Technology Industry

Dell’s stock price has taken a small hammering as its margins have slumped. So far I’ve seen this attributed to expanded marketing expenses (probably associated with its move into Asia) and to a slowing economy. But I wonder to what degree falling margins and the need for the ongoing “turnaround” are results of previous feasting too heavily at the profit trough while pushing its partners out of the way.

About four years ago, I was writing a profile on Dell and interviewed the then research director of iSuppli, a company that closely follows the electronics industry and how it runs. Here’s what he said:

A lot of people deal with Dell because they have to and can’t afford not to, not because they want to. The moment they start dealing with Dell, it’s going to impact their margins. We have had some cases where people declined to bid on Dell projects because the margins were at such a point that they didn’t see any reason to go ahead.
[…]
[Contract manufacturers’] normal margins are only in the very low single digits. Then Dell comes in and they’ll set a target price point which makes margin non-existent or negative. The most public case was when Dell first got into the PDA market. Three companies were bidding, and then when two saw the way the business was going to pan out, they walked away, and walked away very publicly in that case. We’re sure there have been others.

For years, Dell had margins approaching 10 percent. Certainly the company operated efficiently, but was it so good that it could triple the net of other highly experienced and savvy PC manufacturers?

Probably not. Dell absorbed margin from its suppliers and, according to my sources, they would heavily rely on the manufacturing and engineering of partners, which let the company keep prices low and margins relatively high. Dell pushed hard on its suppliers with the concept that the added volume would let them hit higher scales of efficiency and greater buying power, so they could make more money on their other customers.

But as I understand it, that eventually started to backfire. Other companies didn’t want to effectively subsidize Dell’s profits, and so the suppliers couldn’t justify the pricing. Now, a customer like Dell can find lots of willing vendors … for a while. But eventually the strategy comes back to nip.

Back in 2003 and 2004, I was telling people that I gave Dell no more than five years before the “Whatever Happened to Dell?” stories started to hit the business press. If anything, I was optimistic, as Slate ran such a story in 2005. Sooner or later it was bound to happen.

There’s only so long you can dump on the people who help make you successful before they get tired and walk off. When that happens, and you’re starting to see the types of margins that you might expect given the nature of the industry, going after new markets and trying to tighten the belt at home isn’t necessarily going to do a bit of good.

Dell manufacturing facility photo courtesy Dell Inc.

There are times the US Patent & Trademark Office and large corporations can leave you scratching your head. As Om Malik reported, Microsoft has essentially received a patent on paging through a document by pressing keys on the keyboard, like page up and page down, for example. It’s absurd, but more of a problem is that the big companies undercut any credibility they had (or didn’t have) when they moan about patent trolls. If you’re going to make everyone spend time on this level of nonsense, what ethical authority do you have to complain about the practices of others?

Here’s the language from the actual patent application:

A method and system in a document viewer for scrolling a substantially exact increment in a document, such as one page, regardless of whether the zoom is such that some, all or one page is currently being viewed. In one implementation, pressing a Page Down or Page Up keyboard key/button allows a user to begin at any starting vertical location within a page, and navigate to that same location on the next or previous page.For example, if a user is viewing a page starting in a viewing area from the middle of that page and ending at the bottom, a Page Down command will cause the next page to be shown in the viewing area starting at the middle of the next page and ending at the bottom of the next page. Similar behavior occurs when there is more than one column of pages being displayed in a row.

Oh, good gravy, are they really serious in Redmond? Scrolling the same increment of document by pushing either page up/down or one of the arrow keys, even if you’ve zoomed in? One might think that the Supreme Court decision in KSR v. Teleflex might have suggested that scrolling through a document is at least an “obvious” invention, even if people hadn’t been doing so for, oh, I don’t know, three decades at least?

A large company often blow a gasket when a smaller company owns intellectual property and dares to assert its rights, whether or not it has embodied said IP into a product or service. But then the same corporation, with thousands of patents in hand, decides to add one more to the coffers on something so basic, so widely practiced, that it seems equivalent to patenting the Enter key.

I’m no lawyer, but Microsoft seems on incredibly shaky grounds and is lucky that the USPTO has so much turnover in staff, with the accompanying loss of institutional experience, that it might as well install revolving doors at each cubicle. When an actor and movement performer in New Zealand was irritated at Amazon (and, as he told me, simply bored), he raised money over the Internet to pay for a reexamination request of Amazon’s one-click patent. He provided enough prior art to get most of the claims overturned. Maybe he should do the same thing for Microsoft.

Or maybe, just maybe, all the large corporations that whine about all the trouble they face from so-called patent trolls should stop abusing and slowing the patent system with their useless intellectual excrement and spend their time doing things like making their own products actually work well. Just think, real patents wouldn’t get clogged quite so much in the system and Microsoft could save the $300 million it’s spending to convince people that a Vista DVD is more than an expensive coaster.

Keyboard image via morguefile.com user Alvimann, via site standard license.

Microsoft is moving ahead with version 8 of Internet Explorer, but the browser has picked up some interesting privacy features. But aside from privacy concerns, an additional consequence would be to make targeted advertising harder to achieve, which means pressure on Google, a noted Microsoft rival.

The two major ones are called InPrivate Browsing and InPrivate Blocking. The former eliminates browser history, cookies, cached files, and other ordinarily stored information when a browsing session is over.

A variety of implausible usage scenarios are described by Microsoft: looking at banking websites on shared computers or doing Internet shopping to buy gifts without the recipient finding out. The most likely situation, however, is the obvious one. Nudge nudge, wink wink, say no more.

Apparently some have dubbed this feature “porn mode.” I don’t think it’s that simple, however. Last year, Google acquired GreenBorder, which created a virtual machine in which a browser could safely run, isolating any malware or security breaches. Users would sign up for an annual subscription.

Some have speculated that it was the first step toward a security product, but generally when Google has acquired products and services, it has left them available to customers. In this case, the company has announced no plans, and if you go to the GreenBorder site, all it says is that it will support existing customers through the end of their current subscriptions. Is there a reason that Google might not want such a service easily available? Sure, it could mess about with tracking user activities over time, reducing the power of targeted online advertising and the rates it could command.

More to that point is InPrivate Browsing:

If IE8 detects that the same off-site resource has been used by more than ten sites (so, ten different sites each using a javascript from google-analytics.com, for instance) then the script is treated as a tracking device, and future attempts to access the resource are blocked. Although this will not completely block information disclosure—the tracking site will be able to monitor your behavior until the block is triggered—it will prevent the monitoring of users across dozens or even hundreds of disparate sites.

Talk about taking the wind out of the behavioral marketing sales. When you’re as behind in a competitive field as Microsoft is behind Google, but you don’t depend on the income from it, you have a couple of choices. One is to try to acquire other companies (like Yahoo) to gain size and catch up. But another approach is to fundamentally damage the competitor’s economic security at little to no risk. That’s hard to pull off, but in this case, Microsoft has the lion’s share of the browser market, which is the very thing that Google currently requires to deliver ads and generate revenue. And for the people who don’t use IE, Mozilla is looking into similar features for FireFox, and Apple’s Safari has privacy features. Should the industry complain, Microsoft can always point to Congress and its push for greater consumer privacy. Whatever you think of the motivation, it could turn out to be a pretty slick business move.

Most companies start their existences in a general direction and then keep moving that way. But sometimes a company takes an unexpected turn, which might be hidden corporate DNA, a stroke of genius, or a mistake borne of managerial ego. Amazon’s behavior suggests a major business model change is already underway.

Although Amazon is associated with online retail success, it has moved into other areas recently:

• cloud computing
• print on demand production
• programming service brokering
• product design and manufacturing

The more I look at the changes the company makes, the more convinced I am that the retailing aspect has become almost a sham — not economically, but strategically. For example, the Kindle is starting to smell like more than finding a new way to text. Had Jeff Bezos only wanted to sell e-books, he could have partnered with Sony or some other consumer electronics company.

Instead, he’s brought design talent in-house (although, according to frog design, Amazon hired not one of its designers, but “several”). That isn’t the sign of a casual interest, but rather of an effort to build a real product company. Amazon is hiring a wireless handset engineer experienced in high speed wireless data protocols that would allow faster transfer of large blocks of data. It doesn’t take a lot of imagination to see how that might connect with developer and architect positions for ordering and delivery of digital media, including software and videogames. Could the Kindle be aimed at eventually becoming a mobile entertainment and information? Perhaps.

Other glimpses from the hiring front show that Amazon’s S3 is becoming “the gateway” for Amazon Web Services (AWS). (AWS is having a road show to sell the concept to entrepreneurs, VCs, and developers in the US, Canada, and Europe.) Then there is the company’s desire “to scale our targeting and ad serving capabilities to millions of consumers” and “to build and operate the Internet’s largest-scale fully-automated sponsored links management system.” That certainly sounds more ambitious than something sitting only on Amazon’s own, admittedly extensive, web sites.

The problem that has faced Amazon in its traditional business is relatively low margins. The 2007 annual report lists net sales of $14.8 billion in 2007 and net income of $476 million, or about 3 percent. In comparison, Google’s 2007 fiscal year revenue was about $16.6 billion with net income of $4.2 billion, or 25.3 percent.

That’s a whole lot of difference, and neatly shows how a service business well run can have much higher profitability than a similarly-sized product-based company. What puts Amazon into even a tighter financial picture is that the bulk of its revenue, over 97 percent, comes from media, electronics, and other general merchandise, which at this point of time still means stuff. Resellers simply don’t see higher percentages of net income because they have to buy from someone else, who also needs a profit. For a comparison, look at the fiscal year 2008 numbers for retail chain Macy’s, Inc. On $26.3 billion of revenue, net income of $893 million translates into 3.4 percent.

In other words, although Amazon is often thought of as a technology company, it’s actually a big store. If nothing changed, the form of business would limit its earning potential. But Bezos is far more ambitious than that, hence the shift. Because Amazon has so many engineers, why not branch out into its own products and services, where margins can run higher and investors rest happier?

Although I posted the conversation with attorney Robert Clothier about some of the legal considerations of blogging, his was a view through the eyes of media law. There’s also a whole other way of looking at blogging when it comes to corporations. Labor and employment lawyer Devjani Mishra, a partner with Seyfarth Shaw LLP, was on the road ane unable to talk, but she did email some comments.

At first she noted that blogging, social networking, and other forms of communications can present a number of problems, including liability for discrimination, defamation, and intellectual property infringement, even if the employee is not aware of the problem. As Clothier pointed out, employees who blog on their own time, using their own equipment, might not legally involve the employer in the activities. But there are many companies that do have employees blog as part of their job descriptions.

Stopping employees from blogging might seem like the safe approach, but that can open a company to liabilities and dangers from other quarters, including:

• anti-retaliation law
• whistleblower protections in Sarbanes-Oxley and other legislation
• curtailing activity considered protected under the National Labor Relations Act
• privacy and wiretapping statutes
• state statutes protecting activities on employee personal time

In other words, there are many more ways a company can run off the rails when it comes to trying to rein in employee activities. Don’t cross boundaries that could prove dangerous and expensive.

Balancing act image via Flickr user _gee_, CC 2.0.

As the Patent Troll Tracker libel suit shows, blogging can bring up some intricate legal issues. Bloggers like Dennis Crouch can find themselves facing subpoenas. A few years ago, Apple sued some bloggers that revealed the date of a new product release; the company wanted the source of the information. And as Cisco is learning, employer bloggers can entangle their employers in legal action. We chatted with media lawyer Robert Clothier, a partner with Fox Rothschild LLP, about some of the questions that arise for the technology industry, where blogging sometimes seems as prevalent as engineering.

BNET: What is the liability of a corporation whose employee is blogging?

Robert Clothier: The issue here is the person who owns or administers the blog be responsible for what third parties say on it? Typically under the laws of defamation, the person quoting is on the hook. But Congress changed that rule for the Internet, specifically for internet service providers, which has been construed broadly. The immunity is in section 230 of the Communications Decency Act. A lot of [that legislation] has been ruled unconstitutional, but this [provision] has remained valued. There’s good reason to believe that the protection would extend to blogs.

You are allowed to edit or modify the content, and that will not change the immunity. You my take content down and that will not change the immunity, so long as [the content is created] by third parties. In a real estate case, where an internet service provider provided prompts asking inappropriate questions [like the married status or race of real estate customers], the Internet service provider did not have immunity. Basically, it’s a small exception to the general rule. There are some companies that are very active in promoting blogs. Other companies are much warier about it. Are they going to be responsible for what their employees say on the blogs [as part of their work responsibilities]? You bet.

BNET: Sometimes bloggers say that their writing has nothing to do with their companies, but there may be evidence to the contrary, as has been the case with VMware. How would a court make a decision on who was responsible?

RC: That’s going to be a real fact issue. If you’re an employee working on your own time and own equipment without the permission of the employer, it has nothing to do on the employer. But if the employer does the blogging from work about work, the employer may not know about it but may still be considered responsible. It depends on whether it’s in the scope of employment. That’s why companies should be adopting blogging policies for their employees. They should be steering employees to be blogging on their own time on their own equipment. It’s not just liability, but the employee statements could come back and harm the company in later litigation or just in PR, what people hear about the company based on what the employee says. That’s a very fuzzy area about whether corporations are responsible for what employees do.

BNET: What about the status of individual bloggers? Are they considered journalists, which would raise the bar of what someone has to prove in a libel case?

RC: Probably [around 35] states have shield laws. These shield laws have different definitions as to who they apply to, and this is a hot issue. Some feel that if you give [protection] to bloggers, anyone can call themselves a journalist. Many of these statutes were drawn long before blogging. There’s a common law constitutional privilege; some courts are increasingly inclined to rule that there is no such privilege. There is precedent in federal courts at least that a blogger qualifies as a journalist for the privilege that Crouch is likely to assert [to protect sources]. The first battle he’ll fight is if he qualifies as a journalist. The second question is how broadly it applies. This privilege is strongest if you have a confidential source. The plaintiff will have to show that he really needs [the information] and can’t get it from anywhere else.

BNET: Can employees be considered journalists in their blogging activities?

RC: I can see the argument that if it’s an employee and the blogging is within the employee’s work, then the employee is not a journalist. I can’t say that I’ve seen a case that addresses that issue. The other interesting twist in some of these [situations] is when an anonymous blogger writes something that someone else thinks is defamatory. Mayor John Smith sees a blog that says he’s a lying, cheating, corrupt politician, but this guy is anonymous. This is another cutting edge area of law. You can’t sue the blogger, because you don’t know who the blogger is. So the plaintiffs sue a John Doe and then issue a subpoena to the Internet service provider and say give it over to me. Usually [the ISPs] don’t care; they don’t want to fight these battles. But the anonymous bloggers can assert rights. There is a first amendment right to anonymous speech. The ISP notifies the anonymous blogger and says they’re trying to get your identity, we won’t fight it, but you can fight it anonymously by hiring a lawyer. The courts might say we’re going to permit this anonymity to be lifted. By and large, in as simple terms as possible, courts will say if the plaintiff can show it has a prima facie case, a good claim that would survive a motion to dismiss, they will permit the blogger to be unmasked. But there are subtle differences between courts around the country. There is no uniformly accepted test.

Troll image via morguefile.com user clarita, permission via standard web site license.

Since March, there’s been a legal brouhaha in patent circles, as lawyer Eric Albritton sued a blogger as well as the blogger’s former employer, Cisco, for libel. Now the dispute is spilling wider, as the plaintiff has sent a subpoena to a well-known law professor and blogger, Dennis Crouch, who wasn’t part of the controversy at all. What’s Albritton after? Only the identities of people who anonymously commented on Crouch’s blog, Patently-O. Now there are probably prominent patent attorneys sweating because they left a comment and potentially could get dragged into the middle of the conflict.

The Patent Troll Tracker Blog, written by Richard Frenkel, would regularly razz so-called patent trolls. The derogatory term refers to small companies and individuals who would obtain patents and then, without creating their own products or services, sue large companies for infringement. Last October, he allegedly wrote that Albritton had “conspired” with a court clerk “to alter official documents in a proceeding involving Cisco.” At the time, Frenkel did the blog anonymously, with, he claims, the knowledge of his immediate superior. No one higher up in the company supposedly knew.

But by February 2008, attorney Raymond P. Niro was offering a $15,000 reward to anyone who could unmask the Patent Troll Tracker’s author. (Niro is a patent lawyer who supposedly inspired the term “patent troll,” which may have been an explicit PR move on the part of Intel.)

Frenkel unmasked himself in February. By March, Albritton had filed suit against the blogger and Cisco, saying that the posts had been conducted in his official capacity. (Cisco has denied that charge.)

As one might expect, the situation has been a hot topic for many of the IP-focused blogs and discussion groups. The latest development was a subpoena to Crouch, an associate professor of law at the University of Missouri School of Law, as well as author of Patently-O. As he wrote, the subpoena’s requests are “quite broad”:

In part, this request is seeking information about the identity of anonymous blog commentators and those who have sent me private emails regarding this case. As I have mentioned previously, my blogging service retains additional information regarding the identity of commentators (such as IP address, etc.), and a full response to the subpoena request could include that information.

He has already replied to Albritton’s attorney. “Time will tell whether a motion to quash will be necessary,” as he noted in his blog.

Aside from the public spectacle, there are some thorny considerations for high tech companies. Many people in high tech blog, and some, like Robert Scoble who started his blog when he was a technical evangelist at Microsoft, become popular. The greater the attention a blog receives, the greater a chance that someone might take offense and involve the employer.

I’m planning to speak with some corporate and publishing attorneys to get a better idea of the boundaries, and will report back as soon as I have something of substance.

One of the potentially clear areas of change in the face of a presidential election is foreign policy. As BusinessWeek pointed out, these are unpredictable times for military deployments and for the defense contractors that provide equipment. But any impact on defense spending won’t stop there; many high tech companies could find sudden shifts in demand — and possibly drops that they didn’t expect.

Military budgets mean high tech spending … a lot of it. For fiscal year 2008, that’s been $316 billion spent on weapons acquisitions alone, and that doesn’t count ordinary IT spending. It’s easy to forget just how digitally-driven the military is these days. A few years ago, I was wrote about the group that provided information security for military data networks in Iraq and Kuwait. Given 130 degree mid-day highs and sand everywhere, a lot of gear replacement seemed like a safe bet.

From PCs and routers to display screens and components for custom electronics, the U.S. military depends on technology, making it both directly and indirectly a major purchaser. But the purchasing that a war kicks off goes much further than would seem obvious. For example, one of the favorite activities of soldiers stations in Iraq has been video gaming:

Games are as ubiquitous at Camp Fallujah and around it as tattoos, buzz cuts and shouts of “Hoorah” from one Marine to another. When the power goes out, a Humvee battery and a pair of alligator clips are all the resourceful gamer needs to resume the digitized fight. The military has long brought the newest technology with it to war zones — and then provided for those who forgot to bring what they wanted. At the post-exchange in Camp Fallujah, a stack of Playstations and Xboxes share an aisle with DVD players, televisions and microwave ovens.

Even now, U.S. teenagers are sending gaming equipment to troops. Greater demand for products could also increase the prices, and margins, which manufacturers and resellers get in general. One soldier’s mother was donating laptops to wounded troops recuperating at Walter Reed Army Medical Center, as have other individuals and groups. Soldiers on the groups use their own laptops to keep in touch with friends and family back in the States via email, as well as the world at large with blogs. I don’t know that anyone has ever added all this up, but I have a suspicion that the financial ecostructure is extensive and large.

According to BusinessWeek, there is a problem in trying to predict what would happen in military technology spending in a phased pull-out from Iraq. Clear prognostication isn’t a matter of saying that it will go down, as happened after the Vietnam War:

“The difference, in a post-9/11 world, is that the perception of threat isn’t likely to ease just because U.S. troops are no longer actively engaged in Iraq,” says Cai von Rumohr, an analyst at Cowen & Co. in Boston. Recent government changes in Pakistan, a volatile U.S. ally; Russia’s intervention in Georgia; and new threats in Algeria all argue for sustained, if not higher, arms spending, he says. So does the fact that U.S. military equipment is, on average, probably older than it was after prior conflicts, which bolsters the case that Armed Services officials make for bigger budgets, he adds.

The trick for tech companies will be to carefully follow what happens to know which technology needs will kick up.

Blackhawk helicopter image via Flickr user soldiersmediacenter, CC 2.0.

Google must win the handset operating system wars because Android’s true mission is to deliver ads, just as a magazine and its articles generally exist to deliver ads. But today’s Wall Street Journal story that Verizon and Google and nearing a mobile ad deal shows the other side of the business equation: the temptation of revenue that will turn Google’s efforts into a self-reinforcing upward spiral:

It’s the latest sign that telecom companies are finally conceding that their homegrown search services have stalled — and that they need help from the Internet’s big guns. Carriers have been reluctant to team up with established Internet players, not wanting to hand over a potentially lucrative stream of advertising revenue.

Telecom carriers are starting to give in because they can’t figure out how to attract a search audience, let alone build the business infrastructure to sell the ads. Also, don’t be fooled by the Journal’s headline; this is all about selling and delivering ads, whether attached to search, general browsing, or text messaging.

That’s where the self-reinforcement comes in. Verizon wants revenue, and Google says, “Sure, we’re happy to create an equitable split. But you do realize, of course, that we need to implement ad display and monetization differently on cell phones. So why don’t you put in orders for handsets running Android?”

Poof! Suddenly the revenue desire of the carriers drives them to choose handsets that are capable of delivering the ads that will turn into extra money. Forget for a moment that people might resent getting ads when they pay for phone service. The carrier executives will go to where they think some easy extra cash lies.

As the story says, the deal isn’t final, and one of the sticking points is keeping information from the searches, which the carriers won’t want to do, as they’ve long prized all customer information. But I’m guessing that, in the end, Google will get what it wants. Verizon may be the number two wireless provider, but Google is so dominant in online advertising that it will have the greater leverage in negotiations.

Once one vendor starts to cave in, the rest will as well, because the carrier market is too competitive. No single company can afford to walk away from deals and leave others with a revenue advantage. Right now, who’s the viable alternative to Google? No one, because success is about being able to both sell and deliver ads.

And then there’s this interesting paragraph:

Verizon eventually wants to put the Google search bar on the home screen of its phones, people familiar with the matter say, which could prove attractive to consumers who reflexively use the Internet search engine on their PCs. The deal could later extend to Verizon’s Web portal and even its FiOS TV service, they add.

That puts into context the thought that Google wants Android to power more than phones. You might expect ads to show up in all sorts of places.

For about two years, Seattle-based Jott Networks Inc. has provided a service called Jott. People call a toll-free number, record a message, and see the words translated into text and emailed, either to themselves or someone on their contact list. (I tried it with a stanza of Gilbert and Sullivan patter song, which the system got mostly right.) There is also some ability to let the service interact with others, effectively providing voice control for a number of web-based offerings. Earlier this week, the company left beta and implemented a fee structure. We caught up with CEO John Pollard for a conversation.

BNET: What is your background?

John Pollard: April 2006 is when [the company] started. The product has been available since December Co-founder Shree Madhavapeddi and I came from Microsoft. Our backgrounds are mobile devices. Shree used to run the server team for instant messenger. I was a director in the mobile devices group running strategy and services, and before that I was an early employee at Expedia.

BNET: Where did you get your funding?

JP: We bootstrapped it ourselves for about 8 months. We knew that we would eventually need funding with the nature of the business. But we wanted to fund it as long as we could so we could control the business and show some real value to our investors. We did a $5.4 million series A round in the Spring of 2007. The lead investor was Bain Capital and the founders of Skype are investors. It’s terrific to have these guys advise the business.

BNET: What gave you the idea for the product?

JP: It was an interesting eureka moment. Shree and I had talked about several different ideas. But it was almost a moment of irony. We’re about as technical as it gets, but we have so many things going on in our personal and work life, how do we stay on top of them? The idea of taking your every day open phone, be able to speed dial a number, say something, and know that your thought was captured and put into a place you could use, it was an incredibly simple idea. It was like a backup for your brain. People trust their phones. They do one thing really well, which is make phone calls, and we expanded on that. We had Jott for iPhone right from day one at the store, which is doing very well. We believe cumulatively it’s the number one application download in the productivity section. You don’t have to call a number [to use it].

BNET: There’s a free version that lets you record for 15 seconds and send a message to yourself, and then there are the subscription versions. Do you have the free one to bring people in?

JP: Perhaps it’s a little bit of that, but honestly, we have 420,000 customers and have done millions of Jotts. We found that people do different things with Jott. Some people require longer Jotts, and others need 15 seconds or less. What it allows us to do is offer a very valuable service for a very reasonable entry price. The lowest paid level of subscription is $3.95. Right now the iPhone app is a 15 second recording [and] is free.

One thing people say is why don’t you have an advertising supported version? But we don’t think people want to send messages that have advertisements in them. The paid plans are super reasonable to get into, so it shouldn’t be a problem.

BNET: How many of your existing customers have converted to the paid version?

JP: We’re not releasing those numbers, but we’ve had a very strong response. Our early adopters are able to get into a promotion, and that’s sign up for an annual plan, as proposed to a monthly plan, at a 20 percent discount. Half of the people who have signed up so far have opted for the annual plan. It surprised us.

BNET: What does the discount do to the business plan? Could you get too many people signing up at the discount?

JP: People who take the discounted version are going to probably be less profitable than people who don’t, but we’ve modeled it and it’s fine. We’ll be able to carry it. The way we figure it, it’s two weeks [of discounts] and after that we’ll have many, many new customers signing up. The new customers will overwhelm the old customers. We don’t talk about what our break even numbers are. [They are] pretty reasonable.

BNET: Are you going after more funding?

JP: We’re going to start raising a B round in September. We had really top shelf VCs on the first round. We didn’t over raise the first round. We tend to be conservative financially. We didn’t want to have a valuation issue on the company. When it comes to the B round, it will be a more attractive proposition. We’re pretty pragmatic about it. We don’t need 50 million customers to make a profit. We do think there’s a marketplace that is large. But we don’t need to be as big as Skype.

BNET: What kind of money to throw at marketing to ramp up the business to be profitable?

JP: When we did our pro forma, we had layered in the marketing expense. Not everyone has a social networking type of marketing model. But what we’ve seen is that we have some good word of mouth. Second, I can upload my contacts and then when I’m on the road I can Jott to them, and then they get messages from Jott. So there’s a certain amount of [viral marketing]. We haven’t done any distribution deals yet, but we have some coming up. We really focused first on getting the product and customer experience right before we went out and did a bunch of expensive distribution.

BNET: What kind of distribution, as there is no product to buy, just the service?

JP: One thing we’ve been clear about is we want the Jott brand to be something that people know and trust. We’ve avoided deals where people would have used the service, ripped our name off, and put theirs on. What that’s allowed us to do is build a nice name in the marketplace. When the time comes for distribution deals now, those customers value our company, value our brand, and want the Jott name.

BNET: Where difficulties do you anticipate going forward?

JP: Entrepreneurs can have the best idea in the world, but if people don’t hear about it, there are some challenges. We want to make sure we get out there, get customers, focus on quality and execution, and not stub our toe. If we take our eye off [quality], I think we’re going to hurt ourselves. So I worry about focus and making sure we continue to have the quality and simplicity that people expect. I’ve been in software for 20 years and I’ve seen time and again companies packing in features and products getting complicated.

We’ve spent a couple of years trying to understand how people will use the product. Any business that has real cost structure, you need to understand how people will use [what it offers]. We’ve tried building features they want that are super simple and do it in a way that you can actually charge something for it to sustain a business. Then it comes down to how big can the thing be, and can we get enough customers to cover the cost of the business. I would say that we absolutely can, and I wouldn’t be here if I didn’t think we could. This is not a business in search of a business model. We have people who pay who tell us how much it adds to their lives, either in stress reduction or just ROI, and we’re lucky we have that. It’s a little bit of luck, and the category we decided we’d get into, we didn’t know we’d be able to do it.

It’s not like we’re pumping money out there and there are no issues. We have to execute very well. We have to be very smart. But I’m very confident about it.