WSJ Article:
The Smart Way to Play the 'Net Is Through the Phone
By JOHN C. DVORAK
Hordes of online traders and individual investors are jumping in to the stock market's Internet
gold rush. Hoping to find the next Yahoo!, they are bidding up prices of initial public offerings
like Marketwatch.com or Theglobe.com 400, 500, 600 percent on the first trading day.
But when it comes to the Internet, the smart money is
still conservative. The shrewdest investors are trying to
figure out where the Internet will change things on a
fundamental level, and then profit from that.
The thinking goes like this: Let's assume the Internet is
going to change everything. And if Amazon.com has become worth more than Sears, Roebuck
on the basis of simply selling books (with hopes of more to come), then what other businesses
that have historically been even better than the book business might benefit from changes
brought on by the Internet? The answer is obvious: the telephone industry.
People talk more on the phone than ever before. They make more long-distance and
international calls than ever before. Enter IP telephony, which uses the addressing scheme of
the Internet or IP (Internet Protocol) to make point-to-point voice connections.
Currently the way you connect over the telephone is by wire switching, now done by a
computer "switch" in a telephone company's central office. It used to be done manually.
You've seen it in old movies: Operators in front of large boards would connect calls by
plugging patch cords into holes. Eventually, big mainframe-like computers took over this
function. But the same Internet protocol that allows you to connect to a Web site to request a
Web page can be used to connect you to a friend with a voice link over the same network. It's
not trivial, but it can be done -- and cheaply.
The idea of making phone calls over the Internet was exploited quickly years ago when some
people discovered that it was possible to send voice over the 'Net using PCs and sound cards
as intermediaries. The quality left a lot to be desired, as latency and dropped data packets
sometimes resulted in comical connections. The phone calls were free, but you got what you
paid for.
But it was quickly discovered that over high-speed local area networks (LANs) and more
controlled environments the quality was as good as that of the switched phone system.
Everyone knew that it would be a matter of time before the entire 'Net could do the same thing.
Backbone speeds are improving, as is the methodology to minimize "hops" between
connections.
It's clear IP telephony's time is coming, and
sooner rather than later. Last year, the research
organization Killen & Associates predicted that
today's $1-billion Internet voice service market
would balloon into a $60-billion market by
2002. They also predicted that in 2002, 35
percent of all phone calls will be over IP
networks. At least according to this outfit, this
means the market will explode in the next 24
months. (You should note that I expected it to
explode in 1998 and I was premature. See
"Internet Telephony Is the Next Wave,"
September 16.)
Who is best positioned to take advantage of --
and profit from -- Internet telephony? The big
boys in this instance are Cisco Systems,
3Com, Lucent Technologies, Nortel and
maybe IBM. They are all focusing a lot of
attention and resources in this arena. But many observers think they're spending most of their
time buying up one little company after another in a feeding frenzy.
It's the smaller companies that offer the growth opportunity -- and the prospects for being
gobbled up by one of the panicky market "leaders." Potential winners among the smaller
players in this area are Inter-Tel (INTL), Dialogic (DLGC) and ADC Telecommunications
(ADCT).
And don't ignore the large telcos, which are
keenly interested in this technology. Last year,
for instance, Deutsche Telekom launched an IP
telephony commercial test in Canada called
T-Net. It let customers of Deutsche Telekom
Canada, a subsidiary, use a special phone
connection that allowed them to call overseas
inexpensively using a normal phone -- and
users couldn't tell the difference. This effort
stemmed from Deutsche Telekom's investment
in the Israeli voice-over-IP company VocalTec
Communications.
What's striking about this is that IP does not
seem to be based on high-bandwidth
installation. But with the emergence of
high-speed Internet connections such as cable
modems and digital subscriber line (DSL), the
situation becomes even more interesting, as
Tuesday's takeover of Excite by broadband Internet access provider @Home illustrates. (See
Weekday Trader, "Excite Deal Shows Cable Modem Is King," January 19.)
DSL and cable modem services can provide enough bandwidth for hundreds of simultaneous
high-quality phone calls. A fast ADSL uplink of 1.54 megabits per second can handle 200
simultaneous calls. The current price for this service is about a $350 per month flat fee -- far
less than the T1 lines so many organizations favor. Small-businesses owners in particular are
drooling over this cost-saving technology.
Compelling economics like that will inexorably drive IP technology forward over the next
couple of years -- and the stock prices of players who help make it happen. |
