Tuesday, March 30, 2004

Daiwa EuroTelcoblog No. 21 Friday, 6th February, 2004: VoIP = Victory over Incumbent Protests?/Vonage funds European expansion (original email blast 2:50 PM Friday, 6th February, 2004)

We are trying to exercise restraint in our coverage of this issue, but the week has provided us with so many important indications of how momentum is accelerating in the VoIP story, that we had to come back with one more update.

VoIP = Victory over Incumbent Protests?

Following yesterday's announcement from the FCC that on 12th February it would vote on the Free World Dialup petition from February 2003 (see PTT Pulse, issue 54, 16 April, 2003, for a detailed summary of the various industry and law enforcement arguments for and against), both the DowJones Newswires and the LA Times are running articles today speculating that the Commissioners are going to vote next Thursday that FWD is not subject to legacy regulation. Both articles report that an FCC pledge to rewrite wiretap laws in order to satisfy FBI/DEA/DoJ concerns has led to the DoJ withdrawing its opposition to the petition.

The FWD petition raises a range of complex legal and technological issues, but the important thing to remember is that it is a petition for declaratory ruling, essentially requesting that the FCC formally state that the FWD service itself is not telephony, and thus not subject to the access charge regime, USO, or other burdens normally imposed on carriers. It is also important to note that the FWD service does not generate revenue from its users, nor does it interconnect directly with the PSTN, both of which factors we believe may have some bearing on a positive decision by the FCC. We think it is safe to assume that a positive ruling in this case would squelch further pressure on similar services which do not interconnect with the PSTN, though the implications for services which do allow this are unclear at this point.

Nevertheless, we think that a ruling in support of FWD would: a) be taken by many (rightly or wrongly) as a signal of a more benign stance toward the entire VoIP issue on the part of the FCC; b) weaken future arguments against the new generation operators from the incumbents (which were quite vociferous in the case of the FWD petition); and c) partially allay the uncertainties of potential investors in the sector. Most of the regulatory issues involved in the US framework are not relevant in Europe, and as we have written before, we think market entry by the access-independent VoIP players into the European markets will be a much more straightforward affair on the regulatory side. However, from a sentiment standpoint in Europe, the boost which a positive FCC ruling might give the industry in the US should have positive knock-ons in heightening awareness of the issue in Europe, just as more forward-looking incumbents and regulators start looking at how they are positioned for the arrival of services in the near future.

Vonage funds European expansion

As if to underline the ongoing momentum of the sector and mounting investor interest in it, Vonage today announced the closing of a $40m financing round led by 3i and co-led by Meritech, both newcomers to Vonage. Existing investors New Enterprise Associates and Vonage management also participated, making the capital raised $103m in total. The press release confirms that the funding is to support expansion and service development in the US, Canada, UK and Switzerland. We expect to see Vonage launching in the UK by the end of Q1, and while we have seen BT move first with voice-over-broadband, we think there are holes in its marketing strategy which Vonage and others will look to exploit in marketing their own services (free on-net calls, richness of features, portability of service). It is going to be an interesting year.

Elsewhere, our grapevine has very helpfully come back with some pointers on the identity of the mystery Nordic SIP start-up, to whom we hope to speak next week.

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