Net phone companies race clock
By Dan Goodin
ÿ
April 17, 1998, 12:00 p.m. PT
Internet phone companies are racing to cash in on what
may become a billion-dollar industry before the
government's wheels of bureaucracy can pick up speed.
Born from a start-up culture rather than the historically
plodding environment of their Bell predecessors, these
companies are looking beyond any potential regulatory
complications that may arise from a report issued late
last week by the Federal Communications Commission.
Although the agency left the door open to regulation
down the road, analysts do not foresee any
insurmountable obstacles for the burgeoning industry--at
least not yet. In releasing its report to Congress last
Friday, the FCC sent a somewhat mixed signal to the
industry. While the agency said it would be premature to
impose fees on Internet telephony companies
immediately, it went on to say that many of them appear
to be no different from traditional analog phone carriers.
That renewed fears that the government may impose
regulatory fees on companies that use Internet
technology to provide long distance and other telephone
services. While traditional phone companies such as
AT&T and GTE must pay so-called access fees and
universal service fees, Internet telephony companies
have so far been exempt. Concerns about the report
have been reflected in the decline of stock prices among
Net phone companies, which may have to temper the
pace of their development. But analysts say the
short-term decline should not deter the industry. "There's
really no reason for companies like IDT to get beaten up
by this report," said Vik Grover, a senior equity analyst
covering the telecommunications industry at Kaufman
Brothers. "It's foolhardy for the Street to think Internet
telephone companies could exist perpetually without
regulation when you're talking about billions of minutes
and 10 percent market share," he said, adding that he
sees no reason to change the short- and long-term buy
recommendations he has made for IDT and Level 3
Communications. Grover cites a number of reasons for
his continued confidence in Internet telephony
companies. For one thing, he and other analysts say the
real action is in the international market for Internet
phone services. For another, he said, if Internet
telephony is subject to regulation, companies could
avoid fees by building their own local networks, as a
number of companies are in the process of doing.
Finally, he said, regulation "could result in the
reevaluation of what is a fair access fee" and ultimately
bring fees down. Still, the report has done some
short-term damage. Before it was even formally
released, the report caused several high-flying Internet
telephony stocks to plunge. Most notably, IDT dropped
25 percent early this month following rumors of the
report's recommendations. The stock price of IDT,
which uses traditional phone networks and the Internet
to provide a broad range of telephone services, has
dropped another 10 percent since the report was issued.
Other phone companies embracing Net technologies,
including ICG Communications, Level 3
Communications, and Qwest Communications, also
experienced dramatic drops after rumors of the report
began to circulate. Qwest and Level 3 have regained
some of that ground but are still well below their
52-week highs. IDT spokeswoman Sarah Hofstetter
said there was no question that the company's stock was
affected by the report. Analysts who follow the Internet
telephony market agree that the report has brought
down the share prices. "It won't be a huge blow, but it's
definitely a setback," said Francois de Repentigny, an
industry analyst with Frost & Sullivan. "It means that the
prospects for rapid growth are diminished, and it will
allow incumbents like AT&T and MCI Communications
to have time to catch up." He explained that the biggest
reason for businesses and consumers to choose Internet
phone services in the near future is the lower prices they
offer over traditional services. If Internet phone
companies are forced to pay regulatory fees, the price of
their services will certainly rise. But de Repentigny adds
that regulation will "stifle the growth of Internet
telephony, but only domestically and only in the short
term." That's because the FCC regulation won't extend
to the international market, where long-term growth of
the industry is expected to be the highest. He added that
enhanced Net telephony services--such as sophisticated
messaging, faxing, and wireless features--eventually will
make the technology appealing even if its prices aren't
much lower than traditional phone service. Under federal
law, traditional long distance companies are required to
pay access fees to the local phone carriers on each end
of every call made. That means a carrier such as Sprint,
when completing a call from San Francisco to New
York, must pay Pacific Bell and Bell Atlantic between
2-1/2 and 3 cents per minute to each. In addition, Sprint
is required to pay into a universal service fund designed
to ensure that phone service is offered even in areas
such as inner cities and remote regions where the costs
are high. So far, Internet phone companies have been
exempt from paying fees because they are classified as
"information services." The exemption would disappear
if the FCC reclassifies the companies as
"telecommunications services"--as it suggested it might in
last Friday's report. Internet telephony takes advantage
of the so-called Internet protocol, or IP, an open
standard that carries email and other traffic over the Net.
Traditional phone networks require that a direct
connection be established between the caller and the
receiver and remain open even during breaks in
conversation. IP networks, by contrast, are much more
efficient. They break up data into tiny packets and send
them over numerous connections. The difference not
only saves money but also makes it easier to offer
enhanced features, such as videoconferencing and
messaging. As 10 percent to 25 percent of all telephone
calls are projected to be made with IP within the next
few years, Wall Street has taken a keen interest in
Internet telephony companies. Former parent Peter
Kiewit Sons spun off Level 3 amid strong demand for its
private stock. And in the last year, IDT's stock has
skyrocketed 430 percent, while shares of National
MicroSystems have more than doubled. In light of the
FCC's report, however, companies may need to revise
some of their business strategies. If regulations "are not
onerous or they are delayed, we will actively pursue IP
telephony," said Shelby Bryan, president and chief
executive of ICG. "If we have horrible regulations, we'll
go do something else for a living." He added that the
Englewood, Colorado-based company is reviewing its
business plan every month and is hoping that IP
telephony "will be a huge part of our business in the
future." ICG is not alone. Most other companies vying
for a space in the IP telephony market provide enough
other services that regulation--should it become a
reality--won't stop their momentum, said Riyad Said, a
senior analyst at Friedman Billings Ramsey. Long
distance and other phone services "are going to be a
piece of this much bigger market, which is effectively the
utilization of IP-based networks to support voice and
data," Said predicted. "I don't see [the report] in any
way as a death knell for these companies. These
networks will continue to be a viable and great way to
handle data and voice communications."
ÿ |
