Following the money trail: Vesbridge plots investment course

Telecommunications Americas, Oct, 2004 by Sue O'Keefe

In early June, the communications arm of St. Paul Venture Partners became Vesbridge Partners. Editor in Chief Sue O'Keefe recently sat down with senior managing directors Zenas Hutcheson and Rod Randall to discuss the VC firm's investment strategy for 2004 and beyond.

SOK: Venture investing in telecom the past few years cannot have been easy. Any areas you've shied away from?

RR: There's real wisdom in the thought that when everybody thinks you should stay away from an area, oftentimes if you have deep sector expertise and industry engagement you can go in and find those pieces that still present dramatic value going forward.

ZH: An example of that is we've continued to be active investors in optical. We led a significant recap in Mahi and we think that's a very strong play. We also have led the Atrica deal for some time now and we're big believers in metro Ethernet. As a general theme, we're looking for things that dramatically reduce the cost of operating networks. We're very pragmatic investors.

[ILLUSTRATION OMITTED]

SOK: What are some of the areas to watch in wireless?

RR: Some of the hot spots of opportunity in wireless are tied to some of the catalvsts that exist in the ether. One of those is broadband ubiquity--wired and wireless. What are the things that are going to utilize this broadband infrastructure? What previously unavailable things will be do-able that will satisfy real needs and real desires? That ties into the second key catalyst: convergence. Convergence is happening, but in a different set of dimensions than was originally discussed in the traditional telecom era: Entertainment is converging with what was traditionally a work-based or communications-based infrastructure, whether it is video entertainment or person-to-person entertainment.

Another catalyst: There's more megahertz, megapixels and megabytes as well as Mbps in each devices than were available in the original IBM PC. We now need the ability to upgrade and fix these devices which historically have never needed this by operators and end users. The concept of web services has linked into the thought of we need over-the-air reactivation, reflashing, renewal of these devices and once you have that, you'd like it to be done automatically, so the network may be able to detect and fix a problem before the user ever knows there's a problem. Another catalyst is security risk. We need security mechanisms within the network that not only protect the subscriber but also protect the network. It is both needed and do-able, but barely do-able, which makes it an interesting venture opportunity.

[ILLUSTRATION OMITTED]

SOK: What are you seeing on the wireline side?

ZH: Hosted voice is an area where we see lots of potential and this has been on our radar for some time. What we predicted and is happening in spades is that the broadband pipes put in by RBOCs and cable operators are being used by other vendors to sell voice services, and voice becomes another application like email. ILECs are going to use VoIP to go into other territories.

SBC is going to go after the voice business of Verizon, Verizon will go after SBC and AT & T will go after both of them.

SOK: So who wins in this new world?

ZH: It's going to be very competitive. Ultimately, I think the big guys will win--they have the infrastructure to scale and the worldwide networks to leverage. I can tell you who some of the early customers will be: AOL, Google, Yahoo!--because VoIP will be just another service.

RR: Exactly.

ZH: All of these groups who are competing for services--e-mail, for example--they will do the same thing in voice.

RR: We call these providers VVNOs--VoIP virtual network operators--and the model is following the same path wireless has followed with the MVNO concept. It's argued that many of these MVNOs can be more effective at building ARPU and stickiness than a generic, horizontal infrastructure provider like a typical carrier could do. [Vesbridge is] an investor in Visage Mobile, which is an enabler for MVNOs. The category is called MVNEs--mobile virtual network enablers. There is definitely an opportunity in the VVNO business that will be enabled by an enabler--a VoIP virtual network enabler, or VVNE.

ZH: We think that's going to be a very important category--how do you do the billing, the customer care.

SOK: So who's going to fill that VVNE role?

RR: There is no natural company to do it, hence the opportunity. There is a natural diversion of interests at that interface point. You really need to separate the billing, service pricing plan, the operations, the customer care, and the content that may be appropriate to the devices and even the applications and the devices.

This is not a casual operation.

SOK: Looks like there are some dramatic changes in the works.

ZH: With hosted voice, the product we've traditionally called dial tone will dramatically change, because it will be integrated into the overall Internet experience and coupled with new services. The geography that has defined competition in the past will change dramatically. The thing that will really determine how quickly this transformation will occur will be government regulation.