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Originally published Monday, April 25, 2005 at 12:00 AM

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Solid rebound for Qpass

After the stock market soured on Internet companies in 2000, Qpass realized it would not go public. The change in plans almost spelled death...

Seattle Times technology reporter

After the stock market soured on Internet companies in 2000, Qpass realized it would not go public.

The change in plans almost spelled death for the Seattle-based company, which had $25 million in the bank, or enough to pay its 200-employee payroll for six months.

To survive, it had to make some serious changes. It would try to apply the same technology in a different industry, but it first laid off most of its employees and shed all of its customers — even paying one a six-figure sum to go away.

At the same time, the company, which provides software for back-office functions of other businesses, needed to get all of its investors, who collectively poured in almost $100 million, to be on board.

Qpass was able to do all this — and more — to overcome what most venture-backed companies don't: failure. That puts it in line to be one of the more notable success stories in the Seattle technology boom-bust-recovery cycle.

Founded in 1997, Qpass has hit on nearly every financing trend of the past eight years. And, now, its actions throughout the years have started to take hold. The company, which does not disclose detailed financial information, says it is cash-flow positive. It also has a marquee customer list and, once again, could be in line to go public or be acquired.

The turnaround traces back more than five years and is one Chase Franklin, Qpass' chief executive and co-founder, sometimes has trouble recalling. On one hand it's unforgettable; on the other, it is something he tries hard to forget.

"We like to consider ourselves as experienced," Franklin said.

Lots of moving pieces

The effort had a lot of moving pieces: layoffs, investor sentiments and redirecting management's vision and efforts.

"That's why it was so damn hard," said Tom Huseby, Qpass chairman and one of its original investors. "Most of the time, there isn't enough belief in the new model and the ability of the older technology to contribute to the new model. Usually, there's not enough belief in the management team's ability to execute.

"In this case, there was enough belief: enough belief in the model, in the technology and in the team."

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To carry out the change, Qpass pulled together $15 million from its core investors, including Westbury Partners, Venrock Associates, RRE Ventures, Oak Investment Partners, Granite Global Ventures and Huseby's own SeaPoint Ventures.

Surprisingly, the easiest part of all was reworking the technology, Franklin said. Because Qpass started out helping media companies sell content over the Internet, it was just a matter of changing the network it worked on.

At its peak, it had partnerships with more than 100 content sites, including USA Today, Dow Jones and The New York Times. Users signed up for a Qpass password that allowed them to purchase archived news stories or puzzles and games and receive only one monthly bill.

By 1999, it found itself caught up in the frothy era of easy-to-obtain capital. The mood was so zany at one point, Qpass staged a phony street demonstration in New York during a tech conference there. Fifty protesters held up signs that said, "Online forms are destroying our suburbs."

Market cooling in 2000

It was all downhill from there. When the stock market cooled in early 2000, bankers started to question the likelihood of an initial public offer, Huseby said.

He said the company never filed the initial documents with the Securities and Exchange Commission, but it had chosen the investment bankers who would underwrite the offer.

Franklin said the board and management team hunkered down to consider the possibility that the public-market hiccup was going to last. With little money left in the bank, their time was limited.

Part of the problem was that its customers did not have the incentive to sell a lot of content over the Internet because it didn't cost them anything to build the network.

"One of the problems is that the Internet is effectively free," Franklin said. Qpass' model depended on media sites offering premium content, with Qpass taking a cut of the fees. The worry was that instead of charging for it, the sites would instead subsidize the content with advertising. That was feasible given that the sites paid little, if anything, to build the network. The incentive wasn't there to charge for content.

That train of thought led Qpass to its business today: helping wireless carriers sell content over expensive networks. Operators spend millions on the rights to cellphone airwaves and billions on installing and maintaining equipment. As a result, those carriers have a compelling reason to make up those costs by selling the content.

Franklin said carriers have even more incentive because they had been competing on price of a voice minute for so long, it was apparent they'd have to come up with new revenue sources to grow.

What Qpass delivers

Today, Qpass assists Cingular Wireless, Nextel Communications, Alltel, Dobson, Triton, Boost Mobile and other carriers by handling billing for their content sales.

In Europe, it serves T-Mobile International, ONE in Austria and Vodafone.

As wireless subscribers buy ringtones, wallpaper and games, Qpass software manages the handset storefront, recognizes the particular handset a subscriber is using to ensure that the content will work, delivers the content and then bills the user.

It then distributes the revenue to those who get a cut, from the carrier to the record label.

Qpass gets its cut from both licensing the software and through a percentage of each item sold.

Jim Ryan, Cingular vice president of consumer-data services, said the carrier uses Qpass' software for its back-end billing systems because the system it uses to handle voice minutes doesn't work for data transactions.

"There is a fundamental difference in what Qpass does and a billing system a carrier has already built," he said.

Qpass' idea to go after the wireless market seems obvious now, Ryan said, but hindsight is 20/20.

"It was a fairly large bet they placed at the time," he said.

Flash back to 2000, and Franklin said it was not a foregone conclusion that data and content would be a big opportunity in wireless.

At the time, he estimated, only 3,000 of a large carrier's 15 million to 20 million subscriber base could buy anything off of a phone. Ringtones and games were not even on the radar screen, and the main products for sale on a handset were books, flowers and event tickets.

In addition, the business did not kick in immediately for Qpass, and investors and management alike had to wonder whether the market would materialize.

"I was living on this knife edge of fear. The market was projected to be there in a nanosecond," Huseby said.

The tipping point came in early 2003 when the number of transactions among Qpass' customers started tripling in three-month intervals.

"After six years, all of the sudden it was right around the corner," Franklin said. "There was such explosive growth in 2003, the operation guys had a heck of a time keeping up."

Last month Qpass' customers sold almost $57 million in data on a retail basis.

That represents a jump of almost 300 percent from the year-ago period.

Feeling comfortable

Now, Qpass seems comfortable in its new skin. It purchased ucp morgen in Vienna, Austria, early this year to expand its offerings to managing the carrier's data inventory.

To Huseby, Qpass' emergence in a time when many others met their demise can be attributed to one thing: Too many companies fall in love with their original plan.

"Qpass has been blessed by a series of founders who fell in love with the idea of the company being successful," he said.

Franklin put it another way:

"There's the type of entrepreneur who has an emotional association with their idea as if it's their baby, and there's the entrepreneur who sees a way to make money. I fit somewhere in between."

Tricia Duryee: 206-464-3283 or tduryee@seattletimes.com

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