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This installment of TMCnet's "Executive Suite," a feature in which leading executives in the Voice over Internet Protocol/communications industry discuss their companies’ latest developments as well as providing analysis on industry news and trends.


Technology Marketing Corporation President and Editor-in-Chief Rich Tehrani recently interviewed Mark Zionts, CEO of Cantata.

 

Marc Zionts

 
 
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Cantata's CEO Marc Zionts


Rich Tehrani’s Executive Suite is a monthly feature in which leading executives in the VoIP and IP Communications industry discuss their company’s latest developments with TMC president Rich Tehrani, as well as providing analysis on industry news and trends.

What new things can we do and where can we do them? Those are the two questions asked each day by users of communications devices, like cell phones, PDAs, softphones, and the like. For the customer, the answer, ideally, would be everything and everywhere. That, of course, presents dilemmas for the service provider as well as the hardware developer, for they must not only ensure the services are available, but that everyone involved realizes benefits, either financially or in the form of services rendered.

When Cantata Technology (News - Alert) was established in 2006 through the amalgamation of Brooktrout Technology and Excel Switching Corporation, that was the challenge it faced — how to ensure everyone in the value chain gained something, from partners to customers to end users to Cantata itself. It’s not a simple proposition, as there are many factors in play, including geography, demand, finances, and regulatory issues. I recently spoke with Cantata’s CEO Marc Zionts, who explained some of the nuances of the creation of an integrated company like Cantata, as well as the intricacies involved with achieving the company’s goal of enabling anytime, anywhere IP-based communication.


RT: What are you seeing in the IP Communications space?

MZ: First, I like the direction you’ve gone with SIP Magazine as well as IMS Magazine, because SIP and IMS are fundamental to what we’re doing. If we see a big trend, it’s clearly the emergence of VoIP services and IMS.

That’s pretty much driving what we’re doing, especially from our perspective of not just thinking about it from a carrier role, but thinking about the whole picture, including fixed/mobile convergence. This is a theme that you’ve heard from us before, but it’s one of the fundamental reasons for combining Brooktrout and Excel together — you have both the enterprise channel and the carrier channel.

Developing products is easier than developing a presence in a channel into a vertical market. With Cantata, we have created a company that can bring this technology into both vertical markets, which is very important because the line between the two is clearly erased — I don’t know if I would even say blurred, but erased, in terms of how services are provisioned.

Whether it’s call center services, unified messaging services, IP Centrex, IP PBX, or what else, IMS is really revolutionizing things in terms of how does the service provider think about the products they are going to offer, and also how an enterprise thinks about the services they need and where and how they’re going to get them. So, IMS will have a very significant business impact that goes above and beyond just the carrier world.

RT: What do people think of the name change?

MZ: I think they fall into two camps. There are the people that get it right away. They often have a musical background and they are familiar with what a cantata is — it’s a musical composition — and when they see the logo, they understand that it is the abstraction of a measure. We have partners who build applications, which are kind of like notes that, together, form a composition. So, we’re like a cantata, and many people understand the thought process behind it.

But the world is interesting, and there are others that think we made up a word. Still, when we explain the thought process behind it, they understand it much better and appreciate how much went into it.

What I am also happy about is that, since we’ve rolled out the name — and I have been in Asia and Europe and jut came back from the Middle East — and there are people who like it. It makes me happy that I haven’t offended anybody; nobody has come up to me and said, “Do you realize that means you don’t care for my mother,” or something like that. I think it has gone as well as a change can go, but sometimes you have to explain it; sometimes you don’t.

RT: Is there any truth to the rumors about you buying the Dialogic division of Intel (News - Alert) ?

MZ: My comment is no comment. But what I can certainly comment on, from an overall standpoint, is we just combined these companies in October and it’s going well. We are excited about our product roadmaps and our internal growth plan.

That being said, we have now acquired a couple companies. We believe in the consolidation in the industry, from both a service provider standpoint and an equipment provider standpoint, and we don’t think the Lucent/ Alcatel (News - Alert) deal is the last big one that will happen. I think you will continue to see consolidation just like you have seen AT&T and Bell South, Telefónica and O2.

I think it will continue as a theme around the globe; it certainly makes sense. We have a great platform here; we have many capabilities here; and we will continue to be smart and look at opportunities out there and consider if they make sense. The key driver, of course, is looking at things from the customer’s perspective.

If the customers in our channel, enterprise or carrier, are buying products from somebody else, would they get more value if they could get that product from us instead? Would the customer benefit from a move? That’s how I rationalize consolidation.

I also try to generate ideas about where I should look for potential targets for mergers or acquisitions. So, nothing specific, but it’s generally our number one task to run our business, number two to grow our business, and number three to keep our eyes open for other opportunities.

RT: I keep hearing just about the pain of Sarbanes-Oxley and how companies are almost buckling under having to deal with it.

MZ: It’s like Y2K in a way. Some people just went nuts about it and they changed the way they do business, not necessarily because they had to, but they didn’t know how not to. Some people have responded similarly under SOX, but even if you haven’t felt a major impact operationally, there’s certainly still a cost — a real cost from an accounting perspective, from a directors’ and officers’ insurance perspective, from a legal expense standpoint, and that tax is meaningful. Imagine what many companies could do with an additional three million dollars to spend each year, or if they generated an additional three million dollars in revenues.

How would that drive stocks and then enable you to use that stock for further acquisitions? The authorities should think about this and look at cost benefit, because we are derailing innovation in the startup world. If Microsoft ( News - Alert) had had a three million dollar penalty tax when it was young, would it have grown as fast? Would it have become the giant it has? Of course, for the Microsofts and the Oracles and the Intels of the world, despite being more than three million dollars, these costs are negligible as a percentage of their sales. But to that 100 million dollar company, it is extremely meaningful.

When you add the fact if those 100 million dollar companies are not generating income, they are not worth much and become micro caps — it is not fun being a micro cap these days. There are not many equity analysts that are going to write about you, and if they are, they are not important and you end up with very little liquidity in your stock. Then you have to sit back and question, what is the benefit of being public here?

You say to yourself: I don’t have liquidity; I don’t really have access to capital; I am not really enjoying this; I am not getting any benefits of being public; yet I have every disadvantage with SOX. Maybe I shouldn’t be public. That is why there have been more public to private deals than IPOs in the last couple of years.

RT: I didn’t realize that the trend was that high.

MZ: It is a huge trend; look at all of the private equity funds. Every one of them has raised billions and is raising new billions. Many are flush with cash, but you hear about some really, really big deals out there, where multi-billion dollar companies are being privatized.

RT: Is there an arbitrage play there? I suppose that even these private companies are adhering to some of the Sarbanes-Oxley concepts.

MZ: We have a big six accounting firm and we run our business according to the gap. We think about stocks, but we don’t have a full stock program here. There is no need.

RT: So there is a little bit of an arbitrage play, kind of like VoIP in the beginning, like going private.

MZ: You cut out that expense, without a doubt. The other thing is that it is hard for a public company to change. Are you staffed right? Are you working on the right products? Does your product portfolio have the right focus? Should you discontinue some products? When you are in the public eye, those are all things that are really tough to do because you have to be wary of sending the wrong messages.

For instance, maybe you don’t need 50 people in your business any longer. You don’t want to say, “I just let go 50 people,” because people will think you are not growing any more. So, even making sound business decisions is harder when you are public. Indeed, it is a marvelous time to be private.

RT: Have you been following the Vonage (News - Alert) stock at all? It has, I think, more ramifications for our business than we would want.

MZ: I know today is its first day of trading. I don’t have any insights and I don’t know the particulars, but it seems like it is Vonage’s idiosyncrasies versus the industry? There have been many articles about its service, which seems to imply they may have issues.

RT: My take is that, because the company doesn’t really want to be profitable and cares more about market share, it has immediately alienated the institutional investor, and the volatility that we are going to see in this stock is because they are selling a lot of these shares to their customers — they like Vonage, but are not necessarily the right kind of investors.

MZ: Vonage will end up with hedge funds and skittish retail investors, without a strong base of institutional longs investors. But the day is early and the stock market is like Chicago weather: If you don’t like it, it will change — give it a few hours.

RT: You mentioned the enterprise, call center, and service provider markets. What are you seeing in terms of growth rates from service provider to enterprise? Are you seeing a division between those different growth rates?


MZ: In our case, I don’t know that we are, but we have kind of a different road, in that we play markets and have some products that are traditionally oriented for each market that are somewhat mature products. Then we also have products in each market that are growth oriented.

So, it may just be the idiosyncrasies of our situation, and I don’t know that, given our size, that we are a macro-economic indicator of the two sectors. Certainly, the enterprise space is good for us and we are seeing growth there. My fantasy is for corporations to start spending again on technology in a big way. The last time the corporate market opened its checkbooks was seven or eight years ago, heading into Y2K.

Since then, there hasn’t been a real technology refresh. There has been a kind of incremental spending, but largely, there are companies, in this country in particular, that are sitting on record amounts of cash but are not spending it. So, while the enterprise is fine, I have this dream that someday, there will be a catalyst for change. Maybe it is VoIP. Maybe VoIP will cause people to say, “OK, let’s try and upgrade everything.”

On the carrier side, our carrier business is disproportionately international. Our total business is 50/50 (U.S. vs. International), but enterprise is disproportionately domestic and carrier is disproportionately international. Because the subscription growth rate in mature markets is not as high as in many developing markets, the name of the game in the carrier world is application growth and service growth. The irony is that that the newest and most innovative services often are rolled out in the fastest growing markets before they are rolled out in more mature markets. But that may be a function of people’s philosophy on network engineering. U.S. and Western European companies are typically larger carriers — the Tier 1s — and they are not likely to roll out a new service until it is gold plated.

It is a very different perspective. In markets like India or the Middle East or Southeast Asia or Eastern Europe, where there is still phenomenal growth, they are also very innovative and quick to try new applications. One of the reasons the carrier business is disproportionately international is simply that you have higher subscription growth and new services growth internationally.

RT: I expected you to say that the carriers are spending more because they are upgrading to the IMS architecture.

MZ: We have growth in both and, again, I caution you to use offset as a macro-economic indicator. I think you get much better feel about trends when you talk to a Lucent and an Alcatel, a Sysco or a Nortel ( News - Alert) just because of the dollar volumes. Just think about our size. We have a very particular model. So we enjoy growth on both; one tends to be domestically oriented, the other tends to be more internationally oriented.

RT: Let’s jump into the future and where we are going with technology and VoIP and communications. What do you think we will see in the next five years?

MZ: Five years is so long. I am trying to figure out what is going to happen later this year. I know what is going to happen tomorrow. I would hope that, five years from now, IMS is a reality in that the initial trials and the initial implementations have gone well and that IMS has become a reality. That would be my greatest hope, and it may be that we will be in some next generation of IMS or testing some next generation of IMS, and that the world will have ubiquitous broadband mobile services that are highly personalized. If that happens in the next five years, we will be in good shape.

That said, will there still be much tedium? Will there still be people at various states of evolution? That is the one point I would want to make, that you can’t give up the installed base; you can’t ignore it. There will still be people trying to get from where they are to where they want to go at various times.

It will almost certainly vary from market to market. Take India, for example, where mobile subscribers have gone from five million to 70 million in five years and are expected to go from 70 million to being the second largest mobile subscriber market in the world in the next five years. I don’t think that IMS necessarily plays out there.

Basic, super cheap 2G may be the right solution, because, if you are taking people from no communication to communication, or to people who just want to do instant messaging because it is cheaper, because they have low incomes, and the carrier has to make money on sub-ten dollar, maybe even sub-five dollar ARPUs, there may be a different requirement.

So, I don’t think that, as much as I am encouraged and excited about IMS, that it is necessarily a one size fits all world. There will certainly be different economics that play out, which is why we believe in our product approach. We have products that are pure IP oriented, but we also have a lot of products that can deal with the different migration patterns of different customers and different regions. Sure, I hope we will be there, but I am sure certain places will not — for good reasons.

RT: I hadn’t actually considered the third world market, in terms of IMS.

MZ: India really has two worlds. There are 200 million people that are middle class, which is bigger than our middle class, but there are another 800 million people who are poor. If you want to get the handset market to 350 million users, you have to have a product that dips below that middle class market into the poor market, which means you will need very, very cheap handsets.

The model there is a little different than we’re used to. The carrier doesn’t provide a handset for you. Each subscriber must go buy their own, which means manufacturers are coming out with ever cheaper handsets. It is a marketplace that is difficult for Motorola ( News - Alert) or Nokia (News - Alert) or Erickson. Instead, there are homegrown cell phones, because they want to be able to sell these things — and make money selling them — for $20, because there are 800 million people each making less than $1000 a year.

RT: It is a very different market than what we are used to here, right?

MZ: I am always amused when I think about places like the Philippines or India, where they actually have very low ARPUs but still make money, whereas here we have with giant ARPUs that are not necessarily making a lot of money. It goes back to my comment about the timing of service rollouts and whether they have been gold plated or not. We have costs that correspond to our ARPU and they, likewise, have a similar scenario.

RT: In terms of the service provider world and competition, what do you make of the roles of VoIP providers?

MZ: As is traditional with an early market, there are literally thousands of ISPs. Then comes a natural sorting process, where some go under, others consolidate, and, eventually, natural leaders emerge. Not only do you see that in the ISP world, it happened with the mobile market as well. Still, never count out the traditional incumbents. People predict their death far too often. They are smart; they are powerful; they have tremendous cash flow; and they are not going to sit idly by and let things happen to them.

This scenario is not unique to the U.S. In Hong Kong, at one point there were six providers; now there are three. Ultimately, you don’t ultimately so many types of providers, though VoIP is a little bit different. VoIP promotes somewhat niche oriented providers, so maybe there is room for more providers, but there will probably still be a few giants.

RT: The other thing about VoIP is that you don’t necessarily need the infrastructure. So it is just a joining of these virtual companies, regardless of geography, whereas the mobile and ISP markets are definitely a local product.

MZ: Right, which is why I said there could be niche providers, because VoIP is different. There could be people that have specific vertical packages and services. They just have to make sure there is value there and that they can get the distribution they need to have a logical business model.

By logical business model, I mean does everybody in the value chain make money? That is one definition of a logical business model. Certainly, we have seen markets where that is not the case — you mentioned Vonage. But, in the end you have to provide your customers the opportunity to make money, and if they are offering a service, they have got to make money on it. If you are offering a service with which they plan to save money, there has to be economic value in it commensurate with what they pay.

Of course, you also have to make money. If your model doesn’t include everybody in the process, there is something unholy about it and it likely won’t survive the test of time. Think about the early days of broadband. I was there with WestTel. Those were tough days. With WestTel’s forward pricing, the chip vendors were not making money, the modem vendors were not making, carriers were not making money. In fact, nobody was making money. So there had to be a time out to ask, “What is good here? How do we keep this up?” Sure enough, corrections were made.

With VoIP, you still have to look at that, too. What is the business model and, at the end of the day, is everybody in the model receiving an appropriate value equation that satisfies their needs? If not, something has to change. Hopefully, we all learn lessons; certainly my lesson from the year 2000 was to be more disciplined and understand the fundamentals — growth is good, profitable growth is better.

RT: Growth is good, profitable growth is better?

MZ: The implication may be less growth. If you were to reinvest all your profits into growth, you would certainly be growing faster. But would you ever get back to a sustainable profitable business equation.

If you decide you are going to grow by cutting prices by 10%, you will grow, but you must understand that you will never get that 10% back. You are not likely to come back later and raise prices 10%. So, it is important to understand that you are making very deliberate, long-term decision.

RT: What do you think about Net Neutrality and the IMS wall-guarding comments that are floating around?

MZ: I don’t know that I am the best expert to comment there. It seems like this is not a new debate — you kind of saw it in Japan and there is just natural tension that exists. Carriers are trying to figure out how they can capture more and different kinds of revenues. Third parties are trying to figure out how they can provide services without having to pay carriers. I think it is a natural tension that is solved better by business arrangements and business logic than political debate. Yes, I am radically simplifying, but I think it resembles many things we have already experienced, like AOL and I-mode in Japan. These things get sorted out. It all comes down to my statement earlier: How does everybody make money?

RT: Now that you have formed a single integrated company, what do you see as your greatest competitive threat?

MZ: I think that we have a couple of things to think about. First of all, on a product basis, we have individual competitors we look at and we do the traditional kinds of analyses on them in those product areas.

We also have strategies. In some cases, risk may be market risk that we can’t really have a strategy with, because we may have a known market — like for the integrated media gateway. We believe we have a better mousetrap and we are going to take market share from a couple of companies we have targeted. To me, there, the primary risk is one of execution.

Can we do it or not? It is not a market risk, because the market is there. It is not a timing risk, because, again, the market is there and it is known. So, can we have the product that has the differentiating features? Can we sell it effectively against the competition? Can we grab the market share?

RT: The integrated media gateway came from Excel or Brooktrout?

MZ: This came from the Excel side. From Brooktrout came the media server, which is a different kind of play because there, the market is clearly nascent. What is the global market for application independent IP media servers? It is a pretty small market with just a few players.

A recent Infonetics report ranked us number one for the first time over Convedia — that’s the good news. The bad news is it is a small market, so my risk here is more a market risk: When and where does the market happen, versus execution. It will move to execution when the market has been defined. Still, we are doing everything we can within the small market.

So, I kind of look at each product line in that manner. If it is a more mature product, there may be very little risk from competition because maybe it is mature to the point that there are very few natural competitors — like Excel’s traditional product ESP. If think back to the late 90s, we would have been duking it out with Semafor, Harris 20/20, and Red Com, none of which are around today. The market is more mature.

If you look for a carrier grade, switch-based converged services platform how many are there? There are not a lot. That is the state of the market. Or if you look at the traditional Brooktrout business with facts, what is our market risk there? It is not a lot. So you kind of dive into it a bit, but I can’t give you a single black and white answer as to our competition. I actually started diving into the different segments where our technology is applicable and have different viewpoints based on each market

RT: What do you hope for the future of the communications market?

MZ: I have never, like you, been a biased person, and I have never been in any other industry. The future to me is ubiquitous, broadband, mobile communication. You want your mobile device to look like your desktop device. You also want the applications on your desktop to travel with you wherever you go. It’s interesting that, sometimes, to think about the future, we put ourselves in our children’s shoes. Our children will grow up never having had a wired phone in their life. Why would they? That would be as ridiculous as having a remote control for you TV attached to the wall. Why did you have a phone tethered to the wall? What was that about? Are you crazy? So they will just think differently. They will think about communications differently.

Also, it has proven a benefit to have been in this industry, because it has made me a fairly intuitive user. Others have to learn everything and new technologies are more challenging. Along those lines, for our kids, the notion that they would ever look at a user manual is ludicrous to them. If you have to look at a manual there is something wrong with you — either there is a problem with the device or there is a problem with you. It is hard reflecting on the future, but I think if you pose the question to a pre-teen or teen, you might get an interesting glimpse.

Let’s face it, some of the biggest areas of growth in our industry were complete accidents, or things industry professionals would have laughed at. I’m talking specifically about SMS, because all of those brilliant people who scoffed at it. Then it happened, an accidental killer app that is now a multi-billion dollar market and still growing. It is huge in places like the Philippines, which is, I think, the biggest SMS market in the world. There are operators there that have 50% of their revenue being non-voice.

Then there are music downloads. Did the brilliant people in the industry think ring back tones and ring tones would be a multi-billion dollar industry? What is driving this? The youth market.

The other market I look at with the kids is harder to figure out. What are they going to want from video? What are they going to want from a chat? What are they going to want from a video chat and other applications that become available with more and more bandwidth? Overall, my long term outlook is very positive. But talk to young people to understand the future more, because we who are approaching our 30s and 40s and 50s are no longer the ones to predict where this is all going, as frustrating as that may be.

So you think about communications, and think about the business market as a market where the pricing is relatively inelastic and where people want services. I think of myself; I go with my Blackberry, and I don’t care where I am. I am going to use it; I am going to talk on it; and I am going to use the device and try to have functionality equivalent to being in the office.

It is clear there are many details involved with tackling a task as complex as providing ubiquitous communications on a global scale. It also is interesting to hear how different the game is in developing markets and how that plays into business strategy. Perhaps most intriguing, however, is the proposition that the formula for success is, in theory, as simple as ensuring everyone in your business model benefiting from the relationship. If Marc’s hope is realized and we see another spending spree in the corporate world, that theory may suddenly become easier to realize.

Rich Tehrani is President and Editor in Chief at TMC.

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