Picked this up off the 3 Amigos thread; felt it had some relevance here.
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For Internet Phone Companies, Hype Is a Double Edge
May 6, 1998 -- A few weeks ago, I told you about the prematurely meteoric rise of
Internet phone stocks, and how even the most ardent believers in this fledgling business
were blushing from all that Wall Street affection.
Since then, the young industry has discovered that the very hype that drives stock prices
beyond reason has some dangerous side effects too. Last month, the Federal
Communications Commission signaled that it might impose new fees on Internet carriers,
fees that would fly in the face of earlier indications from the Clinton Administration that
the Feds would not crush Internet telephony under the weight of new regulations.
The contradiction matches the dual perceptions of the Internet phone industry. It's a
child with the market capitalization of middle age. It's just learning to walk, yet all those
investors betting on Internet phone companies to win the telecom derby has traditional
carriers preparing for war.
Internet phone companies used to worry whether their sound quality was good enough.
Now, they have to worry whether their political connections are sound enough to stave
off regulatory threats that are probably premature, yet brought on, in part, by the
industry's own success as selling itself to the Street.
So what are the suddenly vulnerable new-wave phoners to do? Facing the specter of
suffocating new federal regulations, the New Jersey-based IDT Corp. (Nasdaq: IDTC)
enlisted an influential ally to come to its political rescue. Enter Jack Kemp -- tech guy.
Kemp last week was named as a "senior strategic adviser" to the IDT board of
directors, less than two years after the company named Jim Courter, a former New
Jersey congressman who later worked for a venerable Washington lobbying firm, as
company presi dent.
Now, it's been well publicized how politicians are beginning to line up on either side of
the Microsoft anti-trust debate, and how heavyweights such as Kemp's former running
mate, Bob Dole, are being paid to push their sponsors' point of view. The computer
industry had to rally its forces in recent months to block the FBI from imposing an
encryption standard that left a back-door open for law enforcement. And online
lobbyists are pushing the "Internet Tax Freedom" bill, which would bar local
governments from imposing taxes on online services.
"As we become more and more visible, the industry is becoming the target of federal
and state legislative and regulatory efforts," noted Bruce Hahn, policy directory for the
Computing Technology Industry Association, in a recent trade interview. "My hope is
that more people in the industry wake up soon." And the Internet phone business has
seemingly gotten its wake-up call.
Stepping back for a second, I can remember three years ago, when IDT was just
delving into the Internet business, as an access provider. IDT made the
then-unprecedented move of hiring a celebrity spokesman and launching a full-fledged
marketing campaign. Of course, the celebrity was Barry Farber, the second-tier radio
talk show host who was years removed from his peak popularity. And the marketing
campaign consisted primarily of low-budget, late night TV spots in which Farber would
pontificate about the virtues of IDT, emphasizing how the service was "uncensored" as a
banner featuring a distinct "XXX" icon flashed in the background.
Times sure have changed, and Kemp, I'm sure, won't be featured in any future IDT
commercials. Instead of customers, IDT and others need to reach an audience of elite
decision-makers who can alter their fate. The politics can transcend technology. "Politics
is playing heavily in the future," says Jeff Pulver, a New York-based technology analyst
who has emerged as a spokesman for the Internet phone industry. "It's a political thing,
not a technological thing at this point."
The business of selling phone service over the Internet is still a drop in the bucket
compared with the overall long-distance market. By some estimates, there are 2,666
minutes of talk over traditional phone lines for every one minute on the Internet. Among
the reasons: few consumers are aware of the technology, and the quality is poorer.
But because the cost of carrying calls is so cheap, Internet phone companies can charge
as little as 5 cents per minute, and many traditional phone carriers see the technology as
a potential threat for the future. When this future, and the threat, officially begins is the
major question.
And it's become a political question. The FCC last month announced that it would
consider imposing fees against companies that sold online phone calls. Such fees --
which traditional phone companies already pay to subsidize basic phone service to poor
and rural customers -- would eliminate much of the cost advantage Internet carriers now
enjoy.
The FCC is waiting for a test case, and will likely rule against the industry, Pulver
predicts. Ultimately, the matter will end up before Congress. That's where the political
muscle of someone like Kemp will come in handy. "We'd love this to end up before
Congress and we hope Jack Kemp will be influential in setting up meetings for us on the
Hill," says IDT spokeswoman Sarah Hofstetter.
While Kemp doesn't have a noteworthy technological background, he is well-known as
a champion of deregulation. Since he and Bob Dole went down to defeat in the 1996
presidential campaign, Kemp has devoted much of his time to Empower America, an
advocacy group he co-founded in 1993 with fellow conservatives William Bennett,
Jeane Kirkpatrick and Vin Weber.
High on the organization's agenda: a call for a moratorium on any new government
regulations. IDT also has substantial business interests in international calling, and has to
be vigilant against governments abroad that want to impose new fees. Hofstetter says
Kemp has some expertise in this area and that IDT may have retained him just for this
issue alone.
"Jack Kemp is a heavyweight deregulatory figure in Washington," says Scott Cleland, an
analyst at Legg Mason Wood Walker in Washington. "They brought onboard a
powerful ally in that fight to protect their regulatory benefits." Kemp isn't the first
powerful ally that IDT has hired. Courter was brought on board in late 1996, directly
from a tenure at the renowned Washington lobbying firm of Verner Liipfert Bernhard
McPherson and Hand.
Ironically, both Courter and FCC Chairman William Kennard, who appears to be siding
with traditional phone companies against the Internet carriers, were partners in the firm
at the same time.
While lobbying has become a necessity for companies such as IDT, high-tech
companies shouldn't expect to win all of their battles. Even Pulver concedes that Internet
phone companies should eventually participate in the subsidy program, known as
universal access, although he thinks government should give the industry a chance to
grow first.
Other analysts believe the industry has grown old enough to fend for itself in the
shark-infested waters of polity. "Think of the Internet as a 17-year-old coming of age
and getting his first job and he says, 'You mean I have to pay taxes? That's not fair,"'
Cleland said. "Well, none of us think taxes are fair, but that's life. So far, the Internet has
gotten phenomenally benign and helpful regulatory treatment. And it won't last forever.
As the Internet grows up it won't need the infant industry protec tion it has had in the
past."
Another irony, incidentally, is that IDT generates very little of its overall revenue from
Internet phone calls. It has other lucrative phone endeavors. This, too, can be taken
more than one way. It could mean the company won't be hurt by over-regulation. And it
could also mean the company will lose a tremendous opportunity for which it's in prime
position.
If it wasn't so important, they might have sent Barry Farber to Washington instead of
Jack Kemp.>>> |
