A SMARTMONEY VoIP article snatched from the IDTC Thread, thanks to Tom Gebing.
SMARTMONEY DAILY SCREEN: The Talking Internet
By JOSHUA ALBERTSON
Dow Jones Newswires
SmartMoney Interactive
NEW YORK (Dow Jones)--With all the talk about the convergence of voice and data, one would think that "chatting" on the Internet would involve more than sending email or typing furiously in some Web chat room. Well, a group of service and equipment companies are betting that soon it will.
Welcome to the world of Internet Protocol (IP) telephony, where voice is just another traveler on Internet networks.
Other than the tech-savvy early adopters in this country, most of the current market for IP telephony is international. And although there is the potential for growth in the U.S., most analysts say that the future is predominantly international as well.
David Smith of Technology Futures, a telecommunications research concern, believes that the international voice-over Internet Protocol market will grow from approximately $600 million today to $20 billion in 2003, while the domestic market will rise from $100 million to $4 billion.
That's because hony is much more competitive domestically; witness the variety of 10cent-per-minute phone plans flashing across your television screens.
But internationally, the market isn't as crowded with good rates, and companies offering Internet voice connections can do so at much lower prices. Internet telephony bypasses the access costs that apply to standard telephone calls over circuit-switched networks. Voice is essentially compressed into packets of data and sent over the Internet through 'gateways" provided by the service companies.
As Smith's estimates suggest, the possibilities are vast. And analysts on Wall Street are getting excited, too. "The potential for IP telephony will be huge," says Ulric Weil of Friedman, Billings, Ramsey.
Of course, potential is the key word. "To pass judgment is difficult," says Weil.
Many of the major networking and telecom equipment companies, like Cisco (CSCO), Lucent (LU) and Ascend (ASND), are at the forefront of this movement, but we chose to focus on the service end for now, where some companies have begun to make Internet telephony a reality,
Our research turned up several interesting players, including competitive local exchange carrier Intermedia (ICIX), which we wrote about last month in our CLEC screen, and Inter-Tel (INTL), which popped up last week on our tech values screen. We also came across PSINet (PSIX), a stalwart Internet service provider that recently unveiled plans to provide a suite of voice-over Internet Protocol services to its corporate customers.
Although the product, PSIVoice, is still in the introductory phases, the company believes that it will parry favor with multinational corporations wishing to communicate between dispersed offices.
The trouble in screening this group is that in these early days of development nobody is making much money from residential customers. And the major players in the corporate market -- where Smith thinks the best opportunities lie -- have yet to realize any significant gains either.
One company that has gotten its program running is Hackensack, N.J.-based IDT (IDTC).
IDT entered the Internet telephony market in 1996 with its Net2Phone product. Net2Phone allows residential customers to use their PCs to call people using telephones at the other end. The call is carried over the Internet until it reaches a Net2Phone switch at its destination, thereby eliminating most long-distance carrying fees.
The company charges from 5 cents to 8 cents per minute for domestic calls and less than 10 cents to some international markets. It has also been busy partnering of late, signing deals with Yahoo! (YHOO), Excite (XCIT) and IBM (IBM) to promote Net2Phone. The Excite collaboration, announced earlier this week, will expand the company's international presence by offering IP telephony services directly to Excite customers. The company currently gets about half of its IP telephony revenue from abroad.
Despite the marketing efforts, revenue from Net2Phone is still rather limited. The company grossed $2.8 million last quarter, approximately 3% of its total intake. But that number is up from $0.8 million a year ago, and the company expects that Internet telephony revenue can account for 25% of total revenue within a year.
Michele Wolf of Bear Stearns isn't convinced that consumer Internet telephony will be a major revenue driver for the company going forward, but she admits that the company is well-positioned should the market explode.
"If the international market took off," she says, "' I think IDT is positioned to be a major player in it. If it runs, then they should be a market leader." Meanwhile, the company is taking steps to diversify its portfolio. Launched earlier this summer, Project David is IDT's corporate entry into the IP telephony market and at rock bottom prices -- 3.5 cents per minute for domestic calls and about 10 cents for calls to certain markets in Europe, Latin America and the Middle East.
Basically, the rates are so low because the company installs gateways in the offices of its corporate customers that enable calls to be routed directly from private branch exchanges (PBX) onto IDT's IP network, which carries them to their destination.
There are plenty of hurdles going forward. Analysts worry that regulators will begin to limit the prices these companies can offer. IDT will also face its share of competition as it broadens its IP telephony offerings. Smith looks for all of the Internet backbone companies to join the fray, followed closely by companies providing cable Internet services. "By definition, the cable modems are always on line," he says. "That's going to be one of the places Smith also sees expanding services in areas where wireless local loops are being deployed.
But for now, IDT is leading the pack, and, according to at least one analyst, that will count for a lot as the market develops. "In IP telephony, he who gets in the earliest stands to make the most," says Weil. Nonetheless, it's still early to play IDT -- or any company, for that matter -- as an IP telephony stock. But it would certainly be an encouraging sign if the company makes good on its plans to gain a quarter of its revenue from this segment.
In the meantime, a consensus of analysts expects the company to report earnings of 18 cents for the quarter that ended in July based on the strength of its traditional telephone service and calling card businesses.
That will bring fiscal 1998 (ending in July) earning s to 53 cents per share, a significant jump over last year's loss of 18 cents. And if analysts are correct, the company should see earnings growth of 57% and 29% in 1999 and 2000. That means that the company is trading at a price-to-earnings ratio -- 28, based on 1999 estimates -- well below its projected growth rate. |
