The Wall Street Journal


   December 27, 1999 [E-Business]

Next Web Battle: Phone Calls;
Upstarts Race to Stake Out Turf

   By REBECCA BLUMENSTEIN
   Staff Reporter of THE WALL STREET JOURNAL

   Web talk is serious business. After years of experimentation, Internet
   phone calls are becoming commonplace, and dozens of players are
   securing big backers and partnerships to get in on the chat. Some
   companies are specializing in the backbone needed to route such calls
   from one personal computer to another. Others are assembling Internet
   White Pages, since there is no common standard for Internet phone
   numbers such as area codes.

   E-Business Start-ups are enlisting veterans of the Web's earlier
   battles. "This feels a lot like the search-engine wars early on," says
   Jan Horsfall, a founder of Lycos Inc., who is now chief executive
   officer of PhoneFree.com (www.phonefree.com), a New York-based service
   that provides free PC-to-PC calls. PhoneFree and its rivals are
   enticing users by following the classic Internet model -- providing
   free services supported by ads. Hungry for publicity, the company is
   sponsoring college phone-tossing events to symbolize the death of
   traditional dialing.

   The founders of one of the earliest entrants, Net2Phone Inc. of
   Hackensack, N.J. (www.net2phone.com), think that voice on the Internet
   will go much further than free phone calls. With America Online Inc.
   as one of its biggest investors, Net2Phone went public this year
   promising that voice will soon be integrated into almost every Web
   site and everything that people do on the Internet.
   [An illustration of Web phone calls]

   "Picture a Nordstrom store with no employees. That's the Web today,"
   says David Greenblatt, Net2Phone's chief operating officer. Text alone
   will always limit e-retailing, he says, because most shoppers will
   eventually need to talk to a salesman. "More than 80% of the people
   who are visiting sites online today walk in and walk out," Mr.
   Greenblatt says. "Voice will increase the success of sites
   significantly."

   Net2Phone has signed long-term deals with many of the biggest Internet
   players. To build on its AOL connection, Net2Phone recently signed
   multiyear deals to integrate its voice software into the online
   provider's instant-messenger service and Netscape's browser. Vendors
   such as 1-800-FLOWERS are using Net2Phone to talk to online customers,
   who typically use headsets or microphones plugged into their PCs.

   As an early arrival in the field, Net2Phone has a leg up. But newer
   players are generating buzz. Dialpad.com of San Jose, Calif.
   (www.dialpad.com), has signed up more than a million customers since
   October by being the first to offer free calls from PCs to phones.
   Dialpad pays a fee to the regional Bell companies in exchange for
   completing the calls to phones, which means it loses money every time
   a customer uses the service. No matter, say Dialpad officials, who
   believe that advertising will offset losses.

   The traditional phone companies publicly insist that Internet
   telephony is a niche business based on unrealizable expectations.
   "There's no such thing in this world as a free lunch," says Howard
   McNally, an AT&T Corp. vice president of transaction services. "Sooner
   or later, the economics of the Internet are going to catch up with
   it."

   An AT&T alumnus offers a retort. "Traditional phone companies don't
   like the Internet because it's a network they can't control," says Tom
   Evslin, who oversaw AT&T's Internet business before founding his own
   firm, ITXC Corp. of Princeton, N.J., three years ago. ITXC specializes
   in transmitting Internet calls and, with other companies such as
   iBasis Inc., acts as a wholesaler to other companies -- Dialpad, for
   one.

   Traditional phone companies like MCI WorldCom Inc. and even AT&T
   transmit some phone calls over the Internet. Free of access charges,
   the Net lowers costs by sending information such as voice in packets
   instead of tying up an entire line on a traditional circuit. AT&T has
   its own Internet calling service -- not free, but relatively cheap --
   in limited markets. A consumer using the service, which requires
   dialing a special code, can call Hong Kong from the U.S. for 35 cents
   a minute, compared with AT&T's $1.53 a minute Hong Kong rate.
     _________________________________________________________________

                          Who's Who in Web Phones

     * PhoneFree.com, N.Y.: Smashes phones to publicize its free PC-to-PC
       calls. (www.phonefree.com)
     * Dialpad.com Inc., San Jose, Calif.: Newcomer offers free
       PC-to-phone calls. (www.dialpad.com)
     * Net2Phone Inc., Hackensack, N.J.: Has inked deals with the
       Internet's biggest players. (www.net2phone.com)
     * Zeroplus.com, Germantown, Ind.: Broadwing Inc. just acquired 18%
       stake. (www.zeroplus.com)
     * DeltaThree.com, N.Y.: Offers cut-rate international calls.
       (www.deltathree.com)
     * ibasis Inc., Burlington, Mass: Carried 150 million minutes of
       Internet calls in '99. (www.ibasis.net)
     * ITXC Corp., Princeton, N.J.: Run by former head of AT&T's Internet
       unit. (www.itxc.com)
     * Visitalk.com, Phoenix: Wants to be global communications
       switchboard. (www.visitalk.com)
     _________________________________________________________________

   In 1999, venture capitalists have poured at least $200 million into
   Web-talk businesses, says Mark Winther, vice president of
   telecommunications services for International Data Corp., a
   market-research firm in Framingham, Mass. That's more than four times
   the level of 1998 spending on Web-talk outfits, Mr. Winther says. He
   predicts the 1999 amount will double in 2000.

   One investor in the field is Chase Capital Partners, which has a stake
   of more than 12% in ITXC. "We felt that over time, there was no reason
   that you wouldn't see voice as a service of the Internet," says Arnie
   Chavkin, a general partner of Chase Capital Partners. He predicts a
   big surge as mobile phones become hooked into the Internet through
   voice.

   Because the Internet sends information in bursts, callers sometimes
   grumble about scratchy or garbled calls. But users say the sound is
   improving. "The audio quality is 100% better," says Myron Baron, a
   64-year-old retiree who primarily uses Phonefree.com and has cut his
   long-distance bill in half.

   A remaining challenge is compiling a universal address book to allow
   PCs logged on to rival services to call each other.

   "It's not going to do any good to have several million software phones
   and no way to complete the call," says Michael O'Donnell, president of
   Visitalk.com (www.visitalk.com), a Phoenix start-up that assigns each
   user a permanent global number. Among the company's major investors is
   China.com, one of China's biggest Web companies.

   Write to Rebecca Blumenstein at [log in to unmask]


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