Marketing its “hidden jewel” software to third parties helps Net2Phone shift from providing low-cost and so-far-unprofitable Internet telephony services to providing the enabling technology, turning potential competitors into partners. Seeing it as less a shift than a diversification, the company's CEO acknowledges that software “may not have the competitive pressures as the services business.”
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Net2Phone also announced that Cisco Systems (Nasdaq: CSCO) has taken a minority stake in Adir. Cisco and Net2Phone will jointly market Adir's software to Cisco's VoIP customers. Products from Adir are expected to be available by the middle of next year, which is when Net2Phone expects the division to generate revenue.
Adir's software, which Net2Phone describes as "expanding the Internet Ecosystem," monitors and reports on the health, capacity, and usage of the network. By handling call management, routing, and authentication, it allows for a higher quality of Internet telephony service. The company said that while these functions are essential for managing traditional phone networks, they have been missing in voice-over-IP networks until now.
Rumors about the new company and Cisco's possible involvement had been circulating for weeks, leading to a run-up in Net2Phone stock. The outline of the plans, including confirmation of the company's name, had as of last Friday been reported by Dow Jones News Service, leaving it to today's announcement to formally fill in the details.
Productizing the hidden jewels
Net2Phone is a leading player in the fast-growing Internet telephony market, claiming 40% market share. About 95% of its business comes from charges for Internet phone calls, however, leaving the company vulnerable to increasing competition. Today's announcement is part of Net2Phone's plans to reduce that number to about 50% in the coming years.
With long-distance rates working their way toward the sub-basement, long-distance carriers like AT&T (NYSE: T) are looking at Internet telephony as a way of reducing costs and expanding their product offerings. The formation of Adir is Net2Phone's way of playing into this.
Adir's network management software will help traditional carriers move more traffic over the Internet. In this way, Net2Phone is able to shift from primarily providing low-cost and so-far-unprofitable Internet telephony services and become a more broad-based provider of the enabling technology, effectively turning potential competitors into partners.
Adir's software has been "one of the hidden jewels behind the successful implementation and acceptance of Net2Phone's services," the company's CEO Howie Balter said in today's press release. "Through the formation of Adir, we hope to enable service providers with the 'brains behind the equipment,' allowing them to realize the full value of their networks." To that end, Adir will help Net2Phone "productize" its technology.
In a conference call later Monday morning, however, Balter chose to characterize the move as less a shift in the company's strategy than a diversification. The company was "not giving anything up," he said. "Our services revenues are as robust as ever." At the same, he acknowledged that the sale of software "may not have the competitive pressures as the services business."
Whether it's a shift or a diversification, Net2Phone and Cisco aren't the only ones with an interest in the company's success in this growing space.
In March a consortium led by AT&T paid about $1.4 billion cash for a 32% equity stake and a 39% voting stake in Net2Phone. AT&T will have a 51% stake in the consortium, whose members also include AT&T's Liberty Media Group (NYSE: LMG.A) and British Telecom (NYSE: BTY). Other companies with investments in Net2Phone include America Online (NYSE: AOL), General Electric's (NYSE: GE) GE Capital, Softbank, and Yahoo! (Nasdaq: YHOO). Net2Phone is a subsidiary of long-distance company IDT Corp. (Nasdaq: IDTC) and went public in July 1999.
Net2Phone's Internet phone services are available through distribution agreements with companies including AOL, Excite (Nasdaq: ATHM), Go2Net (Nasdaq: GNET), Infospace (Nasdaq: INSP), Microsoft (Nasdaq: MSFT), and Priceline.com (Nasdaq: PCLN).
Your Turn:
Is starting a new company and marketing one of its "hidden jewels" to other companies the right move for Net2Phone? Share your thoughts on the Net2Phone discussion board.
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