Tuesday, December 7, 2010

Recent Trends in Telecommunications Favor a Tiny Firm Called Counterpath

The important trends in telecommunications are these:  the wholesale move to internet architecture, the next is to mobile communications, then texting, and finally to video telephone calls.  One could argue the order of importance, but if all calls become internet calls, then I say the move to the internet (called VOIP - voice over internet protocol) is the first order of importance.  Then the numbers demand you name mobility next, then texting (an outgrowth of messaging), and finally video telephone calls are coming on stream.

On January 10th of 2009, Verizon (VZ) announced it would be routing all calls through the internet within seven years.  This was the seminal announcement that signaled the end of the way telcos had been transmitting calls to an inevitable move to the internet, which began when engineers figured out how to send a voice signal through the packet network of the internet.  It is a technology that has been perfected over the past fifteen years, and will surely be picked up by all telephone companies in the coming decade.

Vonage (VG) was an early adopter of internet telephone service, and it conducts its business as a normal telephone company, charging all of the taxes that regular telephone company is obligated to collect.  But because they are sending their signal over the internet they are able to include for no additional charge all domestic long distance and calls to over 60 countries, while AT&T (T) is still charging a monthly fee just to get a lower rate for domestic long distance, and yet another monthly fixed charge for lower international rates.  Vonage, which does not offer video yet, is presently previewing the transcription of voice messages to text, which is very handy and puts them again in the vanguard, but video must be in their thoughts what with Skype coming on with a free preview of what video calls will be like.

Video phone calls, which were first showcased by AT&T in the 1960s, finally became a reality with the internet this past decade, when the substantial bandwidth capability of the internet allowed the processing of the huge amounts data necessary to transmit streaming images became available.  Indeed, AT&T offered such a product again this past decade called CallVantage, but never promoted it, and then deep six-ed it.

Skype swooped in to take advantage of the new video opportunity (which was AT&T's to lose), and now news programs and game shows use Skype to connect with individuals, reporters and experts instead of AT&T.  So far, these Skype-to-Skype video telephone calls cost nothing with Skype customers enjoying a tax free status not unlike that of Amazon customers.  How long such a status can continue with governments at all levels desperate for cash is debatable.  And whether free service is a profit model that will work for telephones is also in question.  If the profit model were that great would eBay (EBAY) have unloaded the biggest part of their ownership of Skype?  And so that's why I am calling Skype's video calls a preview.

While Skype has a product for the masses, Cisco (CSCO) is showcasing a premium video conference product which Alec Baldwin appeared to mock in 30 Rock, and which appeared to dazzle Ellen Page as she talked to her doctor in Denmark in Cisco commercials.  This conference product takes full advantage of its router capability, and it is certainly in Cisco’s interest to pursue these video products, because video telephony is a bandwidth hog requiring lots of their routers and equipment.  And Cisco, along with Juniper (JNPR), will be big winners as the nation's networks move over to the internet.  But Cisco also wanted video on an individual basis for their business customers everyday use (to sell even more routers), which they called their Unified Communicator, and that brings us to the focus of this piece.

Now comes a tiny company (market cap $58 million) from Vancouver, Counterpath (CPAH, CPAH.OB), which was originally focused on the endpoint technology, called a softphone, meaning a software telephone, configured with your computer's microphone, speakers, and camera, or it can be just an ordinary phone plugged into your internet router (there's Cisco again).  And voil√†: you have an internet telephone.  This technology of Counterpath's is used by AT&T, Verizon, Sprint (S), Vonage, plus British Telecom (BT), Deutsche Telecom, and over 300 other companies.  (With such a large customer base, it is hard to imagine a buyout offer coming from any source other than that list.) 

Over time, Counterpath has moved from the endpoint (the phone) back to the server to provide these interesting possibilities:

A Single Number for your Cell Phone and Land Line.

The internet will allow a user to have a single number for both cell phones and land lines, and to able to tell whether the intended receiver of a call is occupied or not.

A Seamless Handoff from your Wifi Internet call to your cell phone network when you leave the hotspot.

A most striking innovation, for which they were recently awarded a patent, includes a hand-over technology which allows a mobile user to take advantage of a wifi hotspot where calls become cost free over the internet yet if the user leaves the hotspot, the call seamlessly transfers to the user’s cell phone network.  And vice versa, if a user comes to a hotspot, the software lets the user know that he can transfer the call to the hotspot.

Counterpath has rolled back to endpoints (the cell phone) to coordinate its new server technologies with a program (its app) for the Android and iPhone, with Blackberry (RIM) to come.  As a telecommunications provider, white label versions will be coming out for its customers.
The company announced that it also has the capability of permitting computer users to send text messages to cell phones and vice versa.

This handy invention has not appeared on the scene in any numbers yet, but this capability alone will be quite important and lucrative.

Now we return to Cisco and their Unified Communicator.  It turns out that tiny Counterpath is the technology behind this product, and Cisco has been CPAH's largest customer.  And sure, I am recommending Cisco as well as Counterpath, but it is a modest recommendation.  Cisco is now a GDP company, a mammoth company that cannot experience the growth that a tiny company like Counterpath can.  This was made clear recently when Cisco said in its quarterly report that they expect sales growth to be modest because state governments are ordering less due to the downturn in the economy.  That's a GDP company.  Counterpath will not be subject to Cisco constraints as I expect demand to come on like a freight train.  No, demand will be unrelenting like a freight train for sure, but it will also be explosive, perhaps not in a destructive way, but more like a flowering spring green explosion after a terrible boring winter.  The major telcos will all be moving their infrastructure to the internet, and customers will be demanding all the services they can now get because the majors have moved to internet - lower overall costs, dirt cheap long distance and international calls, texting to and from their computers, lower cell phone bills (at least when they're in a hotspot), one number for all their phones, and seeing the other party (video). 

The important investor in the company is Canadian/Welsh billionaire, Sir Terry Matthews, who has invested in start-ups in networks and telecoms for many years with over sixty deals.  He came across the Counterpath, which one of his companies was doing business with, and recognized its potential.  To Counterpath's expertise in VOIP and video, he merged with two other companies adding mobility and texting.  He has funded the shortfalls in revenue of this development company, but he will also be the big winner here.  As he is fond of saying, one of the keys to his success is timing.

And timing is why this company is so attractive.  Although the company is hopeless about transmitting its story, there is a story, and that story is that they sit at the crossroads of the great trends in telecommunications – the move to the internet, the move to cell phones, to texting, and the move into video.  They are certainly in the sweet spot, and with their patent portfolio, possibly in the catbird seat.

The bulk of the shares in this company are in closely held hands, so potential buyers should be aware that the company trades erratically, and could move volcanically (up or down).

But this much is for sure:  investors wanting to travel downstream in telecommunications with the current at their back will want to invest in Counterpath.


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  2. Great synopsis, Tom.

    CounterPath tech would be a game changer for several potential buy-out suitors. AT&T, for example, will find itself in the communications buggy whip business very soon unless it gets on the VoIP SIP-based bandwagon.

    Doug Schott

  3. Looks like you are on to something, Tom.

    CounterPath released their 2nd quarter 2011 10Q earnings report and the news was excellent. There was a substantial increase in revenues from the previous quarter and comments from the company president indicated that the uptrend is likely to accelerate going forward.

    This stock could be an easy triple from this level.

    Thanks for the timely recommendation.


  4. Another take on the earnings report: