IP-colored glasses

To make a long-distance call from Genuity’s Burlington, Mass., headquarters, all you have to do is dial 9, 1 and then the number—the same as most PBX-based offices these days.

But if you’re feeling a bit more daring, you can dial 9 then 2 to make an IP call. Instead of going over the public network, your call will travel to a gateway where it’s packetized and sent over Genuity’s IP backbone.

Of course, voice-over-IP service is hardly just a company perk. Genuity has been selling wholesale VoIP service at a clip of about 100 million minutes per month. And as the folks at Genuity love to point out, the provider cumulatively passed the 1 billion minutes mark this fall.

"While AT&T, WorldCom and Sprint are complaining about the consumer long-distance business heading south, I know where 1 billion minutes have showed up this year," says Genuity Chairman and CEO Paul Gudonis.

The leader of this well-funded GTE spinoff has hit on something big: the idea that VoIP could someday overtake the traditional voice business. It’s a vision shared by Bob Olshansky, Genuity’s director of IP telecom engineering. "As we move further down this road of convergence, that Internet telephone number is going to be as important as your public network telephone number," he says.

While VoIP isn’t Genuity’s bread-and-butter business—access and Web hosting form the lion’s share of the company’s annual revenue—it is a rapidly growing one. Revenues from Genuity’s value-added services grew from a little more than $11 million during third quarter 1999 to almost $21 million in third quarter 2000, according to the company’s Securities and Exchange Commission filing (Table 1). And for the first nine months of 2000, revenues in that sector increased $38 million, or 161%, over the same period in 1999. A significant amount of that growth is attributed to sales of VoIP services.

"Worldwide, there’s about $750 billion of telecom services revenue, a good portion of which could migrate over to the Internet over the next 10 years," Gudonis says. "A billion minutes is really a drop in the bucket, but it’s the start of a trend."

At the head of that trend is Genuity. The company’s beginnings are about as convoluted as they come, but the combination seems to work in its favor. Genuity exists in a rare netherworld between start-up and incumbent. Its ranks are filled with a juxtaposition of Internet gurus and telecom mavens. "We’ve been able to combine the talents of tremendous IP expertise, along with a team of folks that really understands the current circuit-switched infrastructure," says Nick Damenti, director of VoIP services for Genuity.

Case in point is the strait-laced Gudonis, who came from Internet backbone provider BBN, and the colorful Olshansky, who boasts a long history at GTE, as well as a distinct East Coast accent.

Together, team Genuity is not only pushing a heady VoIP strategy, but it is continuing to search for ways that data can infiltrate the public network, including a recently unveiled weapon called Black Rocket. And its secret is that it doesn’t do it alone. Whether it’s partnering with systems integrators for e-business solutions or with other carriers in selling VoIP minutes, Genuity relies on other companies in the last mile so it can focus on what it does best: IP infrastructure.

There and back again

What do you get when you cross an Internet backbone pioneer, a major independent local exchange carrier, a relatively unknown applications hosting provider and 24 dark fibers? Here’s a hint: The answer starts with a "G."

A large part of Genuity’s lineage can be traced back to Cambridge, Mass.-based BBN, and while Al Gore may have earned a permanent bum rap for his assertion that he fathered the Internet, BBN legitimately can claim at least part of that distinction.

"The idea of architecting infrastructure that can never be shut down was exactly what we created the company on," says Joel Whitman, Genuity’s vice president of Internet strategy. It was a BBN employee—Robert Kahn—who helped develop a network for the U.S. government during the height of the Cold War. Kahn developed ARPANET for the Department of Defense’s Advanced Research Projects Agency along with ARPA employee Larry Roberts. The network was designed with a distributed architecture to ensure that its computer systems couldn’t get wiped out during a nuclear attack.

Kahn, along with Vinton Cerf (frequently referred to as the real father of the Internet), then developed the TCP/IP protocols. BBN started a commercially available version of ARPANET, and the Internet subsequently was born.

Given its history as an Internet pioneer, BBN had become quite an attractive acquisition for a major service provider looking for an established data play. The company was bought by GTE in May 1997 and subsequently was folded into GTE Internetworking. GTE acquired 24 dark fibers from Qwest Communications at the same time it acquired BBN, and the Internetworking unit took over the construction of a new nationwide fiber network.

"The whole acquisition worked very well," says Gudonis, who originally joined BBN in November 1994. "The goal was to take the Internet knowledge, the expertise and the market position we had as a Tier 1 backbone and provide more fuel. We needed three things at BBN: capital, fiber and distribution. GTE provided all those."

GTE provided the final element in November 1997 when it purchased an applications hosting and security subsidiary of Bechtel Enterprises called Genuity. But the name was put on ice when the company was rolled into GTE Internetworking, and it wouldn’t re-surface until earlier this year.

Which brings us to GTE’s merger with Bell Atlantic. As part of an agreement with the FCC, GTE agreed to spin off GTE Internetworking as a separate subsidiary to earn merger approval. GTE got its merger; GTE Internetworking got all the data centers, hosting centers, network operations centers and the fiber backbone that had been built up under GTE’s purview. Renamed Genuity, the company officially was spun off with its IPO at the end of June.

GTE may have gotten the short end of the stick in its compromise with the FCC. "After the judges got through with them, most of the reasons [the merger made sense] kind of seemed like they were gone," says Clif Holliday, president of B&C Consulting and a GTE veteran. "And one of the big ones was Genuity."

But GTE is hardly out of the equation. As part of Verizon Communications, it still owns a 9.5% stake in Genuity, and if it can earn FCC approval to offer long-distance in the former Bell Atlantic states, it has the option of acquiring a majority control of Genuity. Given that GTE already has Section 271 approval in New York and Massachusetts, it’s probably only a matter of time before Genuity re-enters the GTE fold.

Safety net

The idea of being re-acquired by GTE provides Genuity with some security. "We’ve got the benefits of being an independent Internet company, running in Internet time, with all the innovation and the rapid growth, and yet we’ve got the benefits of being associated with Verizon through the ownership stake in the company," Gudonis says.

Those benefits include retaining Verizon as a sales channel and a $500 million service contract with the provider. It also includes significant financial backing—Genuity has the option to borrow up to $2.75 billion from Verizon.

Access to Verizon’s purse strings couldn’t hurt, given that most telecom and Internet-related stocks—Genuity’s included—haven’t performed well during the past several months. "For emerging carriers, the funding sources have just dried up," Gudonis says. "However, because of our relationship with Verizon and our strong market, we were just granted an investment-grade rating by S&P and Moody’s, which gives us access to capital markets that, frankly, our competitors don’t have."

Genuity was downgraded by AG Edwards from "buy" to "maintain position" last month, but an investment-grade rating is a stronger indication of Genuity’s stability, says John Marcus, senior analyst at Probe Research. "S&P and Moody’s are known more for bond rating rather than stock rating, and an investment-grade rating from them on their debt would indicate a fair amount of long-term confidence from Wall Street," he says.

In comparison, Genuity competitor PSINet was downgraded from "accumulate" to "reduce" by AG Edwards last month.

The fact that Genuity went ahead with its IPO in late June is perhaps further evidence that Wall Street views it with kinder eyes than some of its competitors. Through that IPO, Genuity raised $1.9 billion in capital at a time when investment bankers either postponed or canceled several other IPOs because of the volatile market.

Of course, because GTE was forced to spin off Genuity, the company had to go public regardless of market conditions. And like most telecom stocks in recent weeks, as of Dec. 5, Genuity’s share price had dipped to $4.625, which is down $6.375 from its opening share price of $11. Last week, Genuity announced it will lower capital spending over the next three years, investing between $7 billion and $9 billion in its network between 2001 and 2004 instead of the $9 billion to $11 billion it originally planned to spend.

So how does Gudonis combat what’s happening on Wall Street? He takes his company’s message on the road. Gudonis spoke at the UBS Warburg conference last month in New York about how he views Genuity’s place in the market.

"The key to us is the right market segment: We’re servicing enterprise customers and the big service providers, so that’s a plus. We are showing strong growth in revenues as well as margin expansion—that’s a plus. With our own capital, with our credit lines and the

Verizon financial backing, we’ve got about $6 billion in financial resources available to us," he says. "If you put those three together, that’s a very powerful story—much different than PSINet or ICG or any of those firms."

But isn’t there a conflict of interest in selling to both enterprise customers and service providers that have enterprise customers of their own? Not according to Gudonis. "Typically, our service provider [customers] are the consumer ISPs—firms like AOL and EarthLink. That brings a tremendous amount of eyeballs and content onto our network, which then is an asset to take to the enterprise market. It’s a complementary strategy to have our ISP customers as well as enterprises because enterprises want to reach those eyeballs."

Some have questioned how Genuity’s share price would be affected if the company were re-acquired by Verizon, but Gudonis quickly points out that such a deal wouldn’t dilute shareholders’ stocks. "We only sold 18% of the economic value of the company to the public," he says. Verizon has the option of acquiring the remaining portion of the company not owned by the public—a controlling share of approximately 80%—but Genuity will still retain the benefits of an independent entity, including its own board of directors and the ability to raise its own capital.

In the meantime, Genuity has little choice but to wait with the rest of the industry. "We’re going to just ride out this market correction here in Internet stocks, and I think people will recognize that it’s very good value," Gudonis says.

The VoIP play

While Gudonis is the brains behind Genuity’s business operation, Bob Olshansky is arguably the blood and guts of its engineering organization. Olshansky, who worked at GTE and GTE Laboratories before becoming part of Genuity, had his own ideas about what to do with GTE’s fiber network.

"Back in the late ’80s, everyone was talking about fiber to the home. I knew that was total bullshit. Anybody could sit down and within a couple of days figure out that FTTH was too damn expensive." However, using a cable network to connect the last mile became an "outstanding way to deliver broadband services," he says.

Weeks after GTE acquired BBN, Olshansky and his team started examining the types of enhanced services they could offer over the company’s fiber backbone, and they settled on VoIP. "It’s one of the major realizations of convergence, which of course is what everyone’s been talking about since the mid-80s," Olshansky says. "VoIP is what’s going to enable the convergence of voice and data."

To be successful at VoIP, a carrier must know something about the data and telecom networks. The carrier must determine how to get the right signaling information, either via the ISDN D channel or SS7, and must know how to connect the data side to the telephone network in the most cost-effective way.

Perhaps Damenti puts it best: "It’s a business that’s easy to get into but hard to get good at."

Genuity sells wholesale VoIP services in the form of ESP Direct—its domestic offering—and International VoIP Direct—which terminates service to about 450 points worldwide. Its customers are providers such

as PhoneFree.com, MediaRing.com and Dialpad.com, which enable users to make PC-to-phone calls using a client installed on the PC.

For the guts of its VoIP network, Genuity has been working closely with Cisco Systems since August 1997. The partnership "allowed us to understand where to focus," says Lou Santora, vice president and general manager of Cisco’s voice and video services business unit. "As you can imagine, this was a huge job trying to build technology to work in a telephony environment."

Genuity deployed Cisco’s trunking AS5300 gateways as well as 3660 and 3640 gatekeepers throughout its network. The gateways, which sit at the edge of the network, terminate all the bearer channels that arrive as time division multiplexed streams. The gateways convert those streams via compression algorithms into IP packets, which then are sent to the IP network.

The gatekeeper, which usually sits near clusters of gateways, provides call control. When a call terminates at a gateway, the gateway strips off the signaling channel and sends it to the gatekeeper, which determines where in the network the call is headed. The gatekeeper then configures the call and sends it on its way. "We took the gatekeeper that we’re deploying and made it a very skinny call control gatekeeper with an application programming interface that other gatekeepers can talk to," Santora says.

Cisco also created a generic API that allows different carrier partners to interface with Genuity’s gatekeepers. "That provides the ability for lots of partners out there that are building applications on top of this network to have an interface they can build to and can turn around services very quickly," Santora says.

Because interoperability between Genuity’s gateways and gatekeepers and its customers’ application servers is so important, the provider needed a network management system that could automatically process thousands of lines of code for each of the networks gateways and gatekeepers.

Enter Comit, or Configuration Management for Internet Telephony. Comit automates configuring gateways to connect to the public network or to one of Genuity’s 450 virtual points of presence. A graphical user interface enables Genuity’s technicians to add new customers or reconfigure gateways in real time. "It’s just a very powerful network management tool; you could not run this type of network without it," Olshansky says.

Despite the fact that there are no softswitches in Genuity’s network (however vaguely that term is defined), Olshansky and Damenti both tout Comit as the softswitch equivalent. "The softswitch is the magic box in the middle of the network that replaces all the tens of millions of lines of code in every switch," Olshansky says. "Comit is what you might call a precursor of a softswitch; it does a lot of the functionality you would want a softswitch to do."

But it won’t matter to end users whether Genuity uses gateways, softswitches or hamsters to deliver VoIP. The bottom line will be how readily the public embraces those services. "The adoption rate is well ahead of what the analysts had predicted," Damenti says. "People are seeing there will be widespread adoption: the question is of when and how. We’re at the beginnings of mass proliferation." Less than 5% of the traffic currently traveling over Genuity’s network is VoIP traffic, according to Olshansky, but they are expecting a 100% increase over the next year.

Numbers from Probe Research back that projection. "We see the voice-over-packet networks market growing at a strong, steady clip, with traffic levels doubling or tripling every year for the next five years," Marcus says. However, growth rates will slow in international and domestic long-distance while local traffic traveling over packet networks will rise significantly, he adds.

Black Rocket

Of all the projects on Genuity’s plate, the one that seems to excite the company the most is Black Rocket. It is Genuity’s answer to the ultimate e-business solution. It combines Genuity’s Web hosting, applications, networking and security offerings into one package, designed to be rolled out in a New York minute.

"E-business is about doing something unique using IP technology," Whitman says. "For us, e-business is any business process that a customer is trying to migrate from a traditional [landline] environment to an IP-based environment."

Announced on Oct. 2 via a $20 million print, radio and TV ad campaign, Black Rocket can be deployed to business customers in as few as 10 days. "There’s a whole portfolio of e-business solutions that run on the Black Rocket platform," Gudonis says. That portfolio currently includes e-business applications called eCommerce and eMarkets, which he describes as a "creative B2B exchange." Other Black Rocket applications in the pipeline include eMedia (for content publishers), eMobility (for secure mobile access) and eCRM (for customer relationship management).

"It’s fast, its sleek, it’s reliable and it really moves your business forward." That explains the rocket part of Black Rocket—but why is it black? "Could the Batmobile be any other color but black?" Gudonis explains. Well, now that you put it that way….

Before the service was rolled out in October, Genuity provided security, managed hosting and access separately, Whitman says. "In the past, those have all been what I would consider raw materials that you would sell to IT departments, which would assemble them into something useful on behalf of their employer or their enterprise."

But whenever the company created customized combinations of those services for its enterprise customers, it had to do so at considerable time and expense. Such solutions don’t scale well and are difficult to support. So when customers started coming back to Genuity for the same tailored solutions, the company decided to launch an architecture that made customization easy—and fast.

Key to offering Black Rocket is Genuity’s systems integrator partners. Just as Genuity relies on other service providers to bring its VoIP services to end users, it relies on systems integrators to work out the details with its Black Rocket enterprise customers.

"Trying to pretend you can be all things to all people gets real dicey," Whitman says. "Ultimately, [our systems integrators] are never going to be successful if the infrastructure isn’t working for them. And we’re never going to be successful if we pretend that we know how to do systems integration, because we don’t.

System integrator partners include companies such as Pricewaterhouse Coopers, Cap Gemini and Ernst & Young. "They’re in the business of communicating what the customer wants to do," Whitman adds. "In the past, the customer would be responsible for making those choices."

Whitman attributes that shift to the changing role of IP in customers’ networks. "IP technology is now seen as a profit center, not just a sub-cost of IT," he says.

To infinity and beyond

Given the fact that Genuity’s current portfolio seems to runneth over with new strategies for leveraging its IP infrastructure—Genuity’s nascent Black Rocket platform and booming VoIP business chief among them—what will the company primarily focus on going forward? Three things, according to Gudonis.

The first is what Black Rocket is designed to address: enabling broadband e-business for enterprises. "Today, less than 1% of the global GNP is being conducted online. That’s a huge opportunity," he says.

The second major focus is on the host of broadband applications that DSL and cable modems will soon deliver—stuff like streaming, multimedia and multicasting. "There’s going to be a huge content distribution on the Net," Gudonis says. "Genuity plans to leverage our broadband fiber network to deliver those services."

The final focus is perhaps the most interesting: the wireless Internet. Keeping in line with how Genuity partners with carrier customers for VoIP and systems integrators for Black Rocket, the company would hammer out partnerships with mobile operators, Gudonis says. "They’ll specialize in the local wireless infrastructure, and we’ll have a nationwide-to-global network to take that traffic and the rest of those applications onto the Internet," he says. "We wont’ be the wireless company ourselves, but… we’ll carry that traffic on the Genuity backbone."

Until that day arrives, though, Genuity—in one form or another—will undoubtedly continue to view the world through IP-colored glasses.