May 2000

BY MARC ROBINS

Well, I can tell you with absolute certainty that they are laughing no more. Three years later, the revolution has arrived with a vengeance -- and the impact of packet-switching technology is being felt all the way from Wall Street to Main Street. It is also evident from the IP SIP-compliant phone you can now hold in your hand to large-scale carrier-class gateways and gatekeepers residing on the edges and in the hearts of today's massive networks.

The technology has matured with breathtaking speed, to the point where it is sometimes impossible to tell a circuit-switched or IP-based phone call apart. Complaints about sound quality have been replaced by great excitement over the coming availability of a slew of IP-based enhanced services never before possible under circuit-switched conditions.

Along with this stunning technological innovation and growing market acceptance has come the gold rush. Wall Street is finally placing valuations on Internet telephony listings in line with other red-hot areas in the Internet space, and there is acknowledgment by analysts and investors that this stuff is here to stay (see chart below). Venture capital firms and investment houses are also digging deep into their pockets. This access to capital is allowing formerly cash-starved VoIP equipment startups to put world-class talent on the development and fine-tuning of world-class solutions, and allowing the VoIP service providers to budget for mass market promotional and marketing activities.

THE DEAL FOR NET2PHONE
A startling case in point to illustrate how far we have come in a ridiculously short space of time: The battle for Net2Phone. Rumors were swirling a few weeks ago that AOL was on the verge of signing on the dotted line to acquire the Web-to-phone calling leader and developer of voice-enhanced Web-based communications -- a move that would have turned AOL into a bona fide global telephone company. It seemed to be a perfect fit. But then even more startling news came over the wire.

An AT&T-led consortium of companies made public their intent to acquire a 39-percent voting stake in Net2Phone. This consortium includes Liberty Media, British Telecom, and AOL. AT&T plans to invest $725 million for a 51-percent interest in the consortium, while the other partners are expected to purchase the remaining partnership interest. Considering that it was these same players (AOL excluded) that pooh-poohed Internet telephony in the early days and considered it be a technology "without teeth," this deal is even more telling: Internet telephony has truly come of age.

THE NITTY GRITTY DETAILS
As reported on our latest-breaking news site TMCnet.com a few days ago, the consortium will purchase four million newly issued Class A shares from Net2Phone at a price of $75 per share. In addition, the consortium will purchase 14.9 million Class A Net2Phone shares from IDT Corporation, Net2Phone's controlling shareholder, for $75 per share. Following these transactions, the consortium will have a 32-percent economic stake in Net2Phone for a total cash investment of approximately $1.4 billion. There is a also a right of first refusal to purchase IDT's remaining stake of 10 million Class A shares in Net2Phone, which if exercised would give the consortium a 59-percent voting interest and a 48-percent economic interest in Net2Phone.

What can we expect to see as a result of this deal? Net2Phone will be able to market services to AOL's 22 million subscribers. AT&T and Net2Phone plan to jointly develop new Internet voice applications for cable telephony and the business communications market -- with a vision of making telephones, Web pages, and fax machines extensions of each other.

The potential ramifications of the deal are exhilarating -- it portends the coming of free phone calls for consumers and new jaw-dropping services for businesses of all sizes. From all of us at Internet Telephony magazine, we hope you'll continue to join us in exploring all that is to come. 

Marc Robins is Vice President of Publications, Associate Group Publisher, and Group Editorial Director. His column, Mind Share, appears monthly in the pages of INTERNET TELEPHONY magazine. Marc looks forward to your feedback.