Net2Phone vs. Vonage - Comparison or Contrast?
Blaylock & Partners –
Telecommunications: VoIP BUY
Industry Update
March 10, 2004
Pricing Date 03/09/2004
Price Target $10.00
Net2Phone vs. Vonage - Comparison or Contrast?
We hosted a field trip last week to visit Net2Phone and Vonage.
While the direct purpose of the visits was to understand each company's strategy, business model, and growth opportunity, we believed the outing offered a unique opportunity to compare and
contrast the two companies.
Net2Phone and Vonage are frequently compared, but less frequently contrasted. While we are bullish on both businesses and believe that their opportunities are great, we note that the companies are more different than they are similar.
VoIP is the common denominator. Nevertheless, they have very different business models, clearly differentiated value propositions, and are leveraging distinct applications of IP technology to deploy their solutions.
Both Net2Phone and Vonage are employing VoIP to enable competitive telephony. NTOP's primary offering is a managed IP solution targeted at domestic and international cable operators. Vonage offers a direct-to-consumer Internet telephony solution and plans to partner with retail chains, cable operators, ISPs, and others to distribute the product.
This report explores the similarities and the differences between business models, market opportunities, competitive threats, and technology choices of Net2Phone and Vonage.
In summary, while both Net2Phone and Vonage have strong value propositions and are positioned to lead the VoIP evolution, they have less in common than is widely understood. In our view, the success of both companies is mutually exclusive and not a zero-sum game. Over the next 12-24 months, we will keenly observe how the VoIP marketplace, solutions, and applications develop in order to understand how the telecommunications industry is going to change as a result.
Investment Summary
We hosted a field trip last week to visit Net2Phone and Vonage. While the direct purpose of the visits was to understand each company's strategy, business model, and opportunity, we believed the outing offered a unique opportunity to compare and contrast the two companies. Further, by juxtaposing the two, we gained some insight into the distinction between IP telephony and Internet telephony as we have defined the two in our past reports.
Net2Phone and Vonage are frequently compared, but less frequently contrasted. As Net2Phone and Vonage are two of the more visible VoIP companies and are arguably industry leaders, they are often compared, and in many cases confused, in the minds of investors and the media. While we are bullish on both businesses and believe that their opportunities are great, we note that the companies are more different than they are similar.
VoIP is the common denominator. Both NTOP and Vonage are VoIP companies. They are both engaging Internet Protocol (IP) technology to enable competitive telephony solutions. They are both leaders in an industry that is changing the communications industry as it exits today. That is largely where the comparison ends. They have very different business models, clearly differentiated value propositions, and are leveraging distinct applications of IP technology to deploy their solutions.
Laying the groundwork: IP telephony vs. Internet telephony. Before we compare and contrast the two companies, we need to lay the groundwork for our discussion by differentiating the two approaches to VoIP. VoIP is more than just telephony over the Internet. VoIP is a technology protocol that allows for the transport of voice over IP networks, as the name suggests. Internet telephony is an application of VoIP that emerged with the growth of the Internet. The goal is to leverage the ubiquitous nature of the Internet into cheap telephony minutes. In contrast, IP telephony employs private and/or managed IP networks to deliver voice solutions. While the difference is subtle, the distinction lies in the inability of Internet telephony providers to provide guaranteed quality of service, true 911 service, or network powering (if you lose power your service may not work). A "replacement" (a.k.a., "IP telephony," "managed IP") service would offer all of these and effectively replace the line from your current carrier. In contrast, an "alternative" (a.k.a., "Internet telephony," "best efforts," "broadband telephony") service would be one in which the consumer decided that he/she could forego these service characteristics.
As mentioned, both Net2Phone and Vonage are employing VoIP to enable competitive telephony. NTOP's primary offering is a managed IP solution targeted at domestic and international cable operators. Vonage offers a direct-to-consumer Internet telephony solution and plans to partner with retail chains, cable operators, ISPs, and others to distribute the product.
Net2Phone is an enabler. The common thread to all of NTOP's offerings are services designed to enable telephony. Net2Phone Global Services (NGS) enables international long-distance telephony through a suite of product offerings. Net2Phone Cable Telephony (NCT) enables cable operators to deploy a fully managed, guaranteed quality of service (QoS) telephony solution to their (the cable operator's) customers. With the announcement of their Voiceline service (see our note, "Introducing Voiceline - a Double-Teamed Approach to Cable Telephony," dated 3/7/2004), NTOP has rounded out its offering for cable operators by deploying a "best-effort" telephony solution, which can arguably be compared to Vonage.
Vonage is a provider. Vonage is providing a consumer (and to a small degree, small-business) telephony solution that leverages a broadband access point and the Internet to deliver voice communications and vertical features. Vonage's strategy involves partnering with numerous third parties, including retail chains (i.e., Best Buy, Radio Shack, Circuit City), ISPs (i.e., Earthlink (ELNK, $8.68, Not Covered)), and cable operators (i.e., Armstrong, Advanced Cable Communications); however, these partners are simply distribution channels for Vonage's voice solutions. While Vonage does allow these partners to offer telephony to their customers, it does not enable these partners to become telephony companies.
The overlap is the offering for cable operators. Where NTOP and Vonage tend to cross paths is in targeting cable operators with their telephony solutions. While both companies have a value proposition for the operator, we do not view their solutions as competitive. Should an operator be looking to build telephony into their network, to offer a true replacement telephony service, and to maintain control of their customer, Net2Phone's solution is right for them. Conversely, if an operator is simply interested in offering an alternative telephony solution, Vonage's reseller model may meet their needs. While we recognize the value proposition offered by Vonage, specifically for smaller operators, we believe that most cable operators, if they have the resources, would choose the Net2Phone model over the Vonage reseller model.
With the introduction of its Voiceline service, NTOP, in our view, is responding to Vonage's marketplace success. Vonage has proven, through signed agreements, that there is demand from smaller cable operators for their service. We believe that NTOP management has recognized that success and has responded with its Voiceline offering. Voiceline is a best-effort, broadband telephony solution for cable operators. From a technology perspective, it is very similar to Vonage's service. The solution, however, is notably different. The operator is not reselling NTOP service. Rather, NTOP is enabling the operator to provide telephony to its customers, albeit as an alternative rather than a replacement service. NTOP provides the operator with the tools necessary to manage this telephony, including billing, provisioning, and other back-office systems. Once deployed, the operator owns and controls the customer. The customer has one bill, one point of contact, and one relationship.
The VoIP landscape is rapidly evolving and developing. NTOP and Vonage have clearly demarcated their positions in this market, and are poised for continued leadership.
Nevertheless, the competitive environment is heating up.
NTOP continues to face the "build vs. buy" decision by its targeted cable operators. To date, the Company has signed only one customer. In order to prove its business model, the Company must sign additional operators. While we remain bullish on its opportunity and believe its value proposition is strong, NTOP's cable telephony business is still an unproven start-up and a speculative venture.
We are not concerned that the Company has not signed more deals yet. What would concern us would be decisions by the Company's targeted customers to deploy telephony without Net2Phone. To date, these targeted operators (i.e. Charter (CHTR, $4.51, Not Covered), Adelphia, Brighthouse, Mediacom (MCC, $8.59, Not Covered)) have announced plans to deploy VoIP telephony, but have not announced how they plan to deploy telephony.
An additional threat to Net2Phone is coming from AT&T (T, $19.68, HOLD, $19 PT),
Sprint (FON, $18.73, Not Covered), and MCI (MCIAV, $20.75, SELL), which have begun to target their own telephony solutions at the cable operators. We note that these solutions, which provide the telecommunications needs for a cable telephony deployment, address only one aspect of deploying and providing telephone service. Net2Phone's is the only fully outsourced provider of cable telephony, and provides a full telephony solution, including planning and deployment, call management services, telecom management, as well as real-time assurance and network monitoring, as depicted in the diagram below. We continue to believe that this solution is the only one of its kind, and offers the greatest value proposition to cable operators.
Vonage, in our view, is at a crossroads with competitive threats emerging from numerous fronts. We believe that Vonage is well positioned to sustain its competitive advantages and to fend off competition. Nevertheless, the threats are formidable, and will likely test the private operator's technical capabilities, market dominance, and business model.
Many of the large traditional wireline carriers have begun to explore their own
consumer VoIP solutions. AT&T has announced CallVantage, its "Vonage-like" service. This service, a best-effort, broadband telephony service, is likely to target the same base as Vonage. While we expect AT&T's initial efforts to be defensive in order to protect its subscriber base, the Company certainly has greater resources than Vonage, and could compete aggressively if it chooses to. Similarly, Verizon (VZ, $39.20, HOLD, $41 PT) has announced plans to deploy a broadband telephony solution in 2Q04, but has said that it will only be available to their DSL customers, and is therefore a defensive move.
The common theme among the various competitive announcements, including Net2Phone's Voiceline service, is that the barriers to entry for offering broadband telephony service are low. That is the real threat to Vonage. Vonage's ability to weather the competitive storm is dependent on leveraging its first-mover advantage, building upon its product differentiation and brand leadership, and maintaining its ability to rapidly respond to customer demands (from the time Vonage decides to roll out a new service until it is deployed is about six weeks). We expect Vonage to sustain its market dominance for the near term as others work to figure out the business. Nevertheless, the Company may need to adjust to an environment in which it is no longer the only game in town.
In conclusion, while both Net2Phone and Vonage have strong value propositions and are positioned to lead the VoIP evolution, they have less in common than is widely understood. In our view, the success of both companies is mutually exclusive and not a zero-sum game. Vonage's service should appeal to a certain consumer segment and to certain distribution partners. Net2Phone has a value proposition that we believe resonates among most cable operators, at least among those that have decided not to "build" telephony themselves. Over the next 12-24 months, we will keenly observe how the VoIP marketplace, solutions, and applications develop in order to understand how the telecommunications industry is going to change as a result.
Net2Phone is a provider of VoIP telephony products and services. The Company utilizes its VoIP technology to transmit digital voice communications over the Internet and other data networks. Net2Phone markets its products and services through two units: Global Services (NGS) and Cable Telephony (NCT). |
