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Ventures and Affiliations
PARTNER OR PERISH
Strong allies with customers and revenues key to VoIP success
By Becky Bracken
WITH THE FREE-PHONE business model on the ropes, VoIP service providers are trying to gain a critical mass of traffic on their networks and to structure a business model based on paying customers. They have started to look around for strategic partners with whom they can share customers, bundle services and increase brand strength.
The trend of strategic partnerships is very telling, not only about the potentially strong future of VoIP, but also about the evolution of voice over Internet service providers' business models.
The unmitigated heavyweight in the VoIP world of strategic partnerships has been Net2Phone Inc. (www.net2phone.com). In the last quarter of 2000 the company partnered with some of the most desirable businesses in telecommunications. America Online Inc. (www.aol.com), Yahoo! Inc. (www.yahoo.com), Microsoft Corp. (www.microsoft.com), AT&T Corp. (www.att.com), and even Cisco Systems Inc. (www.cisco.com) have partnered to use Net2Phone's voice capabilities to enhance their own offerings. Net2Phone has become in effect the VoIP arm of these big names, and, as a result, according to Deutsche Banc Alex. Brown (www.alexbrown.db.com), is "the largest provider of Internet telephony with approximately 39.4 percent global market share, and a key enabler in the migration of voice to the Internet."
Analysts and providers alike have acknowledged that without the added distribution and revenue channels garnered from partnerships, most VoIP providers are in trouble. VoIP by itself is no longer necessarily an attractive offering. Plummeting costs of long distance minutes, inconsistencies in network quality, the lack of consumer awareness of VoIP technologies are all working against providers. Added to that, they have no guarantee that enough money will be coming in to recoup operating costs if they rely on an advertiser-based revenue model.
So the answer would seem to be to partner with an Internet player with an established consumer base. The VoIP technology is used to enhance the partner offering, while generating revenues based on actual usage minutes, a strategy that seems a likely step toward long-term profitability.
THE PERFECT PARTNER
Howie Balter, CEO of Net2Phone, says there are three distinct criteria for a viable business model in this space: a critical mass of customers, meaningful partnerships and a platform capable of layering different services on top of an IP network. Net2Phone, he says, has met all three with a little help from strategic partners.
Balter identifies the partnerships with AOL, Yahoo! and Microsoft as those that will help build Net2Phone's customer base. In each of these partnerships, Net2Phone's technology is the voice arm of large portals with millions of users.
AOL, which owns about five percent of the VoIP provider, is clearly an important strategic relationship for Net2Phone. The agreement with them essentially has the Net2Phone technology embedded within AOL ICQ, which is the largest instant messaging community on the Internet. The agreement provides users with free PC-to-PC calling but requires fees for PC-to-phone calls. The free services are used to cross-sell customers to paid services. "Literally tens of million of people are using this for real-time communication," Balter says.
Microsoft Instant Messenger is another Net2Phone partner, and Balter says the combined services have "taken the marketplace by storm. We started offering free PC to phone within the U.S. The take rate was unbelievable--4 million within three months. The minutes really kept ramping up," Balter says.
Net2Phone offers domestic free minutes to Microsoft Instant Messenger users, but charges for international calls. Balter says the company has converted about 500 to 600 free users to paying customers per day.
Another partnership bringing customers to the Net2Phone network is with Yahoo! Net2Phone carries the traffic for the 1-800-myyahoo portal. The revenues from the transactions are shared between Yahoo and Net2Phone, allowing Balter's company to turn profit above costs.
Net2Phone Partnerships
March 1998--October 2000
March 1998--Yahoo! integrates Net2Phone's PC services into portal functionality.
March 1999--Netscape signs deal to integrate Net2Phone in new browsers.
July 1999--ICQ signs 4-year exclusive deal with Net2Phone to embed Net2Phone's software in instant messaging direct.
March 2000--AT&T signs plans to buy 2 percent of Net2Phone for $1.4 billion.
March 2000--Yahoo! invests $150 million in Net2Phone.
July 2000--Microsoft launches MSN Messenger 3.0 with Net2Phone.
September 2000--Net2Phone launches Adir Technologies Inc. to focus on licensing voice over IP network management software with Cisco Systems.
October 2000--Net2Phone voice enables Yahoo's properties, including instant messaging and new 800-MY-Yahoo portal.
"If you can quickly and effectively reach that customer base and start leveraging your fixed cost and start to take advantage of your network, then you can move toward profitability," Balter says. "Partnerships, especially if they're exclusive, give you that kind of platform."
Once a critical mass of customers is achieved, Balter said other meaningful partnerships that promote a company's expertise are crucial to success. The partnership with AT&T, which has a sort of platform licensing agreement with Net2Phone, is an example.
"They would like to take advantage of our knowledge and expertise in VoIP so they can offer that to their corporate customers," Balter says. "The idea is to make that platform available to AT&T, so we don't have a relationship with AT&T's 10,000 plus business customers. Our relationship is with AT&T."
The third prerequisite for business viability, Balter says, is a scalable platform capable of layering different services over an IP network. Net2Phone's partnership with Cisco Systems gives them that advantage, he says.
Cisco saw that Net2Phone had a commercial platform that allowed Net2Phone to manage the process with a suite of software services. The software is able to monitor packetized phone calls, and to look at the gateway and report performance. The software looks at the latency and the quality of the connections, and integrates with a real-time billing system. Through the partnership with Cisco, Net2Phone created a subsidiary called Adir, that will bring a solution to market to manage all of the gateways in the network. That solution will eventually be offered to any Cisco-powered network.
"That gives us credibility and gives us mind share that our platform and our commercial service is one that Cisco believes is powered by the leading solution," Balter says. "And secondly, it means in the future our platform will be compatible with all Cisco powered-networks. The partnership increased our footprint. This is a more strategic technical relationship rather than a distribution marketing relationship with Microsoft and AOL."
THE COMPETITION REPLIES
honeFree has partnered with Telocity, a provider of residential broadband services. DialPad has joined with Engage Inc. (www.engage.com), a provider of online marketing solutions, and is also linked to Quicknet Technologies Inc. (www.quicknet.net) to combine Quicknet's Internet telephony calling cards with DialPad's free Internet phone service.
Deltathree Inc. announced a partnership in September with 1stUp.com (www.1stup.com), a provider of private-label Internet access solutions and a majority-owned operating company of CMGI Inc. (www.cmgi.com) which then had to close down Dec. 10, as well as Setel (www.setel.com.au), a telecommunications provider in the South American island nation of Curacao.
All of these companies realize the need to partner to broaden their customer base as well as their offerings, but haven't yet drawn the big-name attention that Net2Phone has.
PARTNERING FOR THE FUTURE
So what do all of these partnerships say about the future of VoIP technology? Elka Popova, program leader for VoIP services at Frost & Sullivan (www.frost.com), says it means that other providers are realizing the value of voice on the Internet.
Not only have VoIP players been entering a number of partnership agreements, but companies outside the industry are showing interest in VoIP, indicating they believe the future belongs to converged voice and data services over IP networks. In short, Popova says, VoIP will be a mainstream technology.
But, she adds, the nature of the interest also sends a strong message across the VoIP space that niche providers won't be in a position to capitalize on the ubiquity of the service.
"First of all, it shows it you cannot remain a niche straight VoIP telephony service provider. You need to go into other areas," Popova says. It's important either to secure access to last-mile broadband solutions and carry VoIP over DSL, or to try to get access to different distribution channels, she says.
"In this case, Net2Phone is gaining an advantage over other VoIP service providers by securing a possible access to AT&T's cable last mile, but this is just one aspect. They have these agreements with MSN and Yahoo! which are additional distribution channels for them. It's another way of reaching end users, another way of increasing traffic. This is one way of gaining a competitive advantage over other service providers. We saw that their traffic increased dramatically after they started carrying minutes over MSN."
Popova says that VoIP providers with less powerful partnerships need to start getting aggressive on gaining a stronger foothold with industry leaders, taking a lesson from Net2Phone.
"In general, I believe these companies should consider finding additional distribution channels and revenue sources," Popova says. "Advertisement revenues aren't directly related to your costs, so you can never be certain that you'll cover your costs and begin to make a profit at some point."
Other VoIP providers understand that partnerships will be the key to success in the future. Lisa Indovino, executive vice president of marketing and sales for deltathree, says that her company is in the process of forging some major partnerships, although she added that the company is not yet in a position to make anything public.
"The way the telecom industry has unfolded, no company is in a position to go at it alone and who you partner with will really begin to determine your success going forward in the marketplace," Indovino says. "Partnering has become more important than ever before."
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