Thread --- A good article on why to own CSCO and LU ---the future of voice phone ---anuary 20, 1999
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.
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