Outlook towards the south and east

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Interoute is expanding. With new investment from Dubai, it's expanding south and east to become a bridge to the Arab world. But it's also planning a big move into the corporate outsourcing market, with a scheme to bypass conventional operators and offer enterprises all-IP telephony through peering arrangements. Microsoft is an ally, CEO James Kinsella tells Alan Burkitt-Gray

James Kinsella: Interoute wants to use VoIP peering to remove the need to route calls over the regular phone network wherever possible

Pan-European operator Interoute is about to launch a bold outsourcing assault on the corporate telecoms market in a link with Microsoft.

The company wants to show corporate customers the financial benefits of moving all their voice telephony onto IP — but not just by offering a VoIP link behind the desk telephone.

Instead Interoute, which has Swiss and Dubai shareholders, wants to create a direct link into companies' Microsoft Exchange systems, which operate their email. The desktop PCs will replace the phones.

"It will be a Skype-like product," says James Kinsella, CEO of Interoute. Voice traffic will be integrated into the office LAN, and there will be inwards and outwards connections into the regular telephone network — just as Skype does with SkypeIn and SkypeOut.

However, adds Kinsella, Interoute is planning to link up individual "VoIP islands" that many enterprises are now creating, bypassing the regular phone network.

This is a significant move for Interoute, which until now has been focussing on the wholesale market — though it has also been making inroads on the world of media, building a service to distribute content securely over its network.

"We're making a move into the corporate sector," says Kinsella. He has recruited a director of voice services, John Wilkinson, to head this move into the converged world of voice and data.

Video from Outlook

"There will be announcements in the next few months," says Wilkinson. He links products that Interoute will offer as off-net and on-net calling using VoIP via Microsoft Outlook, "including video from the desk top", and instant messaging with presence indication. "We'll have full PSTN access, in and out, and free conference calling."

But he is looking wider than that. Because the new service the Interoute will be launching runs on Outlook, the company will be looking at a hosted solution for its customers: it will be acting as an outsourcer of Microsoft Office-based services as well as a telecoms supplier.

Interoute has been steadily growing for the past few years, following a bumpy start and a restructuring. The main shareholder is the Swiss-based Sandoz Family Foundation. There are no publicly-traded shares, so numbers are not available.

A year ago Dubai Holding invested around $145 million in the company, via Tecom, a telecoms operator based in the United Arab Emirates. According to Kinsella, "Dubai Holding has a focus on telecoms infrastructure in the Arab world with a bridge into the western world — which is us."

Other investments in the group include Du, a new mobile operator in Dubai itself, as well as Maltacom and Tunisie Telecom. It has a 60% stake in the Maltese operator and earlier this year successfully bid $2.25 billion for a 35% stake in the Tunisian company.

"Dubai has a minority shareholding in Interoute," says Kinsella. "The Swiss are still the majority." However Dubai Holding is now advising Interoute on its strategy for eastern and southern Europe.

South-eastern expansion

In August Interoute bought Telecom Partners Network, a Bulgarian operator, for an undisclosed sum. Bulgaria is due to join the European Union in January 2007. "We want to extend to Turkey," says Kinsella, "where we've set our sights on partnering with a Turkish entity." The company is looking for Turkish partners, he adds.

With the help of its Swiss — and now Dubai — money Interoute has built through acquisition for the past few years. A year ago it completed the acquisition of the operations of Via Net.works in Spain, France and Germany, and of all PSINet Europe operations in Germany, France, Belgium, Netherlands and Switzerland. (PSINet in the UK went to Telstra.)

Previous acquisitions included network infrastructure of Ebone, applications and services of Virtue Media Services, and CeCom's network in the Czech Republic, Slovakia, Hungary, Austria, Germany, Poland and Romania.

"The aim is to drive the company south and east, and into the corporate space," says Kinsella.

Half of the company's new revenue comes from corporate accounts, he adds, though wholesale business is still in the majority. "Wholesale is a very good business."

Virtual private network

The move into the corporate sector is driven by advancing technologies, he says. Interoute will be using its network "to allow one Microsoft user to get to every other", says Kinsella. "If they're on our virtual private network so much the better", but it's not a requirement.

Interoute plans to join XConnect, a VoIP peering company, says Kinsella. Interestingly, Ohad Finkelstein, his predecessor as CEO of the company, is now on the board of XConnect, which has expanded rapidly from a European base — Swedish and Dutch VoIP operators were among its early users — towards North America.

Corporate customers will use a soft client at first to link into Interoute's system. "We're doing a lot of work with Microsoft," he adds, and Microsoft is working on integrating its system with office PBX networks. "We're signing beta customers up now."

Once Interoute gets the system rolling, the company wants to start selling the next versions of Office and Outlook to clients. These are expected to follow the launch of Windows Vista, Microsoft's latest operating system. The next version of Outlook includes voicemail and other VoIP-based features, says Kinsella. There are also features to make Outlook more suitable for mobiles with wifi.

Interoute has put a significant part of its development team into this project, he adds.

"Our biggest target market is existing customers, around 10,000-15,000 corporate customers." And he believes that legacy operators will be unable to compete with the new product set.

Users will be able to set up a call by clicking on a name in their Outlook contacts directory — just as those who have downloaded the right Skype add-on already can. But Skype is outside the emerging collaborative VoIP world: the alternatives are to choose between a free Skype-to-Skype call to another Skype user and a paid-for SkypeOut call to a regular phone number.

The first stage of what Interoute plans to do is provide all on-net calls within a customer's network free — pretty much like any other VoIP operator — but then it will extend this so that someone in company X will be able to call a customer in company Y free if both are on the Interoute service. They won't need to know that both are Interoute users: there will be an automated, seamless central directory.

But Xconnect is taking this vision globally. Already a VoIP customer of Telio in Norway can call a customer of VozTelecom in Spain for nothing, via the XConnect peering system. Both Telio and VozTelecom were founders of XConnect.

Without such a system, when a Telio customer dials a Spanish number the call would default onto the legacy phone network. Once it got to Spain, the carrier there would port it back to the local VoIP system. Now, Telio identifies — via Xconnect — that the call is destined for another VoIP network. With peering, the call stays IP all the way and the participants benefit from the extra features of VoIP.

And the VoIP networks save money by not having to use regular telecoms networks to deliver their calls.

Some calls inevitably need to get onto the PSTN: if they're bound for a regular, analogue number. But the industry still uses the PSTN as the default network for delivering calls to any number worldwide, losing the benefits of all-IP routing, including marginal price.

Interoute wants to offer a similar facility to its corporate service. As more and more enterprises move to VoIP, the company sees opportunities for calls from company X being made entirely in the IP world to more and more other companies worldwide — bypassing the regular telecoms networks and cutting costs for enterprises.

Replace the phone

Interoute aims at completely replacing the phone on the office desk with its new service, using e-numbering. "Ideally we'll use call forwarding" so that calls to a regular phone number will be automatically rerouted to the IP service.

"You will also be able to forward calls to a mobile," says Wilkinson. "Something like this will kill roaming charges."

Meanwhile, says Kinsella, Interoute has been doubling its revenues year on year while keeping network costs relatively flat. He pulls out a chart which show network costs have risen gradually from around £37 million a year in 2003 to £40 million now, while revenue has risen from £10 million to £90 million in the same time. Capex and opex have both risen in the same period.

"Capital expenditure has stabilised and will be down next year," says Kinsella. The company has helped to slow the growth in opex by consolidating offices: "We had five in London alone," he says. Now all are in one building, with a back office in Prague. "It's not as cheap as India, but ...," he shrugs: it's in central Europe and is close to his customers. Head office "has got to be in London, but the UK is so competitive".

So, following the Bulgarian deal he's looking to fill gaps in the network in eastern Europe, listing Poland and Romania as well as Turkey. "We're looking for partnerships in Turkey and we're also looking for acquisitions in those areas. We'd like to do what we did in Bulgaria," he adds.

The company has a ring starting in St Petersburg in Russia. "We spent a week in Moscow but we walked away."

Extension towards the south and east, and the Dubai shareholding are important, but "the breakthrough is the technology", says Kinsella, turning to Wilkinson: "John's voice product is at the base of it."

Interoute's revenues have increased in the past three years while network costs have stayed relatively flat