to all(WSJ article from Dec. 15)enjoy! Matt
December 15, 1997
Internet Telephony's Time
May Have Come -- Again
By LISA BRANSTEN
THE WALL STREET JOURNAL INTERACTIVE EDITION
Elon Ganor, chief executive of VocalTec Communications Ltd., says he'll remember 1997 as "the
year that the telecommunications industry started to understand the implications" of what his
pioneering little company was doing.
It certainly is a sea change from just a year ago, when few saw much business potential in the
prospect of voice communications over the Internet, a concept VocalTec pioneered in February 1995
with the release of Internet Phone, the first commercial application of the technology.
Internet telephony turns voice calls into data and sends them to their destination not via normal phone
lines, but through the Internet and corporate intranets -- for only the price of a call to an
Internet-service provider.
The technology's early adopters were lured by the prospect of making long-distance calls at local
rates. But those early adopters were few, largely because the software was complicated, the sound
quality was poor and the early technology only allowed for calls between PCs -- and only then if
they had compatible software.
VocalTec has seen the initial wave of interest swell, then crash -- and now swell again. The company
-- based in a Tel Aviv suburb with its U.S. headquarters in Northvale, N.J. -- rode the first blush of
optimism to an initial public offering in February 1996 that valued the company at nearly $100
million.
But the hype soon cooled to a consensus that while the technology was interesting, few people
would use it. By October 1996, the backlash had arrived in earnest, and investors had lopped off
nearly $75 million of VocalTec's market value.
But optimism about the sector rebounded this year as sound quality improved and several big
technology and telecoms companies invested in research and announced plans for new products.
Then the real wake-up call came in August, when VocalTec announced it had inked a deal under
which German telecommunications giant Deutsche Telekom AG agreed to pay $48 million for a 21%
stake in the company and spend $30 million on VocalTec products and services by 1999.
The deal between VocalTec and Deutsche Telekom deal was a key signal that the thinking about
Internet telephony has "gone from 'if this happens' to 'when this happens,' " says Joseph Mele,
president of elemedia, an Internet-telephony software venture of Lucent Technologies Inc. "A couple
of years ago, it was just VocalTec, and now it's the big telecommunications companies."
Another Helping of Hype
The hype is back. But Jeff Pulver, president of Great Neck, N.Y., Internet-telephony consulting
firm Pulver.com Inc., says the latest round of excitement isn't like that seen in 1995. This time, he
says, "it's a good kind of hype, because the people who are talking are the major carriers, and
they're not just talking about it -- they're delivering products."
While there are lots of estimates about the market potential for Internet telephony, most analysts
agree it will be big. International Data Corp., of Framingham, Mass., estimates Internet-based phone
calls will amount to just 198 million minutes this year -- a rounding error compared with traditional
calls' 79 billion minutes -- but Net minutes are rising 220% annually, while traditional phone calls
are growing 15% a year. And Christopher Mines of Cambridge, Mass., market-research firm
Forrester Research, estimates that spending will rise to nearly $2 billion by 2004 from about $30
million next year.
While that still will be a tiny part of the long-distance market, it should be enough to allow
companies in the sector to get off the ground, he says, adding that "in a $75 billion long-distance
market, [$2 billion] is still crumbs -- but the crumbs in the long-distance world can make a meal."
Internet telephony was first pitched as a way for home users to escape long-distance charges, but
now its widespread adoption is more likely to be spread by businesses that see it as an opportunity to
save money on faxing and international calls.
WorldCom Inc.'s UUNet Technologies unit took aim at the fax market this summer, unveiling an
Internet-faxing service that it said could save customers 35% domestically and 55% internationally.
As with Internet telephony as a whole, even a tiny slice of the market would be a big moneymaker:
UUNet estimated this summer that the global fax-transmission market is $92 billion a year. And as
Mr. Mines points out, Internet telephony's reception problems aren't as pressing with faxes as they
are with voice calls.
Fax transmissions make up about half of international telecommunications traffic -- another area that
has businesses keenly interested in what Internet telephony can deliver.
Mr. Mines estimates that governments' practice of using long-distance charges to subsidize local
calling adds 20 cents to $2.50 per minute to international calls, adding that even international
deregulation won't drive those rates down as quickly as the adoption of Internet telephony could.
Internet telephony, he says, should keep users' prices lower than switch-based phoning "well
beyond 2000."
Indeed, several of the entrants in the Internet-telephony world, such as IDT Corp., started as
"call-back companies" set up to help consumers and corporations alike cut international rates by
taking advantage of lower communications costs in the U.S. According to Sales Director Mordy
Rothberg, IDT's Net2Phone unit has 60 companies in Oman that are using its Internet service.
Enter the Big Boys
Of course, Internet telephony can still cut users' domestic phone bills as well. But that won't
necessarily mean rates will drop, industry executives warn.
Tom Evslin, the former AT&T Corp. and Microsoft Corp. executive who resigned to form ITXC
Corp., a company with backing from AT&T and VocalTec that wants to become a broker between
Internet-telephony systems and the traditional phone network, says he doesn't believe migrating to
Internet telephony will result in drastically lower prices because the major carriers "don't have an
incentive to drop prices to avoid what for them is a reasonably small erosion in market share."
That's not necessarily a bad thing for Internet telephony, however: Instead of trying to strangle the
technology in its cradle, some of the biggest carriers are diving into the sector.
In addition to Deutsche Telekom -- which is testing a product with a small number of customers --
the major players that are testing or developing Internet-telephony products include long-distance
companies AT&T and WorldCom, as well as IDT.
The renewed interest in the area has set off a battle among the big telecommunications-equipment
companies and data-networking giants to supply the sector -- investments from giants such as Lucent
and Cisco Systems Inc. have marked another stamp of approval for the sector.
But Internet telephony's backers are looking beyond voice to a larger role for the technology, one
that draws on its ability to allow users to offer several different kinds of data at once.
"I believe over time, voice isn't going to be a key driver," says elemedia's Mr. Mele, adding that
"the real value will be the multimedia aspects" allowing people to, say, speak together via PC while
exchanging graphics, video and the like.
Whatever the applications spawned are, the question now is which companies will emerge to take a
dominant position in the sector. Some, such as Mr. Mines, think the "little guys will get squished
because they don't have the deep pockets or R & D budgets."
But Mr. Ganor isn't worried.
"IP telephony is a very big paradigm switch that involves lots of details and lots of different
elements," he says. "We have seen in the history that whenever there was a paradigm switch, those
times gave birth to newcomers that became major players."
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