8x8 Gets the Money Call

It's been a busy year for the VoIP (voice over Internet protocol) space. Motley Fool Inside Value pick Microsoft (Nasdaq: MSFT  ) , Google (Nasdaq: GOOG  ) , and AOL rolled out Internet-phone offerings, while Motley Fool Stock Advisor pick eBay (Nasdaq: EBAY  ) made a multibillion-dollar deal for Skype. VoIP's rise is bad news for telco carriers hoping to keep their land-line cash cows intact, but these companies are starting to take action to bolster their prospects.

Take last week's deal between BellSouth (NYSE: BLS  ) and 8x8 (Nasdaq: EGHT  ) , for example. BellSouth wants to offer a digital phone service that capitalizes on VoIP's relatively low expense, and 8X8's got the technology to make it happen.

8x8 is growing rapidly. In the third quarter, revenues increased from $2.5 million to $7.1 million. Still, the company posted a net loss of $5.5 million, which outstripped its $3.7 million net loss in the year-ago quarter. In addition, the company only has a little more than $5 million in the bank.

Don't assume this deal will mean good news for 8x8. BellSouth could merely be seeking a quick and cheap way to jump into VoIP. After it learns more about this approach, it's certainly possible the company could develop its own system, leaving 8x8 out in the cold. With all the competitors that currently have their own solutions, can it really be so hard? A happier outcome for 8x8, with its tiny $136 million market cap, might be an eventual buyout by BellSouth.

A closer look at the deal reveals what may prove to be a strategic error for BellSouth. It's trying to maintain a capital-intensive wireline business for a shrinking -- but still lucrative -- pool of customers. At the same time, it wants to introduce a new product that will likely cannibalize customers from its wireline services. With so many competitors also vying to offer digital phone services, it seems unlikely that BellSouth will be able to produce any new profits by capturing others' market share.

Since the details of the deal were not disclosed, it's impossible to determine how much the company will benefit -- if it benefits at all. A deal with BellSouth lends 8x8 a certain measure of credibility, but the smaller firm will likely not command a high price for its services. Still, 8x8's stock surged 45% on the news to close at $2.54. At this point, an investment in 8x8 is looking more like a gamble.

Fools, now is the time to open your hearts and wallets to worthy causes! Please support our five Foolish charities at www.foolanthropy.com.

Fool contributor Tom Taulli does not own shares mentioned in this article.


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