Investor's Business Daily interviews NTOP
Net2Phone's Seen Internet Telephony's Ups And Downs
Investor's Business Daily
Wednesday December 24, 6:50 pm ET
By Reinhardt Krause
biz.yahoo.com
Voice over Internet protocol, or VoIP, isn't the first Internet calling technology to go through ups and downs - and 8-year-old Net2Phone Inc. (NasdaqNM:NTOP - News) has been there for most of those ups and downs.
It was way back in 1996 that the company launched a personal computer-based product for sending international calls over the Internet. When Net2Phone went public in 1999 during the dot-com boom, its shares skyrocketed. And in April 2000, AT&T Corp.invested heavily in Net2Phone.
Internet calling, though, didn't live up to its hype, at least not in that earlier guise.
These days, the company sells VoIP-based services and long-distance calling cards directly to consumers, but only outside the U.S.
In the U.S., Net2Phone now wants to make a buck from cable TV companies that are readying VoIP phone services to compete with the local Bell phone carriers. The Newark, N.J.-based company hopes to manage cable operators' phone networks for them.
The company has hooked up only with two small cable firms, Liberty Cablevision of Puerto Rico and St. Louis-based Cebridge Connections.
Net2Phone Chief Executive Stephen Greenberg recently spoke with IBD about cable telephony.
IBD: AT&T Corp. is no longer an investor in Net2Phone. Could you describe your ownership structure?
Greenberg: Liberty Media took AT&T out completely (bought its stake). There's a limited liability corporation called NTOP Holdings that's owned by (telecom services provider) IDT and Liberty Media (which owns portions of various Internet and video companies). They control approximately 40% of the outstanding common shares and 56% of voting shares.
IBD: Does most of Net2Phone's revenue come from the retail unit that operates outside the U.S., rather than your wholesale business with U.S. and other cable firms?
Greenberg: We call (the retail unit) Net2Phone Global Services. We've actually broken the company into two. Almost all our $91 million in revenue comes from that part of the business right now. We're in 130 countries.
IBD: Why not pursue a U.S. retail strategy, such as Vonage Holdings?
Greenberg: We're in business to make money, and the cost per customer acquisition is too high. That business model doesn't work.
On the cable side, we have (business) models that we've worked out that actually make money. Net2Phone already has been there (U.S. retail). We're not interested in marketing for the sake of marketing, just to get our name out there.
In the future, when people think of VoIP and cable telephony, they're going to think of Net2Phone. What we offer is a primary line replacement that competes directly with a regional Bell.
IBD: Is it fair to say, as many analysts and observers do, that Net2Phone's VoIP system would appeal mostly to small cable firms?
Greenberg: That's unfair. It's really attractive to every tier one or tier two company. There are certain tier one firms that obviously aren't going to be our first customers out of the box (because they'll do their own VoIP). But if there's a tier one company that doesn't have a really strong balance sheet and isn't able to spend the same kind of capital as a Comcast or a Cox, Net2Phone can help them get into a voice business they desperately need to be in.
IBD: What's a tier one cable firm?
Greenberg: In my mind, I'd say a company with at least 1.5 million subscribers. That would include Comcast,Time Warner, Cox, Cablevision, Charter, Bright House (Newhouse) and Adelphia. I'm not sure if I missed anybody.
IBD: Why would a cable firm partner with Net2Phone?
Greenberg: Time to market, being able to deploy immediately, would be the No. 1 reason.
IBD: Why would a cable firm partner with Net2Phone for VoIP instead of a much bigger firm, like AT&T Corp.?
Greenberg: For a bunch of reasons. For one, I don't think anybody else has the soup-to-nuts solution that we do, especially the ability to manage the network. No. 2, we're happy to be blind to the customer. That may not be true of others. We're not a threat to the cable companies.
IBD: Are some cable firms leery of partnering with a third party because of experience with AtHome, the high-speed cable Internet service provider that went bankrupt?
Greenberg: Absolutely, but there are dissimilarities in what we do.
IBD: Such as?
Greenberg: The most important is that we're blind to the customer.
IBD: Meaning?
Greenberg: If you are a customer of Liberty Cablevision living in Puerto Rico, you're going to get one bill from Liberty. You're never going to see Net2Phone.
IBD: Is it vital for Net2Phone to land a big cable firm as a customer, since the 10-biggest cable firms have roughly 98% of cable-modem subscribers and 88% of pay-TV subscribers in the U.S.?
Greenberg: We estimate that for Net2Phone there's a market opportunity, in terms of homes passed (by cable systems) domestically and internationally, at 256 million homes passed. Our immediate opportunity is 82 million of those. Right now, the only real competition for those is whether (cable firms) build it internally or outsource to us.
IBD: How many of those 82 million homes passed are in the U.S.?
Greenberg: About 30 million. There are another 31 million in western Europe and 21 million in Latin America.
IBD: Big cable firms that are moving ahead with VoIP - Cox, Time Warner, Cablevision, Comcast - are doing it on their own. Why?
Greenberg: Like in most situations, if you think you can, you're going to do it on your own. I think there's a combination of factors, having to do with corporate ego, having to do with control, all of which are sensible.
With our target market, we're looking at cable companies that lack the technical, financial and human resources to do it (VoIP). That's not to say that some companies now attempting to build by themselves won't turn to Net2Phone down the road.
IBD: With prices falling for phone calls, and VoIP one reason, why is it necessary for any cable company to get into the phone business?
Greenberg: The most important reason is to reduce churn (customer disconnects). Cox has shown that when customers buy both (pay-TV service and Net access), churn is reduced by 28%. When they also buy telephony, it goes down 53%. That's why cable companies are going there (to telephony).
IBD: Even if VoIP use grows, don't start-ups like Net2Phone face hurdles turning profitable?
Greenberg: There's always going to be pricing pressure. But we're moving up the food chain. We're no longer in the wholesale business. Net2Phone started with PC-to-phone services. Then Internet cafes and calling cards. Now we're moving into corporate solutions. As we move up the food chain, we're going to stabilize and keep our gross margins around 40%. |
