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Is It Time For Net2Phone?

CEO Stephen Greenberg says his company is conquering voice-over-Internet.

Net2Phone was born in 1995 amid expectations that the Internet would replace voice networks run by telephone companies. To do that, the central challenge was to chop the human voice into digital packets, send them out over the Internet and have them arrive at their destinations actually resembling a voice. If that challenge could be met, the cost savings would be huge and the voice-over-Internet concept would become truly “disruptive.” Fearing just that, AT&T invested $1.4 billion in Net2Phone.

But it didn’t work, or at least not as prophesied. Voice- over-Internet couldn’t match the quality of traditional telephone circuitry. Net2Phone’s investors came and went.

Today, however, Stephen Greenberg, a silver-haired lawyer who has been CEO of Net2Phone for a little more than a year, argues that his company has developed the expertise to make Internet telephony work in two major markets. The first road to success is to sell in developing nations such as India. The second, closer to home, is to allow cable companies to deliver voice to the home at the same time that they deliver both video and data via broadband connections. If these bets pay off, Net2Phone could realize some of its early promise.

Greenberg visited Chief Executive to talk about what where Internet telephony has been-and where it’s going.

Voice-over-Internet has always been a technology that is just beyond the horizon, something about to happen. Have you solved the problem of getting voice calls over the Internet to really sound like voices?

If we went back to the period of time you mentioned, you had “echo” and “jitter” and other words that people used to describe problems. Another one was “latency.”

When Net2Phone was founded, we had all those problems. The reason was that we built our own proprietary network. We built our own gateways. Technical people are very proud of what they do. We built it in-house.

But today we have moved very heavily from our own gateways to Nuera Communications gateways. That, along with other improvements such as the software that our folks have developed, has taken us to the point that if you use our phone-to-phone service, you really would find no difference between it and any so-called traditional carrier. The quality is as good. You can make your long-distance and international calls at a fraction of the price. We’re there.

So how are you going to take advantage of this?

Net2Phone is really a company with two heads now. One is the traditional kind of telephony, either using a PC or an Internet Protocol (IP) telephone or a regular telephone to dial in.

The other piece is that we are now offering IP telephony over cable. Everybody knows that if you introduce telephony over cable, it’s good for the cable company because the churn rate goes down and the penetration rate goes up. Obviously if it’s IP telephony, it’s even better because it’s cheaper.

But there’s a perception problem-nobody is really sure whether IP telephony is available today. But it is, and we have it. I just came back from Europe and it’s clear that what we have really moves the whole concept of delivering IP telephony over cable forward. If you think about the number of homes in the world that have TVs and have cable, it’s really going to be a very important future for us. Yet there is a perception that IP telephony is a cut below. That’s simply not true.

You say you’ve built your own network. How big is it?

Most of the network we use is leased from various Internet Service Providers (ISPs). For example, in India we have about a dozen ISPs who resell our services. We have a series of devices such as an Internet telephone that we can distribute through ISPs or telecom providers, which extends our network even further. Our network extends pretty much worldwide.

We recently put hubs in the United Kingdom and Hong Kong because of our international channel sales business. We have a great brand name internationally. When you mention voice-over-Internet in India or in Mexico or in major parts of Asia, it’s synonymous with our name.

Just how big is this part of your business?

When I was taking over, we asked ourselves, “If we are really going to move to becoming Ebitda cash-flow positive and take advantage of our assets, what is the business that we should be in?” We were in a lot of businesses at that time. We were in the wholesale business. We were doing a lot of pre-paid credit cards. We were on the Web. We said, “Okay, we have this wonderful base of experience in running networks. We have this great brand and we know how to do voice-over-Internet better than anyone else.” So what we decided was that international channel sales going into countries that liberalized or permitted voice-over-Internet to happen for the first time, that was really the place for us to be.

Where are you doing that?

One of the most obvious examples is India. On April 1 of last year, India liberalized its market. You have 130 ISPs, and for the first time they were able to offer voice- over-Internet services out of country. Net2Phone was solicited by almost all of them. We are now in the process of finalizing agreements with the major players. That will become a very nice, growing business. It will change our revenue mix from when I became CEO, when this part of the business was about 20 percent of our business. Now it will be north of 50 percent of our annualized revenues. Because of our restructuring, we did take a hit to our top-line revenue. We stopped giving away free minutes and got out of businesses with margins that didn’t make a lot of sense.

It’s amazing that India now is a major base of revenue.

Obviously, nothing happens quickly. The revenue hasn’t been flowing. The pipes have just been opened. But it’s coming. The important thing is that India is just an example. You have Mexico. You have Brazil. You have Panama. You’re going to have important areas of Southeast Asia and other countries in South and Latin America where we already have people on the ground.

What happens in India is going to be replicated. If you travel, you know that people go to these Internet cafés in remote areas of India or Panama. You maybe never had telephony service there. Now you can go and make your calls from the Internet cafés over Net2Phone’s network. China is also going to be enormous.

You’re helping these nations leapfrog the absence of voice networks by routing voice traffic over existing data networks?

Exactly. We are exporting a form of technology that helps countries come into the modern world. They can do that without having to worry about any major infrastructure like these old circuit switches.

How big is this opportunity for you?

It’s enormous. Just think of the world population. I stopped giving guidance to the Street about two conference calls ago for this very reason. My people and I know that if we stick to our business plan and implement, it’s going to benefit not only people in India and Pakistan and Mexico, but also our shareholders.

Here at home, the problem is how to conquer the “last mile” between high-speed broadband networks and the home. The cable industry has one pipeline into homes, and the other guys who have a pipeline are the Regional Bell Operating Companies (RBOCs). Why are you working with the cable guys?

About three years ago, AT&T put $1.4 billion into Net2Phone. It was when Michael Armstrong was chairman of Net2Phone and John Malone sat on AT&T’s board. AT&T was acquiring a huge number of cable companies, including TCI, which is Dr. Malone’s company. If you were forward-looking, you understood that in the future the ability to deliver IP telephony over cable would shore up cable companies in terms of their customer base.

What happened to us and AT&T was that while the people who made the investment were very forward-looking, there were many folks at AT&T who weren’t looking forward to voice-over-Internet because it would cannibalize their business.

It would destroy their entire business model.

You got it. Some of these folks said to top management, “Hey, why did you spend $1.4 billion with these guys in Newark? We would have just developed it in-house. We would have developed it perhaps more slowly so we didn’t have to worry about it.” As a result, we really never developed a strategic business relationship inside AT&T other than with the people at the top.

They were never able to exploit the technology?

Exactly right. So then during the Comcast negotiations, Dr. Malone left the board of AT&T. A limited liability corporation was formed. Into it went the AT&T shares and the shares that remained in the hands of our founder IDT. Also coming in was Liberty Media and Dr. Malone, who bought into it and owns a substantial piece of Net2Phone. The people at Liberty Media always understood the value of IP telephony.

We set out to come up with a solution to deliver quality IP telephony in a fully managed way via cable, and we looked for a venue to do it. Liberty Media owns or is a partner in a number of cable companies internationally. But there’s only one geography where they own 100 percent, and that’s Liberty Cablevision of Puerto Rico. We took our best and brightest and asked them to come up with a solution. We displayed it for the first time last June in Puerto Rico.

So Puerto Rico is a test bed?

Originally it was, but now it’s evolved into a full service IP telephony program where we’re actually billing and getting paid. It’s real and it’s live.

We’ve developed a control system where you look at a big screen. It’s color-coded. From the inception of the call, you know everything you need to know about the call. If there’s a problem, the screen changes color. You can fix the problem remotely. Everything you need to know about that call can be displayed on that screen because of the management software we developed. Our solution manages the entire network for the cable company.

It was a purely software-driven thing?

No. We had been using Motorola hardware in Puerto Rico. But through a series of nice circumstances, we started a dialogue with a company called Arris in Duluth, Georgia. They’re probably the largest hardware provider into the home in terms of IP telephony. Their hardware brings the cable company into the consumer’s home, and Net2Phone’s solution brings the traffic out and into the whole IP world.

We started to market jointly to cable companies, offering an end-to-end solution. We’ve also developed a business model where for the cable company we can deliver this service with hardly any cap ex for them, and we can do it within the margins they’re used to. I think you’re going to see us signing some major players over the next six months, both domestically and internationally.

You’re blowing our minds here.

I know. It blows my mind, too, and I worry about not being able to execute.

So you can bring telephony into the home over the network of the cable company, which has 100 percent of a market?

We can bring telephony over their pipe as long as they’ve provisioned for high-speed. We can give them a telephony service with all the features of a primary line.

Can you do it in the States?

Yes. We can do it anywhere in the world. The only thing we need is to know that the home has been provisioned for high-speed.

And you’re the first ones to figure this out?

We have bright, wonderful people at Net2Phone, but there are other bright and wonderful people in this world. We have a first-to-market advantage, which will last for about two years.

Why haven’t the other guys done it yet?

Part of it has to do with the perception that IP tele-phony is not going to be available until 2004 and perhaps 2005. We have it now. What keeps me up at night is making sure that I execute right for Net2Phone and take advantage of this first-to-market opportunity.

Will the cable companies go for your solution in a big way?

A majority of cable companies have very heavy debt. It’s not true of Comcast and it’s not true of Cox. But most have a lot of problems. Once they start to realize what Net2Phone has to offer, I’m more than excited about this side of our business.

If what you’re describing works, then the whole telephone industry gets shaken up.

The real fight is going to be the cable companies against the RBOCs. Who eventually is going to own the customer? There’s going to be just one pipe. I’m not a seer, but down the road there’s going to be a fight over who owns the pipe. The RBOCs want to deliver content. The cable companies want to deliver telephony.

Who wins?

The idea here is getting a triple play-voice, video and data on one network. The phone companies do not offer video over their networks. At this point, that’s technically impossible. The only way to get that is to partner with the satellite companies. That’s a very odd mixture, to have a satellite sending in your video and to have the data lines sending in your data and your telephony. The opportunity for convergence that we see is to have all three services on one pipe, and the only way to do that is going to be cable.

So what keeps you awake at night?

I worry about taking advantage of this two-year opportunity I see us having. I worry about just not getting the message out to the cable companies. The most important thing is to continue what we’re doing in Puerto Rico, which has been flawless in terms of execution, and to go forward with non-Liberty cable companies. The world needs to know that once we get out of our own family, the execution will be as flawless as it has been in Puerto Rico. That’s what keeps me up at night.

How Cable Telephony Call Is Routed

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