Will Jingle Networks Go Bankrupt Bad Business Model

free 411 phoneJingle Networks, the operator 1-800-Free-411, will announce tomorrow that they’ve become profitable on a per call basis - a huge milestone and proof of concept for a startup that is trying to destroy entrenched competition by offering free 411 calls.
The nation's top free 411 service will no longer be quite as generous to its competitors.Jingle Networks, which operates 1-800-FREE411, last month won a patent for a key feature of its service and plans to seek license fees from rivals, company founder Scott Kliger says.

The gambit could herald a shakeout among players in the nascent but fast-growing market for free directory assistance, says analyst Kathleen Pierz of The Pierz Group.

"We're not looking to be the only company that does (free 411), but if others want to do similar things and want to use the technology we came up with, they should pay a fair price," Kliger says.

He would not disclose the royalty Jingle is seeking but said the company plans to approach competitors within the next few months.

Free, advertising-based 411 has exploded since late 2005. Such calls now constitute 3.5% of all directory-assistance traffic, up from 1.5% a year ago, Pierz says. She projects the free 411 market will balloon to 15% of all directory assistance by 2011.

Jingle is by far the market leader, handling 20 million calls a month. Other players include 1-800-411-SAVE, Microsoft's (MSFT) 1-800-555-TELL and 1-800-SAN-DIEGO. In trials are AT&T's (T) 1-800-YellowPages and Google's (GOOG) 1-800-GOOG-411.

Jingle's patent, which it bought from inventor Scott Wolmuth, is for a system that plays an ad related to the listing a caller requests on a free 411 service. So, according to Kliger, a rival service that examines a caller's request for, say, Domino's Pizza in Atlanta, identifies the category (pizza) and then plays an ad for Pizza Hut likely would infringe on the Jingle patent.

While about half of all ads on free 411 services are targeted, the industry is moving toward a relevant-ad model, Pierz says. Such ads have far greater impact. About 5% of callers who hear a relevant ad press a button to connect to the advertiser, vs. 0.5% of those who hear a non-targeted ad, Kliger says.

Analyst Matt Booth of The Kelsey Group called Jingle's patent "broad and strong." Yet with free 411 still generating little revenue, he says competitors are likely to resist paying royalties. "There's not enough money on the line," he says.

Citing earlier, more general patents for ads on 411 services, Andre Vanier, CEO of 1-800-411-SAVE, contends Jingle could be challenged in court. He says his company has applied for its own patents related to 411 ads and plans to use them in negotiations with Jingle. "One of the best defenses is a good offense," he says.

AT&T, Google and Microsoft's Tellme unit declined comment. Booth said all the giants have large patent portfolios of their own and almost certainly would fight Jingle's bid to collect royalties. Yet under one likely scenario, he says, Jingle could be acquired by a large company that wants to control the patent.

Patent disputes have rankled the technology and Internet industries recently, threatening to shut down Internet phone provider Vonage this year. Critics assail the U.S. Patent and Trademark Office for approving broad patents that cover "business methods." A recent Supreme Court ruling makes it slightly easier to challenge a patent in court, says Rothwell Figg attorney Marty Zoltick. Congress, meanwhile, is considering patent reform.

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