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The Tax that Could Kill VOIP

You've got to hand it to the U.S. Internal Revenue Service. In an attempt to tax the fledgling Internet telephony market, it is apparently planning to use an excise tax enacted in 1898 during the Spanish American War. The 3% federal tax could be applied to changes in technology used in “telephonic or telephonic quality communications”. This seems a strange approach given how the U.S. has bent over backwards to not tax e-commerce activities to encourage the industry's growth. You have to think there are just too many bean-counters in the IRS with too much time on their hands, or the major telecom carriers have got some pretty good lobbyists in Washington. If you take a step back, a 3% tax shouldn't scare the Internet telephony industry and new players such as Vonage Holdings and 8X8 because it seems to be a small cost to play in a fast-growing industry. What Vonage et al should really be concerned about is the aggressive strategies adopted by large telcos such as AT&T.

RIM's Chinese Strategy

What's next for Research in Motion? What about the huge Chinese market? It seems it's only a matter of time before the folks of Beijing get addicted to the Crackberry amid reports RIM has been working with CSL and Hutchison Mobile about the launch of Chinese-based services soon. Here's an intriguing back of the envelope calculation: RIM has about 1.2 million subscribers. If it can capture just 1% of the Chinese market, that would give it another one million customers. Interesting…..

The Plot Thickens at Nortel

Mark Evans, Financial Post
So Nortel Networks Corp.'s books were apparently cooked after all. The burning questions are what exactly happened, who fudged the numbers and what were their motivations.
Until Nortel says otherwise, the responsibility for the accounting fiasco lies at the feet of the three executives fired “for cause” in April — chief executive Frank Dunn, chief financial officer Doug Beatty and controller Michael Gollogly.
According to unidentified sources cited by The Wall Street Journal, the company's board has “determined the company inaccurately employed an accounting manoeuvre to make it look profitable, when in fact it wasn't.”
The “manoeuvre” in question has to do with complex accounting rules involving things such as writedowns for assets and bad loans. Nortel had billions of dollars in play from acquisitions and equipment deals done during the telecom boom from 1997 to 2000.
If the Journal story is accurate, it confirms speculation that has been bandied about since Nortel's accounting problems evolved from a minor problem into a financial disaster in late-April.
So what prompted the financial massage? One argument is the short-tempered Mr. Dunn was hell-bent on wrapping up the company's extensive restructuring by returning the firm to profitability last year at a time when the telecom equipment industry was still in a deep slump.
Mr. Dunn could have made it clear to senior executives it was paramount Nortel post profits –the sooner, the better. With firm marching orders, these executives and their staffs may have decided to play it fast and loose with accounting rules, which can be more art than science. A few numbers get shuffled here and, voila, profits.
This, in turn, triggered a company-wide bonus plan in early 2003, and everyone went home happy. Mr. Dunn looked like a hero for nurturing Nortel back to health, while he and thousands of his employees received some major walking-around money.
If this scenario materializes, are Mr. Dunn, Mr. Beatty and Mr. Gollogly on the hook? Do they bear responsibility for ensuring the accuracy and legitimacy of the company's accounting systems? In a world obsessed with the Sarbanes-Oxley Act, they have to take the blame if they signed off on the books.
A more sinister prospect is Nortel's books were deliberately torqued — driven by a bonus scheme the board — which includes new CEO Bill Owens — put in place to motivate people who had watched tens of thousands of their co-workers eliminated through layoffs, office and plant closures and asset sales.
With more than $140-million of bonuses within reach — slightly more than what ex-CEO John Roth made in 2000 — it is easy to understand how avarice may have come into play. Given the enormous wealth that executives received during the dot-com and telecom booms, it is possible many people within Nortel believed their bonuses were entirely justified.
(Nortel said yesterday it intends to recover any bonuses paid to executives found guilty of wrongdoing.)
If all it took was a little number fudging here and there, who was really going to get hurt? Employees would be rewarded, while investors would be happy if Nortel shares bounced back a little bit. It seemed so simple and, more important, lucrative.
So far, Nortel is not providing specific details.
As investors showed yesterday, Nortel will — for the most part — be valued on its business prospects as the telecom equipment industry appears to have its first year of growth since 2000. Nortel is well positioned to capitalize on demand for equipment to run Internet and wireless networks.
This week, Nortel investors have been swamped with new information. They have been told: the company will provide an update next month on the impact of the restated results, which cover the periods between 2001 and 2003; preliminary first and second-quarter results will be disclosed in August; and the board will claw back unwarranted bonuses.
All of this suggests the investigation by the company's independent audit committee, which started its work in November with advice from a major law firm in Washington with connections to the U.S. Securities and Exchange Commission, is close to completing its work.
It may not have all the answers yet but the committee, headed by ex-Royal Bank of Canada chairman John Cleghorn, probably has enough information to ascertain what roughly happened.
What has become abundantly clear is the committee believes Mr. Dunn, Mr. Beatty and Mr. Gollogly had the ultimate responsibility for making sure Nortel's accounting systems were accurate. It may be they were ignorant of what was happening within the ranks but there are no excuses these days in the post-WorldCom/Enron world.
A major issue going forward that Nortel will have to address is the class-action lawsuits being launched. If the books were manipulated, some analysts believe the company could cough up as much as US$500-million in settlements. It is entirely possible Nortel may be making settlements or defending itself for the next two to three years.
As Mr. Owens battles to restore Nortel's credibility, he will also have to deal with the fact the fallout of the company's accounting problems will not vanish any time soon. It could be some time before Nortel can start with a clean slate but at least you get the feeling the healing process is underway — even if it is embarrassing, painful and expensive.

Nortel: Who did it?

According to the Wall St. Journal, Nortel Networks' books were cooked by senior executives. If this is accurate, you'll see the class-action lawsuits coming from miles away. The big question is who perpetuated the financial massage and why did they do it. Are we talking about fraud and criminal deceit here, or well-intentioned but flawed interpretation of accounting rules so Nortel could return to profitability. One suspects the answers are not that far off.

Video-on-Demand Gains Momentum

Mark Evans, Financial Post
Thursday, July 01, 2004
Like many new consumer-oriented technologies, video-on-demand has experienced a number of growing pains. Among the challenges are getting people aware the service exists; making sure it is user-friendly; and offering consumers enough quality titles — movies, children's shows, documentaries — to make it attractive and, more important, worth paying for.
In Canada, Rogers Cable Inc., Videotron Ltee, Shaw Communications Inc. and Cogeco Cable Inc. have been busy over the past year or so with VOD strategies. Rogers, for example, now has more than 1,400 titles available. Many of them, however, are more filler than fulfilling, and the on-screen menu is difficult to navigate.
Rogers has made VOD, which lets people request an available title whenever they want, accessible to 1.9 million of its 3.2 million customers. It expects to have 90% of its network footprint covered by year-end.
Mike Lee, vice-president of product development, said Rogers has seen “pretty decent” pick up, with 30% to 35% of subscribers using VOD each month. “The numbers are where we expected them [to be],” he said.
“We have a pretty optimistic perspective in terms of what it would contribute to the business. If loyalty is a measure of the effectiveness of a product, 85% to 90% of the people who bought [VOD] before, bought it the next month. Like Alexander Keith's beer, people who like it, like it a lot.”
Clearly, content is going to be a crucial part of VOD's success. When it comes to movies, consumers will likely be not too enthused buying something months after it has appeared in theatres and retail outlets such as Rogers Video and Blockbuster. At the same time, consumers will not settle for movies that are second-rate — even if they are relatively new.
This explains why Rogers, et al have moved into children's programming, documentaries and television series until they can get access to first-rate movies. Videotron, for example, has been offering Star Academie — the French version of American Idol.
The VOD market's growth could get a jump-start with the recent introduction of subscription video on demand (SVOD) service. Unlike VOD, which works on a pay-as-you-go basis and requires consumers to watch a title within a short period of time; SVOD allows users to buy a monthly subscription so they can view titles whenever they want.
Earlier this month, Rogers unveiled its first SVOD movie service with The Movie Network. Rogers' customers can choose from 40 movies at any time of the day and as many times as they want. Like a VCR or DVD player, movies can be stopped, paused, rewound, fast-forwarded, or replayed at no additional cost.
For many people, a SVOD movie service is appealing. Couples with young children, for example, will appreciate the ability to watch a movie later when they finally get a few hours of quiet time.
SVOD will really get interesting when it gives consumers the ability watch popular television shows around the clock. What would you pay to instantly access The Sopranos or Six Feet Under? This would be a popular option for people who do not want to go through the bother of taping shows, or borrowing tapes from co-workers.
For VOD service providers, SVOD of prime-time television shows would be the “holy grail”. Unfortunately, it will probably be some time before this service materializes because VOD has to gain a much bigger foothold, and the financial arrangements between service and content providers needs to be worked out.
“It is hard to predict exactly how far we are away but every broadcaster group is talking to us and interested in how they can make it available on the on-demand service,” said David Purdy, a senior director, digital television products with Rogers Cable. “Global, CHUM and Astral are probably the three most active with us, and the ones doing the most experimental work today.”
As VOD and SVOD become more popular and the programming improves, there is little doubt it will change when and how we watch movies, documentaries and television shows. It is enough to make couch potatoes everywhere kiss their remote controls.

Canadian VOIP – Tepid Demand, Lots of Choices

Canadians have been slow to adopt Internet telephony but a sea change is coming
Mark Evans, Financial Post
June 24, 2004
According to a recent poll by Ipsos-Reid, Canadians have been slow to embrace Internet telephony and there appears to be little demand for the service among consumers.
However, this has not stopped an increasing number of companies from jumping into the market. The playing field now includes Primus Telecommunications Canada Inc., Comwave Telecom Inc., Vonage Holdings Corp., Nicer Technologies Inc. and BabyTel. Telus Corp., AOL Canada Inc., Saskatchewan Telecommunications Holding Corp. and Yak Communications Inc. plan to launch services later this year.
Jon Arnold, an analyst with Frost & Sullivan, said the Canadian Internet telephony market will be slower to develop than in the United States because telephony service in Canada is high-quality and relatively inexpensive.
“There is not a lot of inertia to push people to look at new alternatives. We're just spoiled,” he said. “For consumers, price will attract them but I don't see enough margin for Voice over Internet Protocol providers in Canada to drop prices to get a lot of [customer] migration.”
Frost & Sullivan estimates there will be 128,000 Canadian Internet telephony customers by the end of this year; 375,000 in 2005; 713,000 in 2006; 1.15 million in 2007; and 1.58 million in 2008. In the United States, subscriber growth is expect to jump to 1.16 million this year from 100,000 in 2003. By 2008, Frost & Sullivan forecasts there will be 16.5 million subscribers in the United States.
Among the biggest challenges facing many competitors is making consumers aware that the service, which uses VoIP technology, is available, and educating them on how it works. This is tough, grunt work that must be undertaken by market pioneers. The reward for being first to market is they will be viable companies when the market eventually gains mainstream momentum.
Ted Chislett, president with Primus Canada, said the education process has taken more resources than the company expected when its Internet telephony service was launched in January.
“We spent a fair bit of money when we launched with radio campaigns, and our call centre spends a lot of time educating customers about the details about VOIP and how it works,” he said. “We are seeing people are intrigued with competition and choice. They call in and you have to explain things like they need high-speed Internet.”
Ipsos-Reid said educating consumers about the benefits and features of Internet telephony will be crucial because only 23% of Canadians are aware of the term VoIP, while 20% are aware of the term IP telephony. Of those who are aware of VOIP or IP telephony, only 13% admit to understands a “great deal” about the technology. Until consumer awareness grows, Mark Laver, a senior research manager with Ipsos-Reid, said “VOIP will likely only be a niche service found in the households of Canadian technology enthusiasts.”
However, the Internet telephony market could be jump-started by the entry of major telecom carriers and cable firms. While Telus will start offering a service this year, Bell Canada has no immediate Internet telephony plans and Rogers Cable Inc. will not get into the market until at least mid-2005.
In the meantime, Primus should be a market leader because it has a well-known brand name and 900,000 long-distance customers, while Vonage has established itself as an industry pioneer after raising more than US$100-million in private equity.
There is no doubt price will play an important role, particularly among smaller competitors. Comwave, for example, is selling a basic package, which includes 411 and 911 service, for $14.95 a month, while BabyTel is offering a package that includes 500 minutes of long-distance in Canada and the United States for $16.95 a month.
Yuval Barzakay, vice-president of Canadian sales at Comwave, said his company is always battling on price as a market bottom feeder. “We are the value proposition,” he said, adding the real competitive threat will be the entry of cable companies and their use of product bundles. Another marketing tool will be value-added services such as Web portals to check your voice message — with the same look and feel as e-mail.