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Net2Phone climbs on high-profile deals

Following a series of high-profile alliances, the Internet phone firm has watched its stock nearly quadruple.

Just a month after its initial public offering, Net2Phone's deal line has been ringing off the hook.

Following a series of high-profile alliances with PC makers, Web portals, and long distance carriers, the Internet phone company's stock has nearly quadrupled. Just today, Net2Phone stock climbed 32 percent to a new high after the company signed an agreement with long distance carrier Sprint to test its service for international phone calls in Asia.

Net telephony, or phone calls over the public Internet, is still an emerging market that is unknown to many mainstream Net users. Yet the market is expected to skyrocket, as consumers here and abroad realize that Web phone calls are often less expensive than regular toll calls, said Probe Research analyst Hilary Mine. For example, Net2Phone charges less than 5 cents a minute for domestic calls, and 10 cents to 20 cents per minute for international calls.

Consumers can download Net2Phone's software over a personal computer and make a phone call from that computer--speaking through a microphone--to a regular phone or another PC that has Net2Phone software installed.

Worldwide, consumers will spend 6 trillion minutes this year talking on the phone. Use of Internet telephony, analysts predict, will jump to 2.7 billion minutes this year--from a mere 200 million minutes last year. "It's still just a drop in the bucket, but the ramp-up is very heavy," Mine said.

Making a simple phone call over a PC is just the first step, according to Net2Phone. As companies improve the quality of Net calls, other unique features may come into play, such as PC video conferencing and unified messaging, which allows faxes, phone calls, and email to be retrieved from a single source.

"There's a vision of having a single device that's both a telephone and a computer, like Dick Tracy many years ago," said David Greenblatt, Net2Phone's chief operating officer. "That's the world we're in and Net2Phone's vision."

Some analysts think the vision is a pipe dream, however. The concept of making phone calls through a PC may not appeal to many.

"It's unwieldy and unnatural," said Forrester Research analyst Amanda McCarthy. "What they've got is a niche market that they've dominated."

While Net2Phone is making a splash on Wall Street with its computer-to-phone call service, the company also makes its money by offering traditional phone service over an Internet-based network provided by parent company IDT.

Yet Net2Phone so far is ahead of the pack in the nascent Internet telephony market. Other competitors include AT&T, MCI WorldCom, Qwest Communications International, and some newer Internet telephony-based firms such as Delta Three and iBasis, according to Robert Fagin, an analyst with Bear Stearns.

Marketing know-how
Analysts say Net2Phone's mass marketing push has been extremely effective, as it has inked alliances with many big-name firms. "Net2Phone has been very effective in cutting deals with people who have a lot of eyeballs. Now they've got a huge percent of the global Internet users, " Mine said.

Today's Sprint deal comes a day after Compaq announced it was making Net2Phone's Internet phone services available to new Presario customers in Canada, Latin America, and Asia.

Earlier this summer, Net2Phone inked a deal with America Online, which will integrate Net2Phone's technology into its popular ICQ instant messaging software. Netscape this spring incorporated Net2Phone's software into its Navigator Web browser.

The company is working on other alliances, executives said. Net2Phone is talking to handheld device makers, other PC makers, international phone companies, and Internet service providers. The company said it hopes to soon close a deal with Microsoft, to include its telephony software in the Internet Explorer Web browser.

Net2Phone plans to release new software next month that will allow a user to "chat" with another user online through a PC, Greenblatt said. This fall, the company plans to offer enhanced services, including messaging services and call routing, a service that can redirect a call made to a user's PC to a cellular phone or voice mailbox, the company said.

Over time, the company hopes to generate new revenue from the enhanced services. Right now, two-thirds of Net2Phone's revenue stems from PC-to-phone calls, with the rest from phone-to-phone calls, said Bear Stearn's Fagin.

Net2Phone lost $3.5 million on $12 million of revenue in 1998. During the first half of 1999, the company lost $2.1 million on $13.2 million in revenue.

Fagin said the distribution deals for its PC-to-phone service are important to Net2Phone as it tries to penetrate the phone-to-phone market and compete with AT&T and MCI WorldCom. He rates Net2Phone a "buy," even though he doesn't expect the company to make a profit until year 2003.

"It's a combination of building up infrastructure and spending on sales and marketing. By 2003, revenue will catch up with the operating structure," said Fagin.