June 11, 1999
Investors Say Net2Phone's Site
Offers Hints About Two Deals
By JASON ANDERS
THE WALL STREET JOURNAL INTERACTIVE EDITION
Message-board users say they've discovered evidence of two partnership
deals involving Net2Phone, a company that routes telephone calls over the
Internet.
Net2Phone isn't talking, but at least one of
the deals is for real. A spokesman for Sprint
confirms that it is testing a service with
Net2Phone. Compaq Computer, the other
rumored partner, declines to comment.
The online chatter on a Yahoo! Finance (quote.yahoo.com) message
board dedicated to Net2Phone's parent, IDT Corp., heated up on
Tuesday when a user poking around on Net2Phone's Web site
(www.net2phone.com) stumbled on a page titled "Welcome to Compaq
-- Net2Phone Asia." Moments later, similar pages had been discovered
for Canada, Brazil and Latin America.
Message-board users pounced on the discovery. "PROOF OF AN
ALLIANCE!!!!!!" screamed one message. "We'll be at 40 in two
months!" wrote another user, predicting the stock price would double.
Just an hour later, with users still excited about the Compaq find, the mood
turned to pure frenzy after a participant made another discovery on the
Net2Phone Web site: a series of Web pages that detailed a new service
from Sprint using Net2Phone's technology.
A spokeswoman for Net2Phone, which has filed to go public, declines to
comment on the pages the users found, except to confirm that they are
"active" pages and weren't built as tests. She says the pages weren't linked
off the Net2Phone main page, and could only be found by users who
"knew what they were looking for."
A spokesman for Compaq says the computer
maker "is not in a position to comment
publicly right now concerning Net2Phone."
But Joe Tomkowicz, a spokesman for Sprint,
confirms that the telephone company has been
quietly testing a service called "Sprint Basics"
since April that allows users to place
telephone calls over the Internet using
Net2Phone's technology.
"We're in a market trial for this product right now, and I really can't say
much more than that at this time," says Mr. Tomkowicz. He says Sprint
has promoted the service on a very limited basis through banner
advertising on Web sites. The trial is scheduled to run through July, but he
declines to comment on whether or not the program would be extended.
He also says it is common practice for Sprint to ask companies involved in
market trials not to make public comments, but declines to say whether
that was the case with Net2Phone.
Net2Phone's main product, from which the company gets its name, lets
customers use their computers to place telephone calls over the Internet to
a phone anywhere in the world. A customer uses his computer's
microphone and speakers to conduct the call. Because the calls are routed
over the Internet, and not traditional phone lines, there are significant
savings -- calls within the U.S. are 4.9 cents per minute, and most
international calls are 10 cents per minute. Conventional phone services, at
best, charge about 10 cents a minute for within the U.S. International calls
can run up to several dollars a minute.
The service being offered by Sprint, however, is more in line with
Net2Phone's newer product, called Net2Phone Direct. No computer is
needed. Customers call an access number, and are then connected to any
number they wish, just as with traditional phone cards. Again, the
difference -- and the source of the savings -- is that the calls are routed
through a computer system and over the Internet.
The discoveries come as message-board
users have been frustrated by Net2Phone's
public-relations silence ahead of its coming
initial public offering. So far, though, shares of
parent firm IDT, which is based in
Hackensack, N.J., haven't raced on the
chatter. IDT closed at 20 11/16 on the Nasdaq Stock Market Thursday,
up from 19 1/4 on Monday. No date has been set for the IPO, which was
announced last month.
Net2Phone launched its first product, PC2Phone, in August 1996, and
became a subsidiary of IDT in October 1997. But consumers were slow
to warm to the notion of using their computers to place long-distance
telephone calls, and the company has yet to turn a profit. Net2Phone
posted a loss of $3.5 million in fiscal 1998 and $2.1 million for the six
months ended Jan. 31. It hasn't yet released figures for its quarter ended
May 30.
Still, revenues have surged, from $2.7 million for its fiscal year ended July
31, 1997, to approximately $12 million in fiscal 1998. The company
reported revenues of $13.2 million for the six months ended Jan. 31.
Net2Phone says it serves about 250,000 customers a month, with about
60% of its business coming from outside the U.S.
According to its prospectus, Net2Phone expects its losses to continue for
the foreseeable future, pressured by significant increases in marketing and
operating expenses over the next several years.
Net2Phone also has a significant reliance on other companies to help route
its telephone calls. According to its prospectus, all of the telephone calls
made by its customers are connected at least in part through facilities
leased from telephone companies and others.
The filings also say that Net2Phone's success depends on its ability to
strike marketing deals with other companies -- which includes computer
makers and telephone companies.
The company already has a deal with Packard Bell NEC to bundle its
Net2Phone software with computers sold in Europe, but so far hasn't been
able to land a similar deal for the U.S. Likewise, the Sprint trial is
Net2Phone's first partnership with a U.S. phone company. Net2Phone has
agreements with a handful of telecommunications companies abroad.
Internet telephony companies have always used their deep discounts as a
major selling point to consumers. Business has boomed internationally,
analysts say, particularly where countries lack the infrastructure to handle
their own long-distance calls and can't compete with the rates offered by
Net2Phone and others. Still, because the calls are being transmitted over a
mix of analog and digital lines, quality can be spotty.
"The growth of these companies has been fairly steady and fairly significant
over the last couple of years, and companies like Net2Phone have helped
sustain this market," said Tom Valovic, an analyst who covers Internet
telephony for International Data Corp., a Framingham, Mass., research
firm. "But this field is very, very competitive now, and is only going to get
more so."
Write to Jason Anders at: jason.anders@news.wsj.com
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