NTOP's New Hosted and Franchise Service Arrangements --
From the Net2Phone 10(K) – filed 10/29/03
Overview
We are a leading provider of Voice over Internet Protocol, or VoIP, telephony services. Since we began operations in 1995, we have evolved from a pioneer in developing PC-to-telephone calling services over the Internet to a next generation provider of high quality voice and enhanced telecommunication services throughout the world.
We expect the Net2Phone Cable Telephony business to grow, and we expect it will begin to represent an increasing proportion of our revenue in future years. Net2Phone Cable Telephony signed its first contract with Liberty Cablevision of Puerto Rico on October 22, 2003 and is actively marketing its services to a wide array of cable operators in the U.S., Europe and Latin America who we believe may prefer to buy our services than build their own cable telephony service. Net2Phone Cable Telephony works with cable operators to deploy an integrated, tested and operational telephony service, including customized operations support systems, network interfaces, carrier interconnects, telecommunications methods and procedures and real-time service assurance, including 24 x 7 network operations center support. Net2Phone Cable Telephony offers cable operators a range of strategic deployment and economic alternatives. We expect our cable telephony agreements will have approximately seven-year terms. Our two basic deployment options are described below, although our agreements could include aspects of each of these options:
• Hosted Service. In a hosted service arrangement, the operator outsources the planning, development and aspects of the ongoing operation of cable telephony. The cable operator collects revenue from its customers and pays us a fee on a per subscriber basis for providing our integrated services as well as ongoing maintenance and support fees. In addition, the cable operator reimburses us for our telecommunications costs plus a margin. These costs include the set up and ongoing management of local and long distance interconnection and termination, the costs of any dedicated circuits and the recurring cost of maintaining phone numbers and other support services, such as 911 and operator assisted calling. Our fees on a particular contract will depend on a number of variables, including the size of the cable operator's telephony footprint, its ability to sell cable telephony services to its customers, the complexity of the deployment and the amount of local versus long distance termination.
In a hosted service arrangement, the cable operator is responsible for sales and marketing, customer activation, customer support, billing and collection, plant engineering and service technicians and any regulatory costs associated with offering cable telephony. The cable operator is also responsible for the capital expense associated with the cost of new service installation, the cost of equipment deployed at the subscriber's premises and the upgrade to its existing cable modem termination server. We bear the capital and operating expenses for the planning, design, procurement, deployment and operation of the VoIP cable telephony infrastructure. Our capital expenses include the hardware and software costs of integrating our services and systems with the operator's systems.
• Franchise Service. In the franchise service arrangement, Net2Phone Cable Telephony initially acquires the exclusive rights to offer cable telephony services in the cable operator's territory, subject to the cable operator's right to buy back the cable telephony rights and subscribers at pre-negotiated periods and valuations. Under this arrangement, Net2Phone manages all aspects of the cable telephony offering in the franchise area. In a franchise services arrangement, cable operators collect the revenues from cable telephony subscribers and pass them through to us. We pay the cable operators an up front franchise fee based on the number of two-way homes passed, a monthly royalty fee based on a percentage of revenues and the costs associated with the deployment of cable telephony. We may continue to offer services to the cable operator if the operator elects to exercise its buy-back option. Our costs include reimbursing the cable operator for the sales and marketing of the cable telephony service and all other direct operational expenses such as customer activation, customer service, billing and collection, plant engineering and service technicians and any other legal and regulatory expenses associated with offering cable telephony. We will also bear the cost for the set up and ongoing management of local and long distance termination and any other telecommunications administration activities required to interconnect seamlessly with the public switched network. We are also responsible for the capital expense associated with the cost of new service installation, the cost of equipment deployed at the subscriber's premises and the upgrade to the cable operator's existing cable modem termination server. Our capital expenses include the hardware and software costs of integrating our services and systems with the operator's systems. |
