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March 1999

Robert Vahid Hashemian Internet Telephony, All Grown Up

BY ROBERT VAHID HASHEMIAN


Okay, what happened? I mean with the Internet telephony stocks. Once the darlings of Wall Street, they have seen a slowdown while investors are gobbling up e-commerce stocks like there is no tomorrow. Like everything else, things will eventually cool off with the e-commerce craze. But one still wonders, whatever happened to the red-hot Internet telephony stocks?

From board manufacturers such as Dialogic and Natural MicroSystems to OEMs such as VocalTec, NetSpeak, and Franklin Telecom, to service providers such as IDT and ICG - all have seen their stock values erode in the face of the high-flying Internet stocks. A logical scenario would dictate that if the Internet is such a hit with the investors, Internet telephony companies should also be up there with the rest of the pack. Let me advise you in advance that this column is not a doom and gloom picture for the Internet telephony market. (Can you possibly imagine the editors of this fine magazine allowing negative comments about Internet telephony?) Kidding aside, there are certainly more factors at work here than just investor boredom. So first let's take a look back and then take a look ahead at what's in store for Internet telephony.

THE INTERNET EXPLOSION
The Internet itself was never much of a big deal to the financial world until Netscape came along. Then other companies followed suit and suddenly the Internet became a hot deal for investors. Almost overnight, countless companies cropped up with all sorts of ways to harness the power of this nascent technology. Internet telephony was one such field and promised the kind of features and savings that people could only dream of just a few years ago. This magazine covers an amazing array of capabilities that have been afforded to us through Internet telephony. The role that Internet telephony plays in the lucrative and high-exposure field of telecommunications has certainly helped it gain respectable notoriety, but more than anything else, it has been the sheer novelty and high-tech profile of this technology that captivated investors and pundits alike. But as of late, it seems that that the Internet telephony market has lost some of its luster and popularity and has taken a back seat to the newcomers (e.g., the e-commerce field). Or has it?

The Internet is not just the Internet anymore. It has become a superset for a number of fields that have cropped up in the past few years which utilize it. In other words, there is market segmentation at work and Internet telephony is one such market. Other markets include service providers, content providers, push, and e-commerce, just to name a few. Undoubtedly there will be plenty more sectors and segments in the years to come.

TELEPHONY'S TODDLER STAGE
Here is my opinion on the current and future state of affairs in Internet telephony. What seems to be declining investors' interest is actually the sign of a market segment starting to mature. Granted, Internet telephony is just a couple of years old, but in today's fast-paced world, a couple of years is all you get to prove yourself and Internet telephony certainly has achieved that. M&As (Mergers and Acquisitions) now seem to be the order of the day, and many Internet telephony companies have been or are being absorbed into larger networking or telecommunications corporations. This has been especially true on the OEM side of the business, in which Micom was recently acquired by Nortel, Array Telecom went to Comdial, Selsius went to Cisco, and Vienna Systems went to Nokia. You can bet there will be plenty more of this to come. If this isn't a testament to the immense power and functionality of Internet telephony, I don't know what is.

On the service provider front, there has not been a lot of activity as far as M&As go, but I expect that we are not too far from the action either. The Internet telephony-only service providers are faced with ever-increasing pressures from the top dogs in the industry. AT&T, Worldcom, and Sprint have stepped up their efforts to significantly increase their market shares. The airwaves are rife with commercials starring Michael Jordan, Paul Reiser, and the Jetsons to attract customers to their respective employers. But beyond that, the smaller phone companies have also been getting bolder, advertising their 10-10-xxx access numbers to tap into this lucrative market. Given such a competitive market, prices have taken a steep nose dive, creating a favorable environment for consumers - and a headache for service providers.

ROOM FOR GROWTH
But a real change is on the horizon. More and more, voice, video, and fax traffic are becoming packetized and transmitted over data lines. Internet telephony is estimated to be a $3-4 billion industry by 2004 - carrying over 10 percent of the voice calls in the US. The phone companies, big and small, have undertaken their own Internet telephony initiatives and will be offering them to consumers. If you are a company such as Worldcom with the vast Internet resources of MCI and UUNET, you would have to be insane not to start thinking about utilizing this medium to carry voice, video, and fax on a large scale. The challenge for today's Internet telephony-only companies is to continue to offer very competitive pricing while enhancing their quality and services. Eventually, either they will be absorbed into larger telephone companies for their expertise and their customer base, or they will merge with smaller providers to create larger organizations in the industry.

The Internet telephony board makers are the ones to watch, as their fate is still, in my opinion, undetermined. Just about all of the large board makers are also actively involved in the CTI industry. Their products are used in a variety of CTI applications from voice mail systems, to unified messaging solutions, to PBXs. Internet telephony is part of their business, but not their whole business. In many cases, the same designs and concepts that go into their CTI products have crept into their Internet telephony products as well, making these seemingly different industries inseparable - at least where IP (Intellectual Property) is concerned.

There lies the complexity for M&As. Many networking and telecommunications manufacturers may be interested in the Internet telephony side of these businesses, but they may have to acquire companies as a whole in order to get access to their Internet telephony capabilities - and that may be too much for them. This creates a condition in which many interested companies may then try to develop their own Internet telephony technologies, bypassing the already established board makers. Having said that, I still expect some action in this sector as stock prices (for the public companies) seem fit for takeover bids.

One thing is for sure, the Internet telephony sector is reshaping itself, and in my opinion, we are experiencing the quiet before the storm. New technologies and new players are entering the market at a rapid pace, promising a constant transformation of the landscape. Companies that were never thought of as telecom players are now suddenly thrown in the mix. Internet telephony as a practical concept may be maturing, but the Internet telephony revolution has just begun.

Robert Vahid Hashemian provides us with a healthy dose of reality each week in his Reality Check column. Robert currently holds the position of Webmaster for TMCnet - your online resource for CTI, Internet telephony, and call center solutions. He can be reached at rhashemian@tmcnet.com.







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