Google Launches Jabber-based Google Talk; Early Product Details and WEBB Exposure (GOOG, WEBB.ob)

Includes: GOOG, WEBB
by: David Jackson

Google is today expected to announce the availability of its own instant messaging (NYSE:IM) and voice-over-IP (VoIP) client, to be called Google Talk. Early product details and analyis:

Google has prepped journalists to expect the announcement of a VoIP-enabled IM product later today. (Bloggers are reporting that the service is already up and running.) The press is expecting a product with similar functionality to those already offered by AOL, MSN, Yahoo and Skype, namely exchange of text messages plus VoiP via a PC.

Some are stressing the difficulty Google faces breaking into a mature market. Google plans to offer the IM/VoIP client to current users of Gmail without requiring further sign-up. And since Google Talk is based on software from Jabber, it's interoperable with AIM (AOL's IM), iChat from Apple and Trillian. That will go some way to blunting the networking effect of the competitors' already-established market shares: Skype has 51 million users, AOL 41.6 million, Yahoo 19.1 million, and MSN 14.1 million. (Data from comScore and Skype.)

However, there is evidence that Google Talk will be more innovative, in particular by focusing on mobility. According to the WSJ (paid subscription required),

As part of this announcement, Google said it also will make Gmail more widely available by letting consumers with mobile phones register for an email account via cellphone.

That would only make sense if the service/client was usable via cellphone. Google's selection of Jabber as the underlying software for Google Talk suggests that this is correct. From Jabber's web site:

...telecommunications companies and service providers have come to rely on the Jabber Extensible Communications Platform (Jabber XCP) to provide reliable, interoperable presence and instant messaging (IM) services. Jabber XCP enables seamless communication among and between communities, increasing consumer loyalty whether those consumers are connecting via PCs or mobile terminals... Jabber XCP has proven to be an invaluable resource for many of the world’s leading providers, including France Telecom, Orange, Wanadoo, Portugal Telecom, Sapo, and BellSouth.

Note that Jabber is 43% owned by WEBB Interactive Services, ticker: WEBB.ob. WEBB is a holding company with no lines of business other than its Jabber stake, yet it no longer reports detailed financial data for Jabber. It's therefore hard for investors to gauge Jabber's growth and profitability and WEBB's attractiveness as a microcap investment.

According to WEBB's June 2004 Shareholder Letter (PDF here),

...the strategic financing transaction with Intel Capital and France Telecom in March, 2003 reduced Webb’s ownership in Jabber,Inc to 43%. Since that time, Webb has been reporting its investment in Jabber, Inc. using the equity method of accounting and no longer consolidates Jabber,Inc.’s results of operations and financial position with its own. Jabber, Inc. had a successful year in 2003, with net revenues more than doubling over the prior year, substantially reduced losses and cash provided by operations. Our goal for Jabber, Inc. in 2004 and beyond is to continue to focus on driving sales and distribution and to lessen the dependence on several large customers, such as France Telecom and Oracle, that dominated growth in 2003.

Despite that, WEBB provided some financial stats for Jabber in its latest 10-Q:

Jabber’s financial plan for 2005 projects total revenues of approximately $8 million based on total sales of approximately $10 million for software sales, professional services and maintenance and support services, total expenses of approximately $12 million and cash equivalents at the end of 2005 of approximately $3 million, assuming the sale of an additional $2 million of Jabber’s series E preferred stock. Based on Jabber’s financial plan for 2005, Jabber will not achieve positive cash flow from operations on a quarter-to-quarter basis until fiscal 2006. Sales represent amounts invoiced to customers during the stated period.

Although WEBB is a holding company, it requires cash to maintain its status as a reporting company. Also from the 10-Q:

We have initiated efforts to raise additional operating capital. We estimate that so long as we remain only a holding company, we will require approximately $50,000 of additional operating capital to sustain our status as a reporting company through the end of 2005 and up to approximately $250,000 of additional operating capital for each year thereafter that we remain a reporting company. In the event that we are not able to raise additional working capital, we will be required to terminate our status as a reporting company under the Securities Exchange Act of 1934. We estimate that the cost of maintaining our operations as a non-reporting company would be up to approximately $150,000 per year. There can be no assurance that we will be able to raise additional operating capital or, if we are able to raise operating capital, that the terms upon which such capital is available will be acceptable.

WEBB's prediction that Jabber will sell a further $2 of equity in a Series E round, and WEBB's statement that it needs to raise further cash to cover its costs as a holding company suggests that investors who purchase the stock based on its 43% Jabber stake could face further dilution in the near future.

Meanwhile, WEBB.ob moved sharply upwards yesterday:

WEBB chart

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