NET2PHONE SECURES LIBERTY AS MANAGED VoIP CUSTOMER

Net2Phone has its guinea pig. With the launch last week of its PacketCable voice service over the network of Puerto Rican MSO Liberty Cablevision, the company has its first commercial deployment — the perfect real-world laboratory in which to test the viability of its managed voice-over-IP business model and a showcase network with which to present that business case to hundreds of curious but cautious global cable operators that want to enter the voice market.

“Liberty Cablevision is truly a cornerstone of our business in that they are our first launch,” said Michael Pastor, president of Net2Phone. “Our customers now have an operating commercial network to look at.”

Net2Phone is targeting that segment of North American cable providers below the top 10 MSOs — basically, any operator that has between 25,000 to 1 million homes passed. Net2Phone is going after operators of all sizes in Europe and Latin America, where due to the fragmentation of the markets and lower penetration levels MSOs don't have the size and capital of their large U.S. counterparts. What all of these providers share in common, Pastor said, is a desire to follow the major MSOs into VoIP, but they lack resources to deploy their own networks.

The next 12 months will be critical for Net2Phone as the cable telephony market takes shape, Pastor said. The top four MSOs have all announced major VoIP deployments: Comcast, the largest of the MSOs, last week detailed a roll-out that would cover 95% of its territory by 2006. Time Warner and Cox Communications have announced similarly aggressive plans. As those MSOs gear up, the second-tier MSOs will have to make decisions about whether they will deploy VoIP, and if so, how, Pastor said.

But while it may seem to be primed for a company like Net2Phone, that market is also very limited. Looking at both overall numbers and cable modem subscribers, the top nine MSOs control more than 90% of the addressable market. By targeting every cable operator below the top ten, Net2Phone is going after a very small piece of the total market, at least in the U.S., said Brahm Eiley, an analyst for Convergence Consulting Group. And as the big MSOs launch their services and the costs of deploying equipment go down, the mid-sized MSOs that form the core of Net2Phone's market will have a lot more options.

“For now Net2Phone's service has value because the big cable companies haven't ramped up yet,” Eiley said. “In a few years, though, companies like Vonage and Net2Phone won't have the same pizzazz that they do today. That's not to say Net2Phone won't be successful as a niche or international player.”

Pastor doesn't argue that much of Net2Phone's business will be international, but he said he doesn't believe the company will occupy only a small niche.

While the addressable market in the U.S. is small, it's also a staggeringly large market, 10% of which is still a hefty potential customer base, Pastor pointed out. And while the international market is spread out and fragmented, Net2Phone's solution is attractive to almost every international provider, Pastor said. He estimated that Net2Phone has a worldwide addressable market of 125 million homes passed.