Winners and losers: Tom Evslin, chairman and CEO of ITXC, put his money on voice when many were backing data—it's a gamble that seems to be paying off - View from the Top - Interview

Telecommunications International, Nov, 2002 by Ken Wieland

If this industry were a horse race then data would have been the red-hot favourite a few short years ago. Voice? Well, it used to be a good runner but surely past its profit-margin best -- a rank outsider.

Fast forward to the present day and we find that many of the data investors are ripping up their betting slips and the voice punters, while not exactly cashing in, are at least still at the races.

If you can tolerate another twist to this metaphor, one man who appears to have backed the right horse is Tom Evslin, chairman and CEO of ITXC, a carriers' carrier of voice and fax minutes over the public internet.

"Around the time we were formed [July 1997] it was clear there was going to be plenty of data capacity," recalls Evslin. "But in all the hubbub [surrounding data], peopIe were losing sight of the fact that voice traffic was growing at 20 per cent a year. What seemed clear to me -- and it's the principle on which ITXC is founded -- was that if you could find a way to use that vastly expanded data capacity to serve the growing voice market then you would have a winning product."

While others were spending huge amounts of capital rolling out broadband networks in the 1 990s, ITXC was ploughing most of its R&D into developing a patented technology that allows the delivery of carrier grade calls over the public internet. After that technology was put in place, ITXC launched commercial service as an off-net carrier in April 1 998 by wholesaling the termination of voice and fax minutes. It's able to do this through a combination of purchasing wholesale P backbone capacity from other carriers on short-term contracts -- ITXC does not own any transmission infrastructure -- and by managing a network of so-called carrier 'affiliates'. The affiliates are the PoPs in the ITXC network -- known as ITXC.net[R] -- inasmuch as they receive incoming calls from other ITXC affiliates via P gateways, which are then terminated over the local loop (affiliates can both originate and terminate calls).

"Carriers who join the ITXC network [as affiliates] have access to an instant international network, and all without having to make extensive capital outlays," says Evsin. "They inherit our economies of scale."

ITXC.net[R] now stretches across over 1 70 countries and is enjoying exponential growth in terms of traffic volume. In September 2002 ITXC reported that it had passed the five billion minute mark since beginning operations in 1998; only four months prior to that the four billion minute barrier was broken.

ITXC's balance sheet doesn't look too bad either with no debt on the books and no rapidly depreciating network assets; it also has strong revenue growth when compared with 2001. For 2Q 2002, ITXC posted record sales of US$66 m, a 70 per cent increase compared to the same quarter last year. Gross margins are also improving as transmission costs come down but, even so, the company made a net loss of US$5.8 m for 2Q 2002 and it doesn't expect to be cash-flow positive until some time during the 2Q-4Q period next year. And post-WorldCom collapse, sequential quarter-on-quarter revenue growth for this year has slowed to single-digit pace. "We've learned how to be smart about reducing our exposure to carriers who we think are in trouble," explains Evslin. "That means, in certain instances, we restrict the amount of traffic that they send to us and we send to them."

While disruption of this sort is a nuisance for ITXC -- dampening as it does revenue growth -- Evslin doesn't view the harsher economic climate as being all bad. "The fact that the capital surfeit has turned into a capital drought has really been a good piece of luck for us," he says. "It means that there's huge pressure on carriers to use our 'capital sparing' model, which has hastened the shift in the industry from vertical to horizontal integration. If capital is limited, and if you are to be a successful retailer, carriers have got to put all their working capital into developing customer relationships. They don't want to spend lots of money on an international network and so that's where we come in -- the second (network] layer of the horizontal stack if you will."

By offering CLECs a non capital-intensive route to undercut ILECs international voice tariffs and still make a reasonable profit margin, Evslin claims that ITXC has allowed competition to materialise in places -- particularly developing countries -- far quicker than it would have done otherwise following deregulation. The emerging competitive landscape in China, India and Bolivia are all examples that Evslin uses to illustrate his point. "One of the main advantages for an affiliate is that it can receive revenue straight away by terminating traffic," adds Evslin. "We know it takes local companies time [and money] to develop their customer relationships through marketing activities, so that revenue can help them get into a position when they are ready to send traffic back (over the network]."

ILECs are attracted to ITXC too, particularly if they have CLECs snapping at their heels with lower tariffs and have profit margins of their own to maintain. A case in point is India. Following deregulation of the international long-distance market in April this year, ITXC signed up three of India's five new international players as affiliates. Then, in September, VSNL -- the country's former international monopoly holder -- also signed on the ITXC dotted line. Elsewhere, ITXC counts all the major US carriers as customers (including the RBOCs), as well as major incumbent carriers such as China Telecom, PLDT, Telkom South Africa, Telenor and Telia -- it also has a growing number of mobile carriers on its books, including China Mobile.