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Why Vonage's TokBox Buy Is a Big Deal: Page 2 of 3

Continued from Page 1

Access Carriers Face Challenge Selling IP Services

Vonage bought TokBox from Spanish carrier Telefonica, which itself had picked up the company in 2012 as part of a massive move into digital, under the Telefonica Digital umbrella. Now, less than five years later, each company moves on.

Before the Telefonica acquisition, TokBox had raised $26 million in funding. It sold to Vonage for $35 million. Clearly, the value of the business changed little under Telefonica management. We have to ask why Telefonica didn't go forward with its initial plans for TokBox, or, alternatively, why TokBox appears to have struggled as part of Telefonica. While TokBox may have been unable to innovate inside a large company, I see Telefonica's struggle to leverage the TokBox acquisition as a reflection of the challenges access providers face in delivering value-added services in the IP age.

I believe carriers that operate large physical access networks (AT&T, Bell Canada, China Mobile, Deutsche Telekom, Orange, Telefonica, T-Mobile, Verizon, Vodafone, etc.) face two major roadblocks to being successful in delivering value-added services. Together, these may indicate that the future is a tiered structure with some companies providing the access/network layer and other companies providing the services layer. This is essentially how the IP-based Internet works today. Most users have an account with an ISP for their access, but don't use that company for services (email, search, social, purchases, maps, etc.). Other companies deliver those services over the top (OTT), just using the IP path to the endpoint.

The first challenge is the relationship between the services and the underlying network.

With IP, the network is abstracted from the actual service being delivered in the IP packets. Other than quality of service (QoS) and routing paths for security, the service (application) and the network have minimal intelligent interaction. This is a dilemma for access carriers. One key way an access carrier can differentiate is to integrate its own OTT offering into its underlying network in such a way as to deliver a differentiated experience. The challenge is that while the existing access customers may adopt the service, nobody outside that base would likely do so.

The access market is very fractured. Let's use the wireless market as an example, with AT&T and Verizon each holding less than 4% of global subscriptions, according to World Atlas statistics. This is an issue of size versus reach.

Assume for a moment availability of a new IP-delivered communications service that 100% of Internet users want, either from their access or OTT providers. As an access provider, if AT&T or Verizon were successful in getting 50% adoption for that service from its access customers, that would translate into a 2% global share (half of the 4%). If an OTT player like Facebook or Google were to deliver a solution that has broader traction and captured 20% share of the users on the new service, that user base would be 10 times larger than the access user base -- and in cloud, scale generally wins. In summary, delivering services that are tightly integrated with the underlying access network may drive initial adoption, but the attainable scale in an Internet world is not sufficient to compete with the volume OTT vendors can achieve cross the entire Internet-connected population.

The second major factor is early adoption and success.

Any new service or technology goes through an adoption process over time as it is used and optimized. The process typically begins with early adopters, representing a small segment of the market. In most new areas, the early adopters provide the test beds and feedback to iterate the solution for mass adoption. Again, market fracture becomes a challenge for access carriers to lead in this process.

If an access carrier with a 10% access subscriber share brings a new service to market that only interests 5% of the overall market at that point in the adoption curve, the access carrier will have the same 5% of its 10%, or 0.5% of the total market. Additionally, because of market forces an access carrier's early adopters will, in all probability, be predominately from its own geographic area – and this in turn would reduce the value of feedback for generating more global offers. Again, an OTT player doesn't have the same access restriction, so can market across all carrier access providers equally. The ability to gain early adopters that can help shape global offers is critical. By limiting the early adopters to a geographic area or access network almost assures the resulting services will be challenged to get broader acceptance. This again leads to the OTT vendor having an advantage through the innovation period due to the larger diverse footprint.

Continue to Page 3: What About TokBox?