Daiwa Eurotelcoblog No. 16, Monday 1st December, 2003: the UK's homegrown Vonage? (original email blast 12:01 PM Monday, 1st December, 2003)
The UK's homegrown Vonage?
Just eleven short months after we began writing about the potential for SIP and other web-based voice communication protocols to add pressure on the European incumbent telco cash flow profile, today's Lex column in the Financial Times ran a piece on..... internet telephony and its potential role in pressurizing incumbent cash flow sustainability, particularly as it pertains to BT Group. Sarcasm aside, this is a very timely worry, in our view, as the market approaches the new year with an eye on emerging themes. There is much to think about at both ends of the spectrum - that is, supranational "free" services which do not currently interconnect with the PSTN directly, and national market-based services which allow interconnection with the PSTN.
Supranational "on-net" services Free World Dialup and Skype continue to add users at an impressive rate - FWD is over 80,000 and should be around 100,000 by year-end, while Skype is at 3.3m downloads to date, which we think may equate to around 2m active users. We expect a revenue model from Skype over the course of the winter, and the FWD community has been an impressive innovator in technical solutions to allow users to arbitrage service into the PSTN from what is usually a "closed" system. No doubt there is more to come.
Vonage last week raised $35m in a new funding round, with which the company plans to fund expansion into Canada and Europe, and we expect to see a big push by the company in Europe early next year. A benign regulatory framework arising from the FCC hearings which begin today would strengthen the hands of Vonage and all other proponents of the technology generally, in our view.
Most of the leadership in the area of commercializing SIP services so far has come from the US, with Vonage as the best-known example. However, we have long suspected that local players in the European markets might be readying similar services for launch in an effort to pre-empt Vonage, and now we have a concrete example.
We met recently with the management of Imass Telecom (www.imasstelecom.com), UK-based provider of telecommunications services, to find out more about their plans for a SIP consumer service launch in Europe. The service, which will trade under the "Byte Telecom" brand, has developed as an adjunct to Imass Telecom's existing position in the international termination, billing systems and software markets, as well as its connections with the call center and calling card markets in India.
Management demonstrated their solution, which involves an ATA and broadband connection. We placed two test calls, one to the US and one back to our office, and the quality was at least on a par with a PSTN call, if not slightly better. An online account management tool (akin to the Vonage dashboard) is in the final stages of refinement. Imass has just established its POP at the telco hotel at 60 Hudson Street in New York, and this will serve as its second data center, the other being in London Docklands. With this addition, the company will be able to terminate calls on the PSTN globally, taking advantage of its least cost routing table already established in its international termination and wholesale units. The company is in the process of acquiring DDI numbers in the UK market, and is investigating similar possibilities for other European markets. This, coupled with the termination capability already in place, should allow Imass to originate and terminate in all key European markets within a very short period of time, and management stated that they believe their current infrastructure and headcount would be adequate to handle 100,000 customers on day one. We believe the company currently employs around 70 people, with most customer service functions to be handled at its satellite location in India.
Imass Telecom is currently sounding out potential channel partners, in the broadband access, mobile telephony and retail segments. We think potential partnerships might involve both white label and co-distribution agreements, similar to those established by Vonage in the US market, with one key difference being the existing involvement of some leading UK retailers in the consumer voice market. We think 2004 is certainly shaping up to be a very interesting year.