VOIP: Is it more than a toy yet?
Frank and thread,
I would be curious as to your thoughts on the viability of Voice over IP as a replacement for both consumer telephony needs and businesses concerned with QoS. Perhaps I am just being caught up in recent positive earnings (or at least revenue) announcements, but it does seem that VOIP is beginning to pick up steam. Most of you have probably seen the following from internettelephony but I would be curious to hear other peoples opinions.
CHANGING COLORS
Despite the fact that selling voice-over-IP minutes promises to get a lot harder in coming months, Net2Phone has managed to evolve its business plan
BRIAN QUINTON
If telecom had an annual Hot Technology pennant race, Internet telephony companies such as Net2Phone would be the high-tech version of the old Brooklyn Dodgers--perennially poised to be real contenders but always ending the season as out-of-the-money niche players who sigh, "Wait till next year!"
But there's something new in the air. Convergence of the Internet and traditional telcos has reached a point of critical mass, thanks to the spread of high-speed access, the explosive growth of e-commerce and the ubiquitous connectivity provided by wireless devices and mobile phones. All these factors are coming together to make this Net2Phone's time.
"We see traditional stand-alone phone companies as a thing of the past," says Jonathan Fram, president of Net2Phone. "Just as the PC has challenged the mainframes, so, too, has the Internet challenged the traditional phone companies."
If all that's true, it comes at the right time
for Net2Phone because the business of selling voice-over-IP long-distance minutes has become tough and is about to get much tougher. Switched long-distance is shaving profit margins on long-distance calls over the public telephone network, which still produces better, more reliable, higher-quality voice calls than those sent over the Internet.
The commercial sector, by far the largest consumer of global telecom, has been slow to adopt voice over IP, and even then has shied away from using
the Internet for
voice communications, preferring to buy services over private networks, such as those of AT&T, MCI WorldCom and Qwest Communications.
Those large carriers now are becoming more interested in voice over IP as they watch their long-distance margins erode. RBOCs also are paying closer attention to the sector. Last summer, Bell Atlantic announced that it would terminate international voice-over-IP calls in New York, a move most observers expect will blossom into a larger IP-calling offering if the company gets the go-ahead for long-distance service next year.
And the launch of free IP phone service Dialpad.com in October marks the arrival of the ad-supported business model on the voice-over-IP scene. Using Dialpad.com, callers can use the Internet to phone anywhere in the U.S. at no cost to them; the company makes its money from ads placed on the Web site. It also has announced plans to begin offering international long-distance calling next year. If past is prologue, it will be followed by a herd of freebie imitators.
These carriers may not win large individual market shares, but taken together, they will eat away at the customers for paid IP calling--and that can't be good news for Net2Phone (Figure 1).
Instant reach
"Cheap minutes can't form the basis underlying Net2Phone's business because those days are numbered," says James Killen, an analyst at Godrey
Securities Associates. "So they've had to stop and figure out where the enduring value of IP telephony might lie and then make some dramatic moves to put that value proposition before all
their markets--both the callers themselves and the ISPs buying into the network."
Net2Phone runs more than 1 million minutes of IP telephony per day on its global network. Approximately 60% of those calls originate internationally. In the Net2Phone system, calls that originate on telephones or fax machines connected to the public network or made from Internet-connected PCs with Net2Phone software are carried to an IP gateway, where they are converted to IP packets. Within U.S. boundaries, these packets move onto an ATM network and move over a DS-3 line at speeds up to 45 Mb/s to 36 local points of presence (POPs). These can hand off traffic to an additional 400 local POPs (Figure 2). Plans are afoot to upgrade the DS-3 backbone to an OC-3 bought from Frontier Communications (now Global Crossing), increasing potential speeds to 155 Mb/s.
IP calls originating outside the U.S. and terminating within this country cost 10½ per minute. Outbound calls cost 8½ per minute if they can be terminated via Net2Phone's network; if they can't, calls are subject to competitive circuit-switched rates. Users prepay a Net2Phone account in $25 increments and that account is debited for each call minute.
Last August, the carrier signed a five-year,
$100 million contract with AT&T Global Services. Under the deal, AT&T's international Internet network--formerly the IBM Global Network--will co-locate Net2Phone gateways in its POPs in 17 countries, with the chance to expand the relationship to another dozen countries later.
Over the next year and a half, wherever possible, these calls will be transferred from leased lines to AT&T Global Services' international network. The carrier will connect calls to its own POPs, which will be co-located with the AT&T Global Network.
The AT&T network deal will allow Net2Phone to terminate some of those international calls more cheaply and to pass those savings--unspecified in size--on to international IP voice customers.
"Like everything we're doing, we don't wait for things to happen; we like to make them happen," says Jeff Goldberg, Net2Phone's chief technical officer. "But the problem is, it takes a while for people to lay fiber. In order to get bandwidth in some of these countries, we've had to use other people's networks. The AT&T deal is an example of that."
Other system improvements center on the unending struggle to raise the quality of IP phone calls. Net2Phone is in the unique position of sharing its network with its parent company IDT, which sells Internet access and wants, naturally, to put as much traffic in the pipe as it can. The result is a constant balancing act between providing quality voice over IP on a managed network and using compression techniques to fit the greatest number of calls into the smallest amount of bandwidth. "The result is, we get beaten up on both sides," Goldberg says. "It's choosing the best coding that we can get. It's figuring out how many frames per packet to send down the wire. Basically, it's trading off latency vs. bandwidth."
And latency is the name of the game in the IP world, particularly in PC-to-phone rather than phone-to-phone IP calling. "When we do PC-to-phone, where people are logged into their local ISP, we have absolutely no control over how oversubscribed that ISP may be," Goldberg says. "To tell you the truth, years back when we first started, I wondered whether this stuff was going to fly because of that problem." The latest release of Net2Phone's client software, version 10.0, includes a new type of codec that improves the latency involved in PC-to-phone calling, along with a new reliance on Microsoft's DirectX's application programming interface capabilities to get around the delays caused by the Windows browser.
The razor and the blade
When it comes to the problem of speeding the installation of voice-over-IP gateways, Net2Phone thinks it may have a unique approach: It will give them away.
In Geneva in September, Net2Phone announced that it would give away free carrier-class H.323 IP voice gateways--costing from $40,000 to $60,000--to service providers and POTS carriers. Net2Phone will handle the back-end management, including installation, billing, routing, monitoring and maintenance.
In return, Net2Phone is asking a guarantee of about 250,000 minutes per gateway per month, with a six-month trial period and optional extensions. ISPs can brand the service and route IP calls made through these gateways over their own networks or they can purchase wholesale minutes on Net2Phone's system.
Providers that terminate calls on their own networks will pay a "gatekeeper" maintenance fee of about 1½ per minute to cover costs of the back-end services.
It's the old Gillette story of giving away razors to sell blades, says David Greenblatt, Net2Phone's chief operating officer. He cites more applicable examples from high tech: the free PC with subscription
to an Internet service and the free mobile phone with activation. "As in many technology areas, clearly the hardware components are the secondary part of the solution," he says. "You want to bring your clients into your services without having them get stuck on the capital acquisition. Clearly, this will not work when you're using $5 million to $20 million switches. But the beauty of IP is that you can have much smaller, much less expensive gateways that make this approach practical."
And the beauty of a successful initial IPO is that it provides the capitalization for programs such as this, says Hilary Mine, an analyst with Probe Research. "This is one attention-grabbing way to use the money they raised in last summer's offering," she says. "No doubt it's risky. For one thing, if the mobile phone analogy holds, other voice-over-IP carriers may decide to do the same thing. But it could also literally put voice over IP on the map."
"We're at a point where we can say we're so confident that we're putting our money where our mouth is," says Mordy Rothberg, Net2Phone's executive sales vice president. "The goal is to jump-start providers into the [IP telephony] industry. This is just a compelling offer to get things moving."
Things had not gotten moving as of press time, but Greenblatt and Fram believe the gateway offer will find takers. "You'll see deals coming out of this in the next few months," Fram says.
Gateway giveaways aside, manufacturing and distributing the plumbing for IP voice are not a permanent part of Net2Phone's business plan but instead the result of no one else making IP gateways when it started its operation. "We're not interested in being a hardware manufacturer," Goldberg says. "It's just that we've been leading the industry by about a year since our beginning. We're simply waiting for the time when people can provide us with the right gateways and equipment that will replace what we've built so far, especially as we go to higher densities and deploy more and more ports."
Getting the words out
If the number of deals signed is any indication, Net2Phone may be on the way to surmounting those distribution hurdles. The carrier inked partnerships with 14 companies last quarter ranging from fellow carriers, such as Sprint, and ISPs, such as CompuServe, to computer makers, portals and browser vendors. These relationships are as key to Net2Phone's success as its technology or its network, Fram says, and he expects the company to keep up the deal-making pace this quarter and into 2000.
Fram generally is regarded as one of the signs that Net2Phone sees its future in strategic partnering. He's careful to establish his technical credentials--he came out of Princeton with an engineering degree and spent time doing computer design in IBM's Poughkeepsie, N.Y., development labs--but his background in the world of media seems as important to his post at the head of Net2Phone as his knowledge of systems. After working as a consultant and a financial analyst, Fram served as the president of the direct broadcast channel Financial News Network from 1989 to 1991. From there, he was general manager of new media at Bloomberg Network, where he reportedly served as Michael Bloomberg's right hand man and helped bring the network into the Internet age. "I launched 10 television networks, three radio networks and did deals for about 40 Web sites," he says.
Net2Phone's IPO was barely complete before Fram assumed office, and the deals--most of them admittedly engineered during the pre-IPO quiet period--began flooding out of its Hackensack, N.J., headquarters. The first was an August distribution deal that put Net2Phone download buttons on several Web sites operated by subsidiaries of NBC, including Snap.com. Next came an August alliance with Compaq Computer to offer Internet phone services to new Compaq Presario customers in Canada, Latin America, Japan and the Asian Pacific Rim. A "community center" button on the Presario keyboard connects users to a joint Compaq/Net2Phone Web site that features the company's software, download instructions and country-specific rate pages.
A few days later, the carrier announced that Sprint would test Net2Phone's voice-over-IP technology and network for international consumer long-distance calls to Asia. The service, called Sprint Callternatives, will originate, carry and terminate consumer long-distance calls to China, Hong Kong, India, Japan,
Taiwan, Thailand and Vietnam.
Other deals have put a Net2Phone button on the tool bar of Netscape's most recent version of its Navigator browser, featured the carrier on Web sites run by GeoCities, Go2Net and Yahoo!, and integrated its technology into computers from IBM and PeoplePC. Web surfers at Priceline.com can bid for Net2Phone calling cards. And AT&T is reportedly beta testing Net2Phone's PC-to-phone service for subscribers to its WorldNet Internet service.
Perhaps the deal with the farthest-reaching implications is a two-part partnership possibility with America Online, which owns Netscape. In July, Net2Phone reached an exclusive four-year agreement to provide free PC-to-PC calling to members of ICQ, an AOL messaging subsidiary. In November it announced a one-year exclusive deal to provide the same service for the 2 million members of another AOL division, CompuServe. Even bigger is a possible deal, unsigned at press time, to offer IP phone cards to the 20 million AOL members using its Instant Messaging service, allowing them to move from text chat to IP voice calls. A Security and Exchange Commission filing also revealed that AOL has taken a 5.4% stake in Net2Phone.
An AOL alliance would give Net2Phone valuable brand identity, and IP telephony itself would be more visible to consumers and easier to use, thanks to its integration with Instant Messaging and the Netscape browser.
All these deals--and the ones Fram promises will come soon with hand-held device makers and perhaps Microsoft's Internet Explorer--are a crucial part of Net2Phone's distribution strategy. "Besides the 250 million copies of Netscape that we'll be embedded in and the 50 million ICQ users who are going to have our product, you'll see 40 million other bundling arrangements with our product this year," Greenblatt says. "We believe in making it easier and making it ubiquitous by making it preloaded because that's part of the business of getting people into this new communication model."
The initiative also places Net2Phone squarely in the path of the convergence of computers and telephones. "When you embed in someone's browser, you're really an extension of the application," Rothberg says.
"We see bundling opportunities as important in the market, but we also see that PCs are going to combine with IP telephony devices--like the button on the Compaq keyboard," Fram says. "Clearly, we want to be there. It's both a distribution channel and a vision of integrating with future devices."
An e-commerce must
Net2Phone's new push behind Click2Talk, its IP voice enabler for Web sites, is another reach for a possible opportunity. E-commerce is, by all reports, booming, but its explosive growth has revealed the limitations of unassisted shopping sites where consumers can't get the service and support they want. Greenblatt cites a Zona Research study that says 62% of Internet shoppers have gotten so frustrated with a Web site that they've abandoned a transaction or a Web shopping cart. And he believes Net2Phone can help.
"Basically, what you have [on the Web] is a lot of unmanned stores," Greenblatt says. "It won't be long that some of these Webmasters realize that 70% of the people who visit their Web sites are walking out empty-handed. How can you change that? Well, voice is one way to bring back that human element that has always helped commerce and can help it again. Especially as you move more and more to those sophisticated services such as real estate, insurance and expensive auctions. We feel that the human element will be a differentiating factor in the quality of sales on the Web."
Adding IP voice capability to Web sites creates a richer consumer experience, Greenblatt says, particularly when you couple it with enhanced features such as an agent who can push Web pages to the user or view a record of a caller's purchase history.
The newest version of Net2Phone's client software includes a button on its graphical user interface that links to the carrier's EZSurf.com Web site, an Internet shopping portal that integrates voice and graphics. After downloading Net2Phone's client software, visitors to EZSurf.com can access a wide range of merchants--from Lands' End and Amazon.com to Harry and David and 1-800-Flowers--via IP telephony and a Click2Talk button.
The the carrier has struck deals with some of the Web's largest hosting companies, including WebHosting.com, 9NetAvenue and Advanced Internet Technologies, all of which have agreed to encourage their customers to include Click2Talk buttons on their sites.
The attempt in all these efforts is to position Net2Phone as a component of the Internet infrastructure, indispensable for the successful conduct of what is turning out to be one of its biggest jobs: selling. Analyst research from Hambrecht & Quist, one of the firms underwriting Net2Phone's IPO, suggests that the company should be valued on par with other infrastructure companies such as Hotmail, MP3, Ask Jeeves and ICQ.
"We're using voice over the Web to give a call center to all these companies that don't have them," Fram says. "We see the notion of voice over the Web as a mandatory element for commerce--not too dissimilar to the mandate to have an 800 number."
The shape of things to come
Sophisticated applications also will help Net2Phone weather the coming storm in long-distance rates while offering a point of
differentiation from its newer, less advanced competitors. The Holy Grail here is unified messaging, and Net2Phone's newest release begins this quest with the capacity to add voice mail messages as attachments to
e-mail so that they can be heard when you check your e-mail on a Net2Phone-enabled computer.
Other features will be developed, according to management, including conferencing, call forwarding and perhaps even video. "PC-to-PC calling is one thing we've been able to do for a long time but haven't deployed until this new software release," Goldberg says. "The ability to have find-me/follow-me services all around the world is going to be part of our capabilities. This will be an industry first, where calls can follow you right to your PC."
New services mean a new business model for Net2Phone. It also means a revenue model transitioning from the per-minute model associated with IP telephony to the recurring monthly revenue of services such as unified messaging, where consumers are relatively indifferent to price and margins have room to grow.
New services can open up a greater potential for advertising revenue, and that allows for a competitive response to ad-supported IP voice newcomers such as Dialpad.com. Fram will not divulge details, but says Net2Phone will offer its own ad-supported model before the end of the year, on a larger scale than the competition.
"You're going to see us lead in that category," he says. "We think our costs are lower and our distribution higher so that we can be the only vendor to be truly profitable in advertising-driven telephony."
In the end, it's never been about just cheap minutes for Net2Phone, Greenblatt says. "We've found ourselves walking hand in hand with the downward progress of long-distance costs, moving nicely into all the other services. We understood this all along as the business model that we were going to follow--to move into the full suite of communications services and become a telephone company for the world by giving worldwide services inexpensively and in a rich fashion." |
