Net2Phone gets product-ive

Execs deny that adding software licensing is a business shift Net2Phone, the company that helped make international IP voice a $70 billion service business, is spinning off its network management software platform into a licensed product, establishing a new business unit that will co-market the platform with Cisco Systems' IP voice hardware.

The new company, Adir Technologies, will license the software that Net2Phone originally rolled out in 1995 to complete packet phone calls over the Internet, including enhancements created to manage the company's large-scale network of global fiber and satellite transponders. Adir offers real-time advanced call management, rating, routing and authentication.

The move to sell Net2Phone's under-lying software will "unlock this technology and offer it to the world," said Net2Phone CEO Howard Balter. "This will allow us to generate new forms of revenue - not just from offering services as we do today but revenue from actually offering product."

The new line of business also will help Net2Phone's existing IP voice business, which is estimated to have a 40% share of the IP telephony market.

"Our existing business now has a goal to become interoperable with all the Cisco networks around the world," Balter said."We believe the exposure of our technology through the Cisco marketing agreement will allow us to be open to various opportunities with telcos and enterprises around the world."

Exposure of another sort may also be on the minds of executives at Net2Phone. The IP voice market is attracting a lot of attention from telcos such as AT&T, which has a one-third stake in Net2Phone and may well be Adir's first platform customer, as well as from large PTTs in countries such as China and Ireland. Unfortunately, its relatively low barriers to entry also make it attractive to other competing voice-over-IP providers; there are now about 300 companies offering to complete packetized voice calls in the U.S. or internationally.

Some of the largest of the domestic newcomers are providing ad-supported services - free to most users - undermining the national business model for paid IP voice calls. And observers have long predicted that the international market for such calls will gradually dry up as PTTs deregulate and open their markets to competitors.

So besides unlocking value in its existing software, Net2Phone hopes Adir will limit its exposure to such erosion in its core IP voice business. Toll charges on the Internet now constitute 95% of Net2Phone's business; the company expects that licensing its platform through Adir will bring that proportion down to 50% within two years.

But executives were careful to deny press reports that they are redirecting the business in response to market pressures in IP voice.

"This was an opportunity which we started working on long ago," said David Greenblatt, who has served as Net2Phone's chief operating officer for the last three-and-a-half years and who will become president of the new company. "Adir was an opportunity that we could take advantage of; it does not constitute a shift in strategy. Our [IP voice] traffic has doubled in the last three months, so we still see great opportunities there."

Contacts with carriers convinced Greenblatt that they need a framework on which to build their own IP voice networks - particularly the PTTs, he said.

"It was clear these guys did not have a solution to implement voice over IP in their own countries," he said. "They are all doing prototypes, but none of them has large-scale solutions. A lot of the equipment out there is enterprise-based, which they do not have confidence in for their nationwide or international networks.

"They need to build domestic solutions," Greenblatt added. No one else offers a scalable solution, and Net2Phone has been running one for three years, he said. "We already have termination relationships with many of these overseas carriers. So we saw an opportunity to both help these people build their internal solutions and also increase interoperability for Net2Phone."

The arrangement with Cisco is non-exclusive, and Adir is looking to form similar alliances with other vendors, Greenblatt said. But as one of the largest suppliers of IP equipment, Cisco should be a key marketing partner for the new company. The size of the Cisco investment was not disclosed, but Balter said his company will maintain a majority stake in Adir.

The move to productize Net2Phone's software should be good for the overall growth of IP voice, said Ofer Gneezy, CEO of iBasis, which provides international voice-over-IP service for enterprises.

"It's a good move for the industry overall and a good move for Net2Phone also," he said. "Net2Phone is pretty much based on proprietary technology, while the rest of the industry is going to open standards. If Net2Phone moves to make their technology compatible with Cisco equipment, it expands the number of service providers who buy from Cisco and, therefore, enables us to partner with more people."

With the creation of Adir, Net2Phone seems to have recognized the difficulties of being both a service provider and a technology developer, Gneezy said.

"Even AT&T couldn't do it, he said. "They had to spin off Lucent."