8x8 2009 Annual Report Download - page 9

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impacted during this timeframe, and this could have an adverse effect on our business, financial condition and results of
operations.
Sales, Marketing and Promotional Activities
We currently sell and market our 8x8 services to end users through our direct sales force, website, retail channels, online
channels, network marketing firms and third party resellers. Our inside sales force primarily takes inbound telephone calls and
website leads which are generated from third party lead generation sources and direct web advertising such as Google and
Yahoo. We grew our quota carrying inside sales force from 31 sales representatives at the end of fiscal 2008 to 63 sales
representatives at the end of fiscal 2009. Quota carrying sales representatives are paid a base salary and monthly commission
for selling our products and services. The commission is based on new sales made by the sales representative. We launched
the retail channel in fiscal 2005 and refocused this channel on our 8x8 Virtual service in 2006 with Office Depot and
subsequently Office Max. Retail channels, online channels and third party resellers generated approximately 14% of our
subscriber additions in fiscal 2009. Our retail channels and online retailers have unlimited return rights for this equipment.
Consequently, we do not recognize any revenue from sales to these customers until end user customers purchase the
equipment. We offer all of our end customers a 12-month warranty from the date of purchase for defective equipment.
Competition
We face strong competition from incumbent telephone companies, cable companies and alternative voice and video
communication providers. Because most of our target customers are already purchasing communications services from one or
more of these providers, our success is dependent upon our ability to attract these customers away from their existing
providers. This will potentially become more difficult as the early adopter market becomes saturated and mainstream
customers make up more of our target market. We believe that the principal competitive factors affecting our ability to attract
and retain customers are price, call quality, reliability, customer service, and enhanced services and features. For more
information regarding the risks associated with such strong competition, please refer to Item 1A, Risk Factors “Intense
competition in the markets in which we compete could prevent us from increasing or sustaining our revenue and
increasing or maintaining profitability.”
Incumbent telephone companies
The incumbent telephone companies are our primary competitors and have historically dominated their regional markets. These
competitors include AT&T, Qwest Communications and Verizon Communications as well as rural incumbents, such as
Embarq Corporation and Windstream Corporation. These competitors are substantially larger and better capitalized than we are
and have the advantage of a large existing customer base, and larger marketing budgets than we have. Moreover, they also
provide the broadband services that are required to use our service, which is a significant competitive advantage.
Cable companies
These competitors include Cablevision, Comcast, Cox Communications and Time Warner Cable. Cable companies have made
and are continuing to make substantial investments in delivering last mile broadband Internet access to their customers. As a
result, they are offering bundled services inclusive of phone service. Cable companies are able to advertise on their local access
channels with no significant out-of-pocket cost and through mailings in bills with little marginal cost. They also receive
advertising time as part of their relationships with television networks, and are able to use this time to promote their telephone
service offerings.
Alternative voice and video communication providers
There are many alternative competitors for the 8x8 residential service including Skype and Vonage. There are also many
competitors for our videophone services and videoconferencing systems, including Cisco, Polycom and various software
offerings that implement videophone functionality on a personal computer. Competitors for the 8x8 business service include
traditional PBX and key system manufacturers and their resellers, including Avaya, Nortel, Mitel and Toshiba, Centrex
services offered by incumbent telephone companies, and VoIP services offered by XO Communications, Cbeyond and other
companies.
Operations
We have a centrally managed platform consisting of data management, monitoring, control and billing systems, that support all
of our products and services. We have invested substantial resources to develop and implement our real-time call management