deltathree Hopes Shakeup Spells Success

Yet another VoIP provider faces an uncertain future. Wholesaler deltathree Inc. has been kicked off the Nasdaq, and is replacing longtime president and CEO Shimmy Zimels. The problem that plagues the VoIP industry – selling service at unprofitable prices – has seeped into deltathree’s operations, said analysts and telecom insiders.

Indeed, the Israel-headquartered company, which runs a division in New York, reported a fourth-quarter 2007 loss of $5.2 million. On March 28, it was delisted from the Nasdaq because its stocks had sunk too low. At press time, deltathree’s shares were sitting on the Over The Counter Bulletin Board (OTCBB) at 14 cents, pennies away from the year-low of 12 cents.

Because of the ups and downs, deltathree on April 1 announced Zimels was resigning and that Dror Gonen of billing provider Comverse Technology Inc. would become president and CEO on May 31, after a transition period. Zimels’ resignation, however, was planned. deltathree and Gonen inked an employment agreement on March 26, the day after deltathree said it was moving off the Nasdaq.

Zimels told PHONE+ it’s time for new direction at deltathree. “Turnaround is always good so the company will do better, and that’s okay with me,” he said. Zimels, who ran deltathree for almost 12 years, will remain on the company’s board. He said Gonen will bring fresh market perspective and management to deltathree.

Patrick Monaghan, a senior analyst for Yankee Group, agreed. “Desperate times call for desperate measures,” Monaghan said. “deltathree needs to rethink their strategy and the best way to do that is by replacing Zimels. Any company presented with the same situation, potential bankruptcy, would do the same thing. This is a last-ditch attempt to right the ship.”

deltathree’s troubles come from competing on price, Monaghan explained. And that’s bad business, added Peter Radizeski, a telecom marketing expert and PHONE+ blogger. “CEOs need to realize that in today's market, you need to sell your services at a price that can afford a profit,” Radizeski said on the PHONE+ Web site on March 26, regarding deltathree. “Remember ‘profit’ from MBA school? It's what's left after you pay all the bills to deliver your service to your customers.”

Zimels said price competition “definitely” causes problems. But, he pointed out, from about 2001-2006, deltathree showed growth. “2007 was a challenging year,” Shimels said. That was because deltathree developed joip for Panasonic, a project that consumed “a lot of focus.” {vpipagebreak}

“We probably should have diversified resources among current and potential business,” Shimels said. joip is a VoIP service consumers use with Panasonic’s hybrid phones.

Still, one year out of the eight that deltathree has been a VoIP provider (it was a minutes wholesaler from 1996-2000) wouldn’t necessarily call for restructuring. Nonetheless, as investors seem to lose faith in VoIP as a TDM alternative, deltathree has to prove its place in the market. It hopes to do that by adding more incumbents, ISPs, cable companies and other VoIP providers as customers. Many of those sources are unproven, though, deltathree warned in its annual report, filed March 31 with the Securities and Exchange Commission.

Shimels said deltathree also is going to try to land more end users through its service provider and reseller channels.

Analysts seem skeptical. deltathree’s channel partners compete against the likes of Vonage Holdings Corp., Time Warner Cable and Comcast Corp., all of which spend “significant sums” on marketing, Monaghan said. “Smaller resellers who don't have big dollars to spend on marketing are at a huge disadvantage. It wouldn't surprise me if there comes a time where the only pure-play VoIP provider out there is Vonage,” he said.

Zimels doesn’t see it that way. deltathree, he pointed out, sells worldwide – Vonage doesn’t.

Stéphane Téral, principal analyst for Infonetics Research, was unconvinced. deltathree should be more specific about its global strategy, he said. “I think of wholesale VoIP and it’s already a crowded space with now iBasis that has emerged as the world’s third-largest VoIP wholesale carrier, behind AT&T, and Verizon.”

If global reach is deltathree’s sole distinction from competitors, it will need to do more than offer low-priced VoIP to more people to survive. Only deltathree can say whether it’s aware of that. Yes, it wants to market to more potential customers, and according to the annual report, is eyeing more acquisitions. deltathree bought the assets and customers of Go2Call.com Inc., a privately held VoIP provider, for $7 million, in February 2007. {vpipagebreak}

At the same time, deltathree’s stocks, as well as those of its counterparts, have hit the skids. Investors are lackluster about standalone VoIP, especially as the economy slows. For example, Vonage stocks remain below $2 even though the embattled company finally went cash-flow positive in the fourth quarter of 2007. Packet8’s provider, 8x8 Inc., has seen its stocks fall to 99 cents with a year-high of $1.57. Primus Telecommunications Inc., operator of Lingo, owns stocks worth 34 cents apiece. SunRocket Inc. no longer exists.

Meanwhile, cable VoIP providers are recording ever-higher profits, according to New Paradigm Resources Group (NPRG). Cable industry VoIP sales have skyrocketed from about $1 million in 2005 to more than $5 million, NPRG said in March. At the same time, incumbent AT&T Inc. and Verizon Communications Inc. are gaining ground, NPRG said. Such growth pits smaller niche players against carriers with big marketing and investment budgets.

The fact is, pure-play VoIP is not the money-making messiah the industry once believed it would be. The unanswered question is how will providers differentiate themselves and become profitable?

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