Stalled, Video-Chat Service TokBox Shifts to Target Businesses

In May 2009, Ian Small, formerly a senior vice president at database maker MarkLogic Corp., became the third chief executive officer in two years of ailing video-chat service TokBox. Sequoia Capital and Bain Capital Ventures hired Small to try to get a return on the $14 million they and angel investors had invested since the startup’s launch in May 2007.

Unlike Skype, its biggest competitor, TokBox had been offering users video chat without requiring them to download software. But after two years, TokBox had stalled at an average of about 180,000 unique users a month, according to Web traffic analysis firm Compete, and Small won’t say how many users it has now. (By comparison, Skype says it has 23 million users online at peak times during the day.) Convinced TokBox could grow by shifting focus to provide its technology to businesses that wanted to integrate video on their websites, Small in mid-November launched OpenTok, a free service for embedding video-chat rooms.

The 20-employee San Francisco business still offers video chat through its website for consumers and small businesses, but is no longer trying to compete with the dozen or so companies offering such services, Small says. Rather than fight for individuals, TokBox is focusing on OpenTok, hoping to eventually build a profitable business through a large network of partner websites. “From that perspective, [TokBox] seems to be different,” says Irene Berlinsky, an analyst for technology research firm IDC.

Investors DAG Ventures, Bain, and Sequoia gave Small a vote of confidence when he introduced OpenTok, investing an additional $12 million, and at least five companies are testing the service, including speed-dating site WinkVid and live poker portal PokerView. Small spoke recently with Bloomberg.com contributor Antone Gonsalves about the challenges of building a business in online video chat and how he plans to make TokBox profitable. Edited excerpts of their conversation follow.

Antone Gonsalves: Why did TokBox fail to attract enough consumers to build a business around online video chat?

Ian Small: Consumers are fairly fickle. There’s a fairly impressive acquisition rate [initially] that any of the sites in this space have. People try it, they use it for a while, then they stop using it. There’s a fair amount of churn in the consumer base. One of the reasons for that is when you are in the video-chat business, there is no asset that gets created that stays around. If you think about Facebook, the thing that keeps bringing people back is the growing base of content. If you look at Skype’s acquisition rate, it should have half the planet by now. They have the same churn issues as everybody else, because essentially it’s a telephone. You use it for the time frame you want to use it for and when you’re done, you may not want to use it again.

Q: So how does OpenTok fit within the online video-chat ecosystem?

A: What we’ve done with OpenTok is to take what we already know and come up with a completely new and different angle that literally no one else is providing at the moment. People are able to engage with each other, face-to-face, around the content they care most about, where that content is [on a website]. Two- way video and multi-way video is very much one of the next frontiers of the Web. It’s one of the few things online that today is not actually integrated into the Web. And that creates a huge opportunity for us. Videoconferencing is something you go to. It doesn’t happen where you are. It exists in its own silo. OpenTok is trying to break down the walls of that silo, so video engagements are wherever you want [them] on the Web.

Q: Can you give examples of how OpenTok would work?

A: The model is completely up to the site that is implementing OpenTok. If you were a dating site, you’d be setting things up so you were only chatting with potential matches based on your profile criteria. If you were a poker site, the people you would be chatting with would be the people you were in the poker game with. But perhaps there’d be an audience watching you, but you wouldn’t be chatting with them, they’d just be watching you and your four or five or eight other players. So it’s really all about the business rules of the site and how it makes sense to integrate chat for that particular activity.

Q: How do you see OpenTok eventually making money? Will it be through advertising, licensing the technology, or a combination of both?

A: We identified two possibilities. If the activity is more toward the media, entertainment, and gaming side of the equation, then an advertising model is extremely viable. After all, we are delivering rich media and we have an excellent infrastructure for being able to deliver rich media advertising, so that’s a very natural model. But as we were out talking to companies, we also discovered that there were a whole set of features they were interested in that for us are possibilities for providing premium services, whether that’s around large audience sizes [or] forms of security or encryption.

Q: As a consumer service, TokBox was not built with the security mechanisms that businesses would demand, such as encryption of the video stream. Is OpenTok ready for the corporate market?

A: As business-oriented sites, for instance in the health-care field, start to adopt this platform, there’s going to be a demand for us to improve the robustness with which we protect the video signals. That’s something we have to work on. Our focus at TokBox and in the initial going with OpenTok is very much in the consumer space where security is less of a premium than it would be in the business space. As we see adoption in [the latter], security will become something we’re more focused on and it’s definitely something that’s on our road map.

To contact the reporter on this story: Antone Gonsalves at antoneg@pacbell.net.

To contact the editor responsible for this story: Nick Leiber at nleiber@bloomberg.net

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