IBD article. Deutsche Telekom Attacks Internet Telephony Market
Date: 5/27/98
Author: Reinhardt Krause
In telecommunications, the best defense might
be a strong offense. That's the game plan at
Deutsche Telekom AG, which has jumped
into Internet telephony ahead of other
carriers.
Voice calls that travel over the Internet
bypass most older, circuit-switched networks
operated by traditional phone carriers. If
Internet telephony takes off as projected, it
could take business from carriers like
Deutsche Telekom on their home turf, say
analysts. The flip side is that Deutsche
Telekom can offer long-distance service for
the first time - via the Internet -from the U.S.
and elsewhere.
In April, Deutsche Telekom began a pilot
program selling Internet telephony services in
the U.S. It's the first global carrier to do so.
Earlier, it bought a 20% stake in VocalTec
Communications Ltd. The Israeli company is
one of the largest makers of Internet
telephony gear.
''Deutsche Telekom has jumped in with both
feet, while most of the other carriers are
tiptoeing in,'' said Erich Almasy, an analyst
with New York consulting firm Mercer
Management Consulting Inc.
The strategy for Deutsche Telekom, Europe's
largest telecom company, is twofold, analysts
say.
''In their minds, maybe they'll capture some of
the Internet telephony minutes instead of
upstart carriers,'' said David Goodtree, an
analyst at Forrester Research Inc. in
Cambridge, Mass. ''At the same time, they'll
be able to lower their own cost of doing
business.''
Deutsche Telekom can lower costs by
offering Internet telephony, which as yet
hasn't been imposed with the fees that
governments attach to conventional telephone
service.
Per-minute pricing for international calls over
the Internet is typically 45% to 60% less than
the long-distance rates charged by traditional
carriers, though that price differential is
expected to shrink gradually.
''We're in a learning phase,'' said James
Lennox, a senior Internet project manager for
the company. ''Prices are coming down all
over. We see that. We believe the
international market will be additive business
for Deutsche Telekom.''
With Europe's telecommunications market
becoming deregulated, Deutsche Telekom is
facing more competition at home. Privatized
in '96, the phone company is still 60%
government- controlled. Its sales rose 7% in
'97 to 67.6 billion German marks, or about
$38.2 billion U.S.
The fact that older public switched telephone
networks, or PSTNs, soon may be displaced
by emerging Internet-based networks is
putting pressure on Deutsche Telekom and
other traditional long-distance carriers.
''The major carriers need to reposition PSTN
to compete against the potential threat of
Internet-based voice in the international
market,'' said Chris Lewis, a London-based
analyst with market researcher Yankee
Group.
Internet telephone upstarts include IDT Corp.
of Hackensack, N.J., Bermuda-based RSL
Communications Ltd. and USA Global Link
Inc. of Fairfield, Iowa.
Deutsche Telekom and AT&T Corp. were
among the first big carriers to take Internet
telephony seriously.
As recently as a year ago, transmission delays
in phone calls over the Net resulted in such
poor quality that the technology was
considered a plaything of computer buffs.
Quality, though, has improved, and Internet
telephony is fast becoming mainstream.
Mercer expects the business market alone for
Internet overseas calls will grow to $2 billion
in '00 from $42 million in '97. The Net will
gobble up almost one-quarter of all
international calls made by businesses in '00,
from 0.5% last year, Mercer says.
In August, Deutsche Telekom spent $48
million for its stake in VocalTec. It also
agreed to buy $30 million in Internet
telephony products from VocalTec.
The products include gateways, which bridge
the technical differences between older
PSTN systems and new Internet- based
networks. Calls that originate on regular
phones are switched over to Internet
networks by gateways.
Deutsche Telekom began its first commercial
Internet telephony trial in the U.K. last year.
It also gained experience in an earlier project
involving 1,000 customers in Japan,
Germany, the U.S. and Canada.
Those moves were a wake-up call for other
carriers, says Tom Evslin, chief executive of
Internet telephony start-up ITXC Corp.
''The traditional telcos were hardly moving at
all, but they got frightened when Deutsche
Telekom announced its investment in
VocalTec and made other moves,'' said
Evslin. ''They didn't trust Deutsche Telekom
to install all those gateways and software just
in Germany, so that's galvanized them in some
respects.''
North Brunswick, N.J.-based ITXC
provides services that route calls between
existing PSTNs and the Internet's backbone.
Its investors include AT&T and VocalTec.
Deutsche Telekom isn't saying what, if any,
relationship it will have with ITXC, Lennox
says.
Much of the fanfare surrounding Internet
telephony involves calls that originate on
personal computers. Deutsche Telekom's
''T-NetCall'' project, however, lets users
make international phone-to-phone calls -
without PCs.
''Of course, we also can offer PC-to-phone
telephony,'' said Lennox. ''We'll do as we see
fit by watching the pilot project.''
Companies can make Internet calls by using a
touch-tone phone and entering a special
12-digit access number in addition to the
number being called.
Deutsche Telekom says it's possible to reach
a limited number of cities in 20 countries.
Prices range from 19 cents a minute for calls
to Britain to 99 cents a minute for calls to
China. That represents at least 50% savings
over normal phone rates.
Still, it's early in the game pitting highly
regulated PSTNs vs. Internet upstarts,
analysts note.
In the U.S., the Federal Communications
Commission has indicated that
phone-to-phone calls over the Internet may
be regulated like regular calls, including fees.
In addition, international agreements forged
through the World Trade Organization are
lowering the fees carriers pay to transmit
normal cross-border calls.
Lennox says that businesses will need to
assess the trade-offs in price and quality of
Internet-based calls with regular voice
services.
''It's still not clear what proportion of PSTN
traffic will move to the Internet backbone,''
said Yankee Group's Lewis. Deutsche
Telekom, he adds, could merely be hedging
its bets.
(C) Copyright 1998 Investors Business Daily,
Inc.
Metadata: DT VOCLF IDTC RSLCF T I/4891 I/3241
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