There are a handful of IP telephony companies around at the time TMC decided to launch Internet Telephony Magazine back in 1997. That was a long time ago and some of these industry-founding companies are still alive and kicking and even have the same name. Deltathree is one such company and they are one of the pioneers of VoIP and I remember visiting their offices in the mid-nineties.

I am always interested in hearing the thoughts of these early VoIP pioneers. The credit for the success of the VoIP market today has to go to companies like deltathree that had the early vision before more recent companies decided to latch onto the VoIP market.

A great deal has happened in the VoIP market in the last few years but I wonder where we would be if the first few companies that launched IP telephony products and services weren’t around for so many years, trying new things to see what worked and what didn’t.

Moreover, the difficulty in navigating the VoIP market with its ups and downs certainly tests a companies ability to execute under the best and worst possible conditions. I always like to hear how companies dealt with the adversity and opportunities that the VoIP market has provided.

When given the opportunity to interview deltathree CFO and Executive VP Paul White, I jumped at it. Here is that interview:

As a pioneer in VoIP how has deltathree dealt with the ups and downs of the VoIP market?

We have literally seen a sea change a couple of times now in terms of people talking about the technology versus people adopting it. We have been at this for about a decade which makes up one of the founding companies in the Voice over IP (VoIP) space. I think the truly exciting part of the day and age we are living in right now is that we are really starting to see people interested in making use of all the great new capabilities that Voice over IP will lend them on a consumer basis.

The part that is now getting lots of attention and focus is Voice over IP to the end user, deltathree is really a leading enabler in this area.

First, we work with consumers directly via our iConnectHere brand that sells globally, which is unusual in this industry. We then leverage that business up the chain to resellers and service providers so that they can provide private label solutions and capitalize on the best of deltathree’s technology while leveraging their own selling and marketing efforts. All these services are built on the same sophisticated infrastructure and allow us to leverage the same core technology platform to cover the diverse needs of a global consumer base.

By serving individual consumers, small businesses, resellers and a wide range of service providers we have inherent diversity in our customer base to help balance the adoption rate of VoIP among our diverse customer types. We also serve customers global which adds further diversification to our customer base and helps buffer against the impact of various adoption rates and market sentiment.

Who do you see as your primary competitor today?

There are a host of different companies primarily doing small pieces of our overall offering. The competitive offering range from PC-to-phone on the narrowband side, phone-to-phone, where you would make use of virtual calling card type services, and broadband phone.

deltathree is one of the few companies that sell all three of those offering types, while most of our competitors are focused on one or the other. Skype, for example, is predominately focused on a PC-to-PC model that is actually hard to get revenues out of because it is predominantly a free model. They do spend a little bit of time on the PC-to-phone model. Vonage is totally on the broadband phone side and is almost exclusively focused in the U.S.

deltathree has the much broader span and coverage in that we support all the offer types globally, and the combination of our wider offerings and global distribution significantly differentiate us from our competitors.

When you look at customer types, we are also differentiated there. Most of our competitors are focused only on their own consumer brand. Vonage is well known for the amount of money that they spend marketing their name in the US. deltathree has a relatively large direct business, but it represents about 25% of our revenue; the other 75% is comprised of resellers and service providers. These customers are much harder to serve, because you need a much more diverse, robust infrastructure. At the same time, these relationships enable us to partner with big brands and jointly realize the significant margin opportunities where we can jointly leverage a large company’s well-known brand and marketing efforts, and our robust VoIP solutions for a win-win situation. That’s how we are differentiated.

Our primary competition on the service provider side are internal development programs and deltathree stacks up well against that option especially in terms of real VoIP market implementation experience, global capabilities, lower cost of development and most importantly time-to-market for getting a VoIP service live.

When did you realize the strength of the current VoIP upturn in the market?

We founded the company 10 years ago. At the time, consumers didn’t really have direct Internet connections, so we predominantly sold to telecom businesses. As consumers have adopted technology, they have moved from not just dial-up Internet usage, but to actual broadband connections. We have led that change with interesting applications that they can use to capitalize on those connections. So we offer PC-to-phone, which is predominantly a narrowband or dial-up type solution, on a global basis. A large percentage of the world has only narrow-band or dial-up connections, so this solution set is appealing to that market and we sell these solutions to both consumers directly under our brand and to resellers and service providers as private label offerings for their own end users.

Broadband access really changed the game for VoIP adoption, ease of use and quality of service. We have also led the industry in terms of broadband phone solutions. We were actually the first company to come up with a broadband phone type of solution several years ago. We have leveraged that experience to consumers directly, and increasingly to resellers and service providers. So at the top end, we have service providers like Verizon and SBC making use of our private label services. We also have hundreds of thousands of direct consumers through our iConnectHere brand.

What services will customers pay for?

A major trend we are seeing overall is people moving increasingly from narrowband adoption to broadband adoption. As consumers get broadband in their house, they are able to pick up a feature richness that they couldn’t get on the narrowband offering. Inbound and outbound calling is obviously a given, but it also features voicemail to email conversion, sophisticated call forwarding, find-me/follow-me features, and a significant price advantage, which is attractive to consumers.

What services are worth mentioning?

On the service provider and reseller front, which is the largest part of our business, we offer complete VoIP platforms to national and international service providers across a wide range of broadband technology platforms, including:

Traditional wireline carriers,
Cable companies,
Internet service providers,
Cellular phone service providers,
And consumer oriented retailers.

We are also seeing an increasing discussion about making use of VoIP technology on a converged wireless basis, meaning that cell phones will have two capabilities. It will be a standard cellular phone on the network of the cellular carrier, but it will allow you to plug into the wireless Internet, where Wi-Fi is the predominant technology of today, so you can get the best of both worlds. That’s where we see the emerging trends, and that’s what we are looking to capitalize on.

What does the future hold for VoIP? For deltathree?

We have three key priorities. Our first priority is to continue our track record of excellent business execution and further extend our organic growth story. We are doing this by capitalizing on the increase in the overall penetration rate of VoIP and specifically getting more market share of the overall base.

This is not a new priority – deltathree has been growing very nicely year-over-year, during the third quarter of 2005 our year-over-year growth was almost 30%. Many other companies are also growing quickly in this space, but growth alone is not the whole story. In our case, at the same time we are growing rapidly, we are maintaining and improving our margins and at the same time, simultaneously significantly improving the bottom line. That’s what I call excellent business execution, and as we move into 2006 and 2007, we are continuing to be focused on doing the same thing.

Our second key strategic priority is on potential intelligent acquisitions that will help us to accelerate our growth. By this I mean strategic acquisitions of companies that are in one or more of our primary business segments where we can move their customer base to our infrastructure and thereby capture the revenues and eliminate the costs.

The third key strategy priority is looking at other types of services that are complementary to what we do today that represent an expansion, that leverages our core capabilities. For example, we are almost entirely focused on the consumer market. We are looking hard at whether or not we want to get into the small and medium business market. So these are the three key priorities that we are focused on.

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