Minimum risk, maximum output

Embracing the adage that the whole is greater than the sum of its parts, Liberty Media last month announced a pair of related five-year agreements aimed at staking a significant claim in the nascent international cable voice-over-IP (VoIP) market. A licensing agreement with Net2Phone and joint venture with IDT gives Liberty the technical and marketing elements necessary to reach its widespread cable customer audience.

Liberty is the brawn of the agreement, as it supplies the all-important customer. Net2Phone brings VoIP technology, and IDT provides the infrastructure. Although Liberty and IDT agreed to split the revenues generated from their joint venture, all daily operations, telephony termination and funding obligations fall squarely on IDT.

For its part, Liberty stepped away from the bargaining table with every hair still in place, using its massive customer base as leverage to craft a plum, virtually gamble-free agreement. Liberty has positioned itself to emerge unscathed should the venture fail.

“Economically, we have no commitments whatsoever, and we don't view it as a particularly risky endeavor,” said John Orr, Liberty's director of corporate development.

For Net2Phone, the voice- and enhanced services-over-IP provider will use Liberty as a battering ram into the VoIP space abroad. Under the terms of the deal, Liberty-owned international cable affiliates will be exposed to Net2Phone technology.

As the largest cable provider outside the U.S., Liberty has investments totaling $54.4 billion globally. A recent $4.7 billion deal struck with Germany's Deutsche Telekom for six of its cable properties brings the company's customer total to more than 25 million, mostly in Europe, Latin America and Japan. Though Liberty declined to provide customer growth projection figures, Orr said Liberty would be “opportunistic” in expanding its customer base.

Net2Phone anticipates heightened exposure from the licensing agreement.

“I don't expect [Liberty] to slow their growth,” said Jonathan Reich, executive vice president of business development for Net2Phone. “It will continue to ramp up over time.”

In addition to 25 million potential new customers, Net2Phone received a $20 million licensing fee, which is covered by IDT's funding obligations. This partnership aside, the agreement could serve as a springboard into licensing deals with other providers, Reich said.

Net2Phone also stands to profit from revenue generated via services layered on top of its licensed core VoIP technology. Demand for enhanced functions such as unified messaging and speech recognition will grow as the deal takes shape over time, said Aurica Yen, analyst with The Yankee Group.

“It really is an unlimited opportunity for Liberty Media and Net2Phone,” Yen said. “Now it's up to Net2Phone to take that partnership and make sure it succeeds.”

Liberty managed to dodge financial commitment in terms of value-added services as well. Cable affiliates wanting to add layered services will purchase them on their own, Orr said.

Although Liberty has agreed to introduce Net2Phone technology, the company has not mandated that its cable affiliates use it, Orr said. But with major shareholders — and in many instances, board members — in numerous international cable subsidiaries, Liberty recommendations could hold much sway.

“We're not going to do any arm-twisting, but we're certainly going to go in and hope to sell the technology and the opportunity on its own merits,” Orr said. “We're hopeful that it will prove to be a solution that our cable affiliates will want to use.”

And why not? Liberty owns an interest in IDT, which still owns a stake in Net2Phone (see figure).

Tom Jenkins, director at Telechoice, said the three-company partnership is logical and indicates companies are straying from their core set of services to offer VoIP. “This makes a lot of sense as an initial way to gain traction in the voice-over-IP market without having to do it all themselves, which they probably couldn't pull off,” he said.

Who owns who?

Liberty Media owns 12% of IDT, which owns 17% of Net2Phone