Net2Phone Makes First IP Call

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The first call over Net2Phone Inc.'s voice-over-Internet protocol cable-telephony platform went through last week, when chairman Howard Jonas rang up Liberty Media Corp. chairman John Malone — Net2Phone's prinicpal stakeholder — on June 26.

Jonas, who was at Liberty's cable system in Puerto Rico, called Malone in Denver and exchanged pleasantries via the Net2Phone technology. Jonas made note of the significance of a successful phone call made over cable plant, in light of the troubles facing WorldCom Corp. (which came to light that morning) and other telephone companies.

"The technology sounds great," said Malone, whose Liberty owns 22 percent of Net2Phone. "The combination of telecom and cable over a VoIP platform is a technology we have been watching with much interest for years," he added, noting that the economics "far outweigh those of the traditional circuit-switch network."

The Jonas-Malone call kicked of a 100-home VoIP test in Liberty Cablevision's 113,000-subscriber cable system in Puerto Rico.

Liberty launched cable-modem service last week, in conjunction with the IP telephony trial. The company is using Motorola Inc.'s BSR 64000 cable-modem termination system and CG4501 cable modem with an IP phone jack.

NETWORK DETAILS

IP telephony calls are routed through an embedded multi-terminal adapter on the side of the home. The calls then travel through Liberty's hybrid fiber-coaxial (HFC) network to the Motorola CMTS.

From there, the call is routed through a Net2Phone soft switch and gateway to the public switched network. Undersea cable lines carry data and voice traffic from the U.S. to Puerto Rico.

The test marks a new stage in Net2Phone's development. The company had previously concentrated on PC-to-PC phone calls.

"This is truly an end to end voice-over-IP service over an HFC network through a DOCSIS [Data Over Cable Service Interface Specification] platform," Liberty Media chief technical officer Tony Werner said. "This is a primary line type of service."

Some Net2Phone gear is DOCSIS 1.1 certified, Werner said, and other parts that haven't been certified are DOCSIS 1.1-capable.

After the Puerto Rico test is complete, Werner said, Net2Phone and Liberty will collaborate on commercial business plans. The early economics look appealing, he said.

"If you look at the cable modem and CMTS as sunk costs, then the incremental economics get awfully good," he said. There are incremental costs with the MTAs, additional bandwidth and more headend gear, including the soft switches.

Werner said Liberty is kicking around two different models to pay for the soft switch. In one, Net2Phone would pick up the cost and receive a larger split of revenues, he said. In the other, the operator would pick up the cost, and Net2Phone would receive a lower fee.

In either case, Werner said, "We think it can easily reach 40 percent to 50 percent [profit] margins in year two, if done right. The incremental cost per line could be in the hundred or sub-hundred range.

HELPS BEAR COSTS

"VoIP is hugely complementary and allows you to leverage the CMTS and plant upgrade," he said. It's also important in markets like Puerto Rico, where lower PC penetration will likely mean less overall cable-modem penetration, he said.

The addition of VoIP helps pay for the cost of data service and for the CMTSs, he said.

The VoIP push comes as Net2Phone reworks its business strategy. Three weeks ago, Net2Phone posted a third-quarter consolidated net loss of $24 million against $30.6 million in revenue. The company said consolidated EBITDA loss from continuing operations was $11.7 million.

Quarterly revenues dropped $10 million from the previous year's $40 million total. The company took a $114 million restructuring charge in the quarter related to layoffs, lease terminations and the closure of unprofitable routes.

The company said it had $122 million in cash, cash equivalents and marketable securities as of April 30.

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