An Evolution Heard ‘Round the World
A new wave of companies is steadily staking claim to a piece of the communications future.
For now, these promising firms are mostly hidden among a glut of “dot-com” ventures. That obscurity, however, is not likely to last.
That’s because this group of companies is harnessing the power of next-generation networks that carry phone and Internet traffic together, making possible a host of new services that combine the strengths of both phones and computers.
These voice-over-IP (Internet protocol) networks carry standard conversations the same way they transport electronic mail--in broken-up bits of data that are reassembled when they reach their destination. The technological shift is not an easy one, but analysts say it will lead to more powerful and efficient networks and will fuel a revolution in data and voice communications.
As the shift to Internet telephony gains momentum, more and more companies are cropping up.
The first to market offered cheaper long-distance phone calls over computers, then computer-to-phone and eventually phone-to-phone services. This area has drawn a crowd of newcomers, including a growing number of publicly traded start-ups.
Consumers now can make cheap, and sometimes free, Internet calls through Visitalk.com, Net2Phone, Deltathree.com, PhoneFree.com and many others. Traditional phone companies are also tapping the voice-over-IP craze by sending some of their phone traffic through wholesale IP telephony providers such as ITXC, IBasis, Gric Communications and Networks Telephony.
These days, most IP telephony companies are moving beyond their “cheap-minutes” strategy toward offering creative new services tailored to customers’ needs. They are being joined by applications start-ups ranging from ThinkLink and Pagoo Communications to so-called voice portals such as Tellme Networks and Talk2.com.
Many of the new companies are private, but others managed to go public while Wall Street enthusiasm was high on their prospects. Recently, though, IP telephony shares have plunged.
“The whole segment is trading at a 98% discount. . . . It’s been ravaged by the market a lot more than a lot of the other segments,” said Ted Jackson, communications senior analyst at U.S. Bancorp Piper Jaffray, a company that has underwritten the public stock offerings of several IP telephony firms.
“These companies are about fundamentally restructuring the communications business, and right now there’s a healthy amount of skepticism with ‘new-economy’ companies,” he said.
Still, the IP telephony crowd has maintained respectable market values for newcomers. Net2Phone’s stock has fallen below $30 a share, down from $92 in August, but the company still has a market capitalization of more than $1 billion. ITXC’s market value also tops $1 billion, despite a devastating stock drop to $25.88 from $124.75 in February.
Such spiraling declines cannot have pleased buyers of ITXC’s recent $85-per-share secondary offering. Still, the market’s current snub has not dampened the enthusiasm of Tom Evslin, a former AT&T; executive and founder of Princeton, N.J.-based ITXC, which was among the first to route phone calls over networks designed for data.
“In the future, all telephony will be IP telephony in the same way that e-mail wouldn’t go over anything other than the Internet,” Evslin said. “Already, 10 of the top 12 largest U.S. carriers use ITXC for part of their traffic . . . and the customers who are making these calls don’t know their calls are going over the Internet.”
ITXC uses special routing technology to send phone calls over the public Internet and then sells that lower-cost voice phone-to-phone routing on a wholesale basis to traditional phone companies such as Ameritech and Bell Atlantic.
Recently, ITXC started selling computer-to-phone connections to upstart companies such as Dialpad.com and Los Angeles-based MediaRing.com. Such PC-to-phone capabilities are being built into Web sites so customers can “click to talk” to speak with customer service or to place a verbal order.
Evslin said worldwide traffic on ITXC’s system jumped 80% in the first quarter, with 2 million minutes traveling over the network on a recent day.
“We think the Web-to-phone business will eventually take over our phone-to-phone business,” he said. “Every week, 1 million new people become users of PC-to-phone communications.
Last year, ITXC sales rose to $25.4 million, compared with less than $2 million in 1998. Losses also jumped, increasing to $20.4 million, versus a loss of $7.2 million the previous year. Analysts think the company will post its first operating profit at the end of the year.
Meanwhile, Deltathree.com, based in New York, has emerged as both a wholesaler to other carriers and a free PC-to-phone service for consumers. The company, which competes with Net2Phone in the retail market, has 2.3 million subscribers in 160 countries and says it handles about 17% of the world’s Internet telephony traffic.
Last week, Deltathree.com signed a deal to route calls made by Priceline.com long-distance customers (along with Net2Phone and ZeroPlus.com) as part of Priceline’s name-your-price long-distance offering.
In addition to selling basic minutes of calling, Deltathree.com sells users add-on features such as phone-to-phone calling cards and unified messaging (combining voicemail, fax, multilingual text-to-speech and e-mail into one account). The company also sells its own version of click-to-talk Web site capabilities and even greeting card e-mail services that include a 10-minute free call back to the sender.
“You can do things with a call over IP that you cannot do over traditional phone networks because their systems were never designed to be used with the Web,” said Noam Bardin, president and chief executive of Deltathree.com. “We’re in the middle of a paradigm shift in the telecommunications industry.”
Deltathree.com has thus far struck deals with EMachines, CNet, Internet portal Chinadotcom Corp., Yahoo, PriceSmart and others. The company has 140 employees and posted 1999 sales of $11.1 million along with losses of $33.8 million.
The company, a subsidiary of RSL Communications, went public last November at $15 a share. The stock peaked in February at $62.37 but has since fallen, closing Friday at $6.50.
“There’s not going to be an easy way out,” Bardin said of the stock’s drubbing. “It’s not going to be press releases and statements. We’re going to have to show that the business model is working.”
Mountain View, Calif.-based HearMe is another kind of competitor in the Internet telephony market. The company doesn’t own or lease wires or networks, but instead focuses on the software and related technology that makes it possible for groups to chat--literally--with each other through the Web.
The company started out focused on the online gaming community. But a side feature that allowed Web players to speak to each other live took hold and the company changed directions to tap that market.
Now, about 600 million minutes a month flow through HearMe-enabled sites run by partners ranging from MTV Online and Sony Online Entertainment to Theglobe.com, TalkCity and CBS MarketWatch.
Less than half of the traffic stems from HearMe’s own still-active gaming groups, down from 90% of the traffic two years ago.
The company’s new strategy was strengthened with its recent acquisition of AudioTalk Networks, an IP telephony technology firm with experience in PC-to-phone and phone-to-PC conference calling, voicemail and voice-enabled messaging.
Now HearMe sees its technology as a key component for businesses that want to create interactive communities, hold live Web events of business conferences or add live voice capabilities to their Internet sites.
Individuals have already embraced HearMe’s approach, as evidenced by the company site’s rich variety of chatting communities--from family conference calls and live karaoke to multi-player games and plain old chat rooms.
When HearMe added a video component to sister site Mplayer.com, users jumped on it, according to Paul Matteucci, HearMe’s chief executive. “Roughly 70% to 80% of the voice-user minutes shifted over to [the] See&HearMe; [area],” he said. “The video is only seven frames a minute, but people just flock to it. . . . A lot of people go there just to see other people.”
Last year, HearMe nearly doubled its sales to $15.5 million, but losses also doubled to $25 million. The company raised $74 million in its public offering more than a year ago and saw its stock jump to $37.50 in December before falling to $6.56 Friday.
But analysts have been impressed with HearMe’s ability to draw users with compelling voice applications. Now they are anxious to see the company step up its move to business applications--and the higher-profit arena of licensing its technology.
Matteucci agrees wholeheartedly. “I think the real juice comes from us selling the technology to do all these things. . . . We’ve got an 85% gross margin with licensing.”
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INTERNET TELEPHONE
Telephone service is moving off traditional lines and onto the Net. A1
* COMING THURSDAY
Consumer guide to Internet phone use.
