused, dealing more with the end user experience. The worlds are different — Flash and Flex as opposed to .NET (News - Alert) and Silverlight, but together they create a stronger, more complete developer ecosystem.
 
The third element was a common focus on innovation and was a big one for both. Ribbit, of course is all about innovation, both in terms of its focus and Silicon Valley roots. Innovation is critical to BT as well, and they explained how BT already had a Web 21C group that was tasked with opening up their network to Web services and APIs. So far, much of their 21CN investment has been about saving money and creating network efficiencies. Now it’s more about creating new services and that’s where Ribbit comes in.
 
I had to ask, though, what did Ribbit bring that the Web 21C group wasn’t doing? They explained that BT’s group was focused on integrating services with other services rather than what they were doing, which is incorporating voice into existing applications. By adding Ribbit, BT now has more ways to monetize their network, which is important not just for improving corporate performance, but for demonstrating their commitment to innovation to investors.
 
Ted and Crick added another facet of reality to this equation. While BT is committed to innovation, they recognize how hard this is to do internally. Continuous, “incremental” innovation is their mantra, and that’s what Ribbit brings to the table. To do this, though, Ribbit needs to operate independently, so BT does not plan to swallow them up into their huge corporate culture.
 
What were the risks and issues around the deal?
Continuing from this last point, it was a condition for Ribbit to remain free-standing and in their current location. The biggest risk overall was for Ribbit to lose its innovation mojo, especially in an environment where change has never happened quickly, until now. They added how this is a common fear among Silicon Valley companies, who dread being lost in the abyss of large acquirers, especially those who are outside the world of 2.0. BT has wisely recognized this, seeing that this engine of innovation is best left alone and where it is, amidst the culture of Silicon Valley.
 
That said, I don’t want to overstate the importance of Ribbit’s physical location. Ted and Crick pointed out that over 40 percent of their developers are outside the U.S., so BT is getting much more than a Valley start-up. On the plus side, of course, now that Ribbit has access to capital and BT’s global presence, they become that much more attractive for developers who see a viable channel to create money-making applications, which to me reduces the risk around this deal.
 
Speaking of maintaining independence, the most interesting thing that came out of our conversation was the fact that BT does not have an exclusive with Ribbit. They can still develop platform solutions for other carriers, and this can actually pay off for BT. Putting aside the potential this has to make your competitors stronger, BT would actually profit in terms of the revenues that come from these platforms. Of course, they lose out on the associated network traffic, but ultimately what’s good for Ribbit is good for BT. Welcome to business in the world of 2.0!
 
On the flip side, Ted and Crick also explained how BT was initially very sceptical of Ribbit. Companies like Ribbit were new territory for BT, and they don’t readily pay start-ups like these much attention. This speaks to the culture change taking place within BT, and once they saw how well Ribbit’s vision lined up with theirs, along with a platform that could deliver on the promise, the fit became more obvious and easier to sell internally.
 
As mentioned in my last column, it is difficult to see what the $105 million valuation was based on, and in talking with them, it seems to me there was more risk for BT not to acquire them now. I’m sure this was rationalized on the notion that they can innovate faster, more successfully and less expensively with Ribbit than without them, and as Web services continues to gain adoption, the asking price was only going to go higher. To me, it’s a bit like when Skype (News - Alert) was acquired by eBay. It’s a major investment, but if it works it will look like a bargain, and perhaps just as importantly, you’re keeping them away from the competition.
 
To me, Ted and Crick put the risk element into proper perspective by saying that telecom is a trillion dollar industry. Placing a $105 million bet on Ribbit is a tiny stake in the ground to create the successor to telephony, which they call “voiceware”. In essence, they’re talking about multimodal, multipoint communications as opposed to serial, point-to-point communications which has defined telephony since its inception.
 
Platform play models are just emerging and have a long way to go before seriously challenging the telcos. To BT’s credit, they’d rather bet wrong today than later, and if the future unfolds as we expect, the wager will be very profitable for them down the line. They’ve bet far more heavily on 21CN actually, and Ribbit is really a natural extension, and a side bet, really.
 
What does the money do for Ribbit?
This was my favorite question, and not surprisingly, I didn’t get much out of it. I was hoping to hear about some grand plans to make acquisitions or establishing other locations to build out their developer ecosystem, but no specifics were shared. Of course, the cash gives them options to do all these things, but they basically said it allows them to scale as business evolves with BT. Software is not a capital-intensive business, but they noted as things ramp up, hard costs like hosting and transport will increase accordingly.
 
Maybe they’ll drive nicer cars now — but maybe not. Basically, Ted and Crick said that the money doesn’t change their plans much. They just want to continue executing their vision and with BT, they now have the means to truly globalize the business. On the plus side, they no longer need to seek out venture funding, and on a practical note, their board of VC executives will be replaced with BT executives. Otherwise, it’s largely the status quo.
 
While I’m no further ahead on my question about what Ribbit will do with all this money, I’m pretty confident that the bar has now been set pretty high by BT for their competitors. In my mind, the bigger questions will be what will BT’s competitors do with their money to keep pace, and of course, who will they be spending it on? I’ll look to explore these in future columns as things develop — and you know they will.
 
 

Jon Arnold, Principal at J Arnold & Associates, writes the Service Provider Views column for TMCnet. To read more of Jon�s articles, please visit his columnist page.

Edited by Greg Galitzine


 
 
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