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Spanish telecom behemoth Telefonica (TEF - Analyst Report) has decided to close its U.S. based VoIP (Voice over IP) subsidiary Jajah by the end of Jan 2014. The shutting down of Jajah comes close on the heels of Telefonica’s decision to scrap its free messaging application Tu Me. Created in 2005, Jajah is an Internet voice service provider that allows subscribers to make international calls via its website. It also allows customers to set up calls internationally, while using a local number.

Closure of VoIP service means that customers will not be able to make calls via its website Jajah.com or through Jajah Direct. Accordingly, registrations of new accounts have also been stopped. Existing customers can send a request for a refund of their outstanding balance.

The Spanish behemoth acquired Jajah for $207 million in cash – a value much higher than the set up costs. Back then, Telefonica was in an expansion mode and acquired Jajah to combat challenges posed by VoIP giant Skype.  

Neither Telefonica nor Jajah divulged any reason behind the closure. However, the general belief is that the company is struggling against the likes of free VoIP alternatives such as Viber and FaceTime. The wrapping up may also be an attempt by Telefonica to promote its very own voice and text app Tu Go.  

Further, higher penetration of smartphones has popularised the use of instant messaging applications like Whats App and WeChat. As a result, paid VoIP service providers like Jajah have clearly lost their shine.

We believe the high purchase price of Jajah and the subsequent closure of the business points out the faulty expansion strategy of the Spanish giant to integrate itself with future technologies.

Telefonica currently carries a Zacks Rank #4 (Sell). However, some better-ranked stocks within the sector are Hawaiian Telecom Holdings Inc. (HCOM - Snapshot Report) Shenandoah Telecommunication Co. (SHEN - Snapshot Report) and Chunghwa Telecom Company Limited (CHT - Analyst Report). HCOM and SHEN carry a Zacks Rank #1 (Strong Buy), while CHT holds a Zacks Rank #2 (Buy).

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