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Net phone start-ups dial in deals with telecom giants

In a search for profits, Net phone companies are ringing in businesses and partnerships, even as the broader telecommunications industry continues to change.

    If you can't beat them, sell to them.

    In a search for profits, Internet-based phone companies are ringing in businesses and partnerships, even as the broader telecommunications industry continues to morph in unexpected ways. As a result, companies such as Net2Phone and Deltathree are offering new services and partnering with traditional phone companies to bolster their ranks against long-distance rivals.

    "The problem they tried to solve originally, cost of long-distance calls, has dissipated because calls are so cheap now," The Yankee Group analyst Aurica Yen said. "They're evolving past voice calls and exploring different revenue streams."

    Established Net phone companies Net2Phone, Deltathree and others burst onto the scene in the mid-'90s, offering phone calls over the Net as a cheaper alternative to traditional long-distance carriers, such as AT&T, Sprint and MCI WorldCom.

    Traditional carriers have responded by lowering rates, and losses by Net-based phone companies continue to mount. As a result, the early Internet telephony pioneers and start-ups, such as Dialpad.com, have begun targeting corporations, striking partnerships with traditional service providers and touting new phone services to drum up business.

    These new entrants were thought to be next-generation competitors to the likes of AT&T and WorldCom, but even they are finding that simply selling phone minutes is not enough of a business model. As a result, they are scurrying to broaden their approach to the market in order to capture higher-margin business customers.

    While phone calls over the Net have long been touted, consumers have been slow to embrace the technology. Out of an estimated 7 trillion minutes people spend on the phone each year, only 1.7 billion minutes were calls over the Net, according to Probe Research. That number, however, is expected to swell to 7.3 billion minutes this year.

    The slow adoption rates resulted from poor voice quality and unwieldy technology: Many Net phone calls are either done through credit cards, where people have to dial a special 1-800 number and use passwords. Another way is through a PC: Consumers download a Net phone company's software, then they dial a number on the PC and speak through a PC microphone.

    The Internet telephony companies have traditionally marketed their services through high-profile alliances with Web sites such as Yahoo or Excite. But to boost sales, they're now pursuing deals with traditional service providers, like the Baby Bells, who can then offer the Net phone service to their own customers. They're also eyeing the corporate market.

    With improved voice quality, the Net phone companies are also creating or partnering with phone makers that allow people to simply pick up the phone and make calls. For example, Newark, N.J.-based Net2Phone, which is partly owned by AT&T, has partnered with Panasonic to allow people to make long-distance calls directly through Panasonic phones.

    They're also in various stages of offering new Net-based phone features, such as unified messaging, the ability to check voice calls, emails and faxes from a phone, computer, or handheld device.

    Net2Phone recently created a new venture, called Adir Technologies, aimed at selling Net phone-system software that it uses for its own network to other service providers.

    The company also created a business division four months ago, targeting companies that want to save money on long-distance bills and use new features, like unified messaging. Net2Phone has already signed on 25 companies, whose employees simply dial the number 8 to make a Net-based call, Net2Phone spokeswoman Sarah Hofstetter said.

    Deltathree, which has renamed its consumer Web site, "iConnectHere.com," recently began partnering with service providers and other businesses, which are selling Deltathree's Net phone services to its customers. Deltathree, for example, struck a deal with online credit card company NextCard, which sells Deltathree's calling cards. Internet Data Systems, an Internet service provider in Poland, is also offering Deltathree's services. Deltathree is based in New York, N.Y.

    Deltathree chief executive Norm Bardin said signing on traditional service providers to sell its services will be a cheaper and more effective way to recruit new customers. The company will also launch new products to tackle the corporate market in mid to late 2001.

    Bardin said its new business strategy will allow the company to become profitable sooner than analysts predicted. Bardin declined to be specific as to when he expects profits, but analysts had previously predicted profits by late 2003.

    To raise revenue, Santa Clara, Calif.-based start-up Dialpad.com, which offers free domestic phone service for consumers with PCs, has just begun selling calling cards. With the calling cards, consumers can make Net-based phone calls with regular phones for a fee. Like rivals Net2Phone and Deltathree, Dialpad.com executives also plan to start offering international long distance at low prices and will soon go after business customers.

    Phonefree.com, which offers a service similar to Dialpad.com, is marketing itself as a communications Web portal where people can get all their voice, email and video-based messages. The New York, N.Y.-based company, which makes most of its revenue from advertising, is also developing a "community" forum for people with common interests to communicate.

    Phonefree.com, which targets consumers and small businesses, plans to partner with cable operators and digital subscriber line (DSL) service providers to increase revenue, Phonefree.com chief executive Jan Horsfall said. Through the service providers, Phonefree.com plans to offer, for $30 a month, unlimited long-distance calls, he said.

    Analysts say the impetus for the new business strategies is the need for Net phone companies to show they can become profitable.

    Net2Phone, whose stock has nose-dived from $76.50 to about $16.50 this year, recently reported a fourth-quarter loss of $15.9 million, or 29 cents per share. Revenue, however, grew from 11.1 million last year to $24.9 million this year.

    Deltathree, whose stock price has fallen from a high of $62.38 to $3 this year, lost $10.3 million, or 36 cents per share, in its second quarter. The company's second-quarter revenue inched up from $2.2 million last year to $7.9 million this year. The company will announce third-quarter earnings later this week.

    Internet telephony "adoption is still slow-going," the Yankee Group's Yen said, "but it's improving and these new business models will fuel wider adoption."