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Strategies & Market Trends : Three Amigos Stock Thread -- Ignore unavailable to you. Want to Upgrade?

To: Sergio H who wrote (4450)	5/7/1998 12:42:00 PM
From: Phil Jacobson	Respond to of 29382

Sergio, watch out asking for my thoughts on internet telephony. You might get what you asked for. Re: Internet Telephony and Jack Kemp as lobbyist. Thanks for forwarding the article. Hadn't seen it. First, on whether internet phone calls will be taxed like normal phone calls. The issue is whether the fees imposed on normal companies to ensure for universal service to rural and poor people will be endangered by having a portion of these calls siphoned onto the Internet. My opinion is that the Feds won't do that until there is a more obvious consensus about whether IP telephony will really take off. But more generally, over the next few years, as Internet commerce starts taking a larger and larger share of the transactions in the economy there will be pressure to impose taxes on those transactions. After all, the only difference is the medium. The government will allow the Internet to develop but once it's past its startup phase arguments can easily be made that "rich people" who have access to technology should not benefit disproportinally from a taxation standpoint just because they can complete their transactions on a PC. It was interesting that the article said that subjecting IP calls to fees would eliminate most of the cost advantage for sending calls over the 'net. That's pretty misleading IMO. Telephony over the net is NOT just about taxation differences. The actual engineering cost advantage of doing telephony over the net is huge. In simple terms a voice connection over normal lines takes up an entire circuit while an IP circuit can process thousands of calls simultaneously over the same line because all the calls are chopped into little pieces and put together on the receiving end. The equipment cost differences are also huge. The cost of telephone switches for processing regular phone calls is about 100 times as much as the cost of a series of Cisco routers and IP gateway boxes to do the same thing for IP calls. For voice the issue is quality and the one to watch is Qwest. They claim TODAY they have the same quality as a regular phone call. But for fax, the quality issue is much easier to deal with becuase it doesn't really matter how long all the packets take to get to the other end as long as they get there at all. That's a huge advantage. I know for a fact that a certain large long distance company is looking hard at sending international faxes over IP and not telling the customer provided they can know for a fact that the call would be completed with 100% quality. They'd still charge the customer for the full price of the fax call while saving about 80% on cost. The reason these savings "disappear" in the article is because the smaller companies like IDTC don't have the other scale efficiencies that enable large companies to lower the price of their long distance charges. QWST is probably a better model to look at than IDTC because they are executing very well to get the scale required to be the low cost provider for all types of services. The point is if these companies get critical mass they will still be able to charge less than the traditional long distance companies for an IP call vs traditional phone call even if both companies are taxed. Of course, this is why the Baby Bells and large long distance companies want these guys taxed now. They are in a pickle. If they create new IP telephony products they cannibalize their existing business, and the better the quality they provide the worse it gets. Long term it's OK but the managers are all paid based on quarterly results and they simply won't allow it without a huge fight that the top brass won't get into. If they ignore it altogether, small companies like IDTC get a real foothold. So they take it to the government and try to get these other companies to feel pain before they're big enough to inflict any themselves. Re: Jack Kemp - what a joke. He will be totally ineffective. The way to do the regulatory stuff is to get some people who completely understand the implications of the technology, can make good projections of where all the aspects of the technology are going (including call volumes, etc.) and get at the people behind the scenes who make the recommendations to the heads of the committees. I think getting high profile people like Kemp involved who don't understand the technology is ineffective at best and it might even be harmful. This will be a long drawn out battle and it will require lots of real work to be done to have any influence. In addition a lot of this battle will be fought on the local front with the state public utility commissions. Again, they need a model for making the right arguments based on economics and technology that can be replicated across the states and modified as needed. Re: stocks, I missed the tax issue when I bought IDTC and am looking for a good exit point. I am long QWST and get longer each time there's a good dip. They're much better positioned. Phil