Asian Crisis No Sweat for IP
Telephony
By Gary Kim
The financial crisis that has rocked East and South
Asia since last year may not have widespread and
significant negative impact on the U.S. Internet
protocol (IP) telephony industry. In fact, at least
some carriers may benefit as hard-pressed
consumers turn to new IP services as a way to save
money.
Software and gateway providers may see slowdowns, but
most of the business this year and next will be in North
America and Europe, so the impact should be minimal. To
the extent that suppliers to the IP telephony industry also
have significant sales in the broader computer telephony
arena. However, they may suffer from weakness in the
call center systems business.
So far, carriers seem to be faring well enough. Indeed,
IDT Corp. (www.idt.net), which fired up its
Phone2Phone service in South Korea in February 1998,
was "very pleasantly surprised by customer reaction," says
IDT spokeswoman Sarah Hofstetter. "Actually, we think
it works to our advantage."
The reason: hard-pressed consumers are looking for ways
to save money, and slashing the cost of international
calling is one way to do that. Daewoo, the large Korean
business concern that is marketing the IDT service, "says
the crisis has killed business everywhere but in telecom,"
says Hofstetter.
In any event, few IP telephony carriers have
overwhelming exposure in Asian markets. RSL
Communications Ltd. (www.rslcom.com), which owns 60
percent of IP telephony provider Delta Three Inc.
(www.deltathree.com), earned only about 8 percent of its
1997 revenue in Asia, according to Richard Klugman,
Goldman Sachs analyst. A whopping 65 percent of
revenues were earned in the U.S. market, with Europe
contributing 27 percent. By 2002, it is estimated that RSL
will earn only about 11 percent of total revenue from Asia,
with the U.S. market contributing 41 percent, Europe 42
percent and Latin America 6 percent.
The Asian exposure, should there be any fall, is probably
the difference between the $22.1 million RSL earned in
that region in 1997 and the projected target of $48.5
million foreseen for 1998. For a company expected to
generate gross revenue of about $560 million, the
exposure is in the $26.4 million range, should growth
completely stall in Asia. That's less than 5 percent of total
gross revenue, even assuming the worst-case scenario of
zero growth from Asia.
Gateway supplier Vienna Systems Corp.
(www.viennasys.com), likewise, has seen "no impact at
all," says Kent Elliott, company president and CEO.
"What has been different, though, is that thinly capitalized
players who might otherwise have started their own VoIP
(voice over IP) services have been weeded out. In
markets such as Hong Kong, cell-phone adoption rates
are down, as people are looking for other ways of
communicating," says Elliott. "This market will not go
away."
Suppliers of software could conceivably see some
slowdowns, though Asian business isn't large for most IP
telephony software providers. For example, Oracle Corp.
(www.oracle.com) typically books 15 percent of total
revenue from the Asia-Pacific region, and sales from this
region were growing at 50 percent annually.
Early in 1998, growth appeared to have completely
stalled. But few IP telephony software firms have huge
exposure in the Asian markets.
There has been significant weakness in the share prices of
computer telephony components since about April,
however. In early June, for example, the Dow Jones
industrial average had temporarily declined 3 percent from
its yearly high. The small, technology-dominated Nasdaq
had dropped 7.8 percent. But a market basket of
computer telephony firms had backed off just more than
14 percent, according to analysts at Piper Jaffray.
Among the affected companies are Dialogic Corp.
(www.dialogic.com), Brooktrout Technology Inc.
(www.brooktrout.com), Natural MicroSystems Corp.
(www.nmss.com), Aspect Telecommunications Corp.
(www.aspect.com), Applied Voice Technology Inc.
(www.appliedvoice.com), Comverse Technology Inc.
(www.comverse.com), Davox Corp. (www.davox.com)
and GeoTel Communications Corp. (www.geotel.com),
for example. Several firms, including InterVoice Inc.
(www.intervoice.com) and Applied Voice Technology,
have strengthened since January.
The weakness appears largely unrelated to the Asian
developments, however, and would seem to have much
more to do with recent consolidations in the outbound
telemarketing business, which have depressed carrier
ordering of call center and telemarketing systems that
incorporate computer telephony technology.
Dialogic, however, reported in its March 1998 Securities
& Exchange 10Q report that first quarter revenue from
the Asia/Pacific region was down 16 percent from the
same quarter in 1997. Cambridge, Mass.-based
computer telephony concern Artisoft also reported
weakness in the Japanese markets, but that does not seem
to be directly caused by market turmoil, since U.S. sales
for the quarter also declined 29 percent. International
sales declined 18 percent compared to the same quarter
of 1997.
Still, some observers think suppliers of IP telephony
software and gateways will avoid damage. VocalTec
Communications Ltd. (www.vocaltec.com), for example,
is a supplier of both host and client software as well as IP
telephony gateways. During the first quarter, about
two-thirds of total sales were in the United States,
according to Phil Leigh, an analyst at St. Petersburg,
Fla.-based investment banking concern Raymond James.
And Leigh doubts there's any negative impact on
VocalTec. "There's enough demand in North America and
Europe to offset any weakness in Asia," he argues.
Because the market is in its infancy, there's no installed
base of usage to decline. Also, anticipated growth in U.S.
and European markets is strong enough to drive the
business forward, unaided by any significant business from
Asia, Leigh believes.
"We're pleased with our first quarter results," says
Howard G. Bubb, Dialogic president and CEO. "Despite
ongoing difficulties in the Pacific Rim, our overall business
has showed continued strength, particularly in Europe.
Also, Dialogic's business is diversified. IP telephony is one
of several key elements," not the entire business.
Company executives don't see that changing.
"Since the economics are so great compared to the public
network, we aren't as sensitive to gyrations," says Jim
Macki, Dialogic's director of product marketing. "We
haven't seen that it's affecting us."
Natural MicroSystems, the Framingham, Mass.-based
company that supplies digital signal processing (DSP)
boards and software tools for gateways, saw its revenues
from IP telephony components rise from nothing in 1996
to $75 million in 1997. That was enough to make IP
telephony the source of 25 percent of the company's
income.
"1997 is a watershed year for IP telephony," says Patrick
Fetterman, market segment manager for IP Telephony at
Natural Microsystems.
Inter-Tel Inc. (www.inter-tel.com) does not appear to
have much exposure to Asian markets in the IP telephony
area, though 81 percent of total net revenues come from
sales of IP telephony network management products. The
company's first quarter 1998 report noted the September
1997 commercial release of Inter-Tel Vocal'Net, the
company's standalone IP telephony gateway product. At
the end of March, however, "revenues from the sale of
this product have not been significant," the Securities &
Exchange Commission 10-Q report states.
The broader Internet community and Internet companies
generally came out unscathed by the Asian financial crisis,
says Derek Brown, Volpe Brown Whelan & Co. analyst.
That's in large part because such firms have little exposure
in Asian markets, being primarily U.S. operations.
Waves for Wireless
Still, large infrastructure projects that might compete with
IP telephony will suffer. That may be especially true for
new wireless networks that had anticipated new
construction. At least one wireless project has been put
on hold in Indonesia, for example, because the currency
drop has virtually doubled the cost of U.S. equipment.
Likewise, Motorola Inc.'s (www.motorola.com) first
quarter 1998 numbers slumped 2 cents a share below the
expected rate, and company executives said the Asian
crisis was largely to blame. Company officials said they
expected lower-than-forecast earnings for the second
quarter as well.
In fact, large infrastructure or transportation projects of
many types could be delayed. In June, for example,
Boeing Corp. (www.boeing.com) predicted that 150 new
aircraft orders would be lost over the next five years
because of the Asian financial troubles. The Japanese
economy sunk into recession and U.S. bankers rushed to
prop up a sagging yen, fearful of further instability in a
region beset by problems.
Ironically, the Asian financial crisis, which began in 1997,
has unevenly scratched the U.S. markets. In fact, the
biggest danger may be to domestic financial markets,
rather than to software, hardware or services suppliers
who sell to East Asian customers. So far, weakness in
stock prices, for example, has been isolated. And for IP
telephony carriers, the cost savings should prove even
more attractive to financially battered Asian consumers.
And battered they are. Gross domestic product (GDP)
seems to have fallen about 20 percent or more in South
Korea, Malaysia and Indonesia in the first quarter of
1998, and new forecasts suggest these economies will at
best see no growth next year.
At least in part, that's because International Monetary
Fund (IMF) assistance to Thailand, Indonesia and South
Korea calls for adoption of austerity plans that will slam
the brakes on growth. South Korea's GDP, for example,
is expected to drop six places, from 11th-largest economy
to 17th, in the 1998 international economic rankings,
according to LG Economic Research Institute of Seoul.
The good news is that the institute expects a return to
economic stability in 1999.
So why haven't we seen a greater impact?
In part, because U.S. exports to Asia aren't a huge part of
the economy. Japan accounts for only about 1 percent of
U.S. GDP last year, while total exports to Asia as a whole
are less than 2.5 percent of GDP. That may be one
reason why the financial carnage has had such little
apparent impact. Still, U.S.-made goods priced in dollars
will be more expensive in Asian markets. That should
slow exports to Asian markets, and should slow U.S.
economic growth as a consequence, say experts.
Indeed, the June Commerce Department report on trade
showed that the U.S. trade deficit soared to a record
$14.5 billion in April as the Asian financial crisis battered
American exporters, pushing down sales of everything
from commercial aircraft to farm products. The
Commerce Department said the April deficit was 9.5
percent higher than the March imbalance of $13.2 billion,
the previous record.
Still, that drag on the economy has been offset largely by
booming consumer demand, the report suggested. The
major danger appears to be a collapse of U.S.
confidence, should the Asian crisis spread to other parts
of the globe, triggering a crash in the high-flying U.S.
stock market. So far, that has yet to occur.
On the other hand, U.S. firms that build products in Asia
could benefit.
When local currencies devalue against the dollar, local
costs decline. The value of the Korean won against the
U.S. dollar dropped 50 percent in 1997, from 844 won
to 1,691 won to the dollar. Thai and Indonesian
currencies dropped at about the same rate. In dollar
terms, the wages that chipmakers pay to Malaysian
workers, who package semiconductors in their ceramic
casings or put together disk drives and other components,
have just declined 50 or 60 percent, for example.
As part of its $57 billion bailout agreement with the IMF,
South Korea was forced to lift many of its prohibitions
against foreign takeovers of local firms. So U.S. firms may
have an opportunity to acquire assets or partners that
would have been unthinkable before the crisis. If Asian
firms reduce research and development spending, U.S.
firms may benefit again.
The Asian crisis may slow sales for some providers of IP
software and hardware and prevent some entrepreneurs
from getting into the carrier side of the business. But it's
hard to imagine any appreciable long-term impact.
Platform suppliers appear confident they can prosper on
the strength of transatlantic sales (North America and
Europe), while carriers will continue to benefit from price
arbitrage opportunities.
According to New York-based Cowen & Co. Managing
Director Susan Passoni, the average per-minute price of
an international call was $1.16 in 1990, was just under a
dollar in 1996 and is about 89 cents in 1998. By 2000
such calls will cost about 83 cents a minute. Minutes of
use (MOU), meanwhile, will climb from about 33.3 billion
up to the 1998 target of about 90 billion MOU. By 2000,
international calls will represent some 105.2 billion MOU.
So even with price declines, the market will explode,
reaching about $95 billion in revenue.
So aside from suppliers of computer telephony
components, who may see sales softness for other
reasons, the larger IP telephony community should not
suffer from the Asian financial distress.
Gary Kim is a contributor to Sounding Board
magazine. |
