International carriers, from WorldCom to China Telecom, want to route some of their long-distance calls over Net-based networks because it's cheaper. And they're partnering with Internet telephony carriers, such as iBasis and ITXC, to do it. In addition to being less expensive, Net-based carriers also are able to offer callers telephony services that traditional phone companies can't.
The Net-based carriers, also called "wholesale service providers," essentially rent their private Net-based networks to carry voice traffic from other phone companies. A caller in the United States could make a long-distance call to Europe, and the call could be connected via an iBasis or ITXC Net-based network without the person even knowing it.
"What's attractive is (telecommunications carriers) don't deal with the infrastructure issues," said Laurie Gooding, an analyst at Cahners In-Stat Group. "When their traffic is exceeding their network capabilities, they have the choice of building more to their network, installing their own IP (Internet Protocol) network, or they can off-load some of that traffic to wholesale carriers."
The number of phone call minutes routed over the Net is expected to jump from 1.7 billion minutes last year to 6.3 billion minutes this year. Sixty to 75 percent of those calls are routed through Net-based carriers, according to market research firm Probe Research. In total, people spend about 7 trillion minutes per year on phone calls.
iBasis and Gric Communications recently inked deals with Jitong Communications, China's third-largest phone company. iBasis, whose largest customer is WorldCom, recently signed a deal to route wireless service provider China Mobile's customers' phone calls and faxes. ITXC, whose customers include telecommunications providers China Telecom, Bell Atlantic and Ameritech, recently partnered with Australian-based phone company Telstra.
Even AT&T has the Internet telephony bug. The company owns its own global Net-based network and recently invested $1.4 billion in Internet telephony company Net2Phone, which makes software and provides the network that makes it easy for people to make cheap long-distance phone calls from a computer.
While some traditional carriers, such as AT&T and Germany's Deutsche Telekom, have their own private Net-based networks and provide wholesale services, most carriers are lagging behind in Internet telephony, analysts say. As a result, the market potential is huge for Net-based carriers, which include Genuity, Qwest Communications and Level 3.
A big selling point for Net-based carriers is their ability to offer new telephony services not available from traditional phone companies, analysts say. New features include unified messaging, the ability to check email, voice mail and faxes on your computer or phone, Internet call waiting, and call routing, a service that can redirect a call made to a person's PC to a cellular phone or voice mailbox.
The Net-based carriers can make good money partnering with traditional carriers to offer the new services to their customers, Cahners' Gooding said.
"These next generation of services are the next revenue opportunity with Internet telephony," Gooding said. "Traditional carriers don't have to solve the problem with building and billing these new services. And they get an attractive cut in revenue generated by those services."
Wall Street analysts are optimistic over the Net-based carriers' prospects. iBasis and ITXC both have received "buy" ratings from analysts.
PaineWebber believes ITXC's shares will rise fourfold in the next 12 months. The analyst firm has given the company, whose shares are trading around $32, a 12-month price target of $120. Similarly, Chase Hambrecht & Quist has given iBasis' stock a 12-month price target of $114. The company's shares are trading around $38.
The companies are not yet profitable but expect to be within two years. Chase H&Q analyst Eric Zimits said the lack of profits is not yet a concern because it's important for the companies to continue to invest money in building their networks, improving their services so they can attract new customers.
"It's a different business model than an online retailer, where it launches the business and loses money for a period of time," Zimits said. "For iBasis, they have to invest a lot on network facilities and pay high up-front costs, but over time, they'll put more traffic on their network."
iBasis and ITXC have seen the number minutes of Net traffic jump in the past year. ITXC carried 131 million minutes in the first quarter of 2000, compared with 11 million minutes during the same period a year ago. iBasis reached 85 million minutes in the first quarter of 2000, compared with 16.8 million during the same time last year.
The two companies have similar business strategies, although ITXC recently created a service that allows service providers and communications Web sites to provide customers the ability to make PC-based Net phone calls.
Gooding said the only obstacle for ITXC, iBasis and other Net-based carriers is whether more traditional carriers choose to build their own Internet-based networks.
But executives from Net-based carriers are not concerned and said the telephony market is big enough for them to succeed.
"The traditional service providers can't be everywhere," said ITXC chief executive Tom Evslin. "We're doing fine being in 60 countries. We carry traffic where they don't have a presence. It's no problem finding customers who need to get to countries and can't do it themselves."