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THE DAY AHEAD: Net2Phone starts talking, but shares may slide

Net2Phone Inc.'s (Nasdaq: NTOP) quiet period is officially over today and the Internet telephony company better start talking to justify its recent run-up.

Shares surged nearly 33 percent to 47 1/8 Monday on this tasty news nugget: Net2Phone's operating chief David Greenblatt will speak at the Telecom Business ྟ conference in New York Tuesday.

Net2Phone: Dialing up big returns?

But Wall Street will surely be listening to see what Greenblatt has to say. No pressure though. Net2Phone, enjoying the last few hours of its quiet period, was mum on Monday on the stock movement. On Tuesday morning, Net2Phone announced a new president and distribution pact with Compaq.

Net2Phone, which provides low-cost telephone calls over the Internet, has been on a tear since going public July 30 with a 5.4 million share initial public offering priced at $15.

Net2Phone made a nice debut, drifted toward its IPO price but then surged Aug. 9 after the company became major tenant on NBC Interactive and CNet's (Nasdaq: CNET) portal, and other NBC online properties. NBC, and GE Capital will get equity stakes in Net2Phone. Net2Phone also is distributed via deals with America Online (NYSE: AOL) where the service is packaged with Netscape's Navigator and ICQ.

So Net2Phone has friends in high places. Big deal, we don't know what the terms of the deals. Why aren't we impressed? Call it learning from history. The Net2Phone story sounds like a re-run of the VocalTec (Nasdaq: VOCL) and NetSpeak (Nasdaq: NSPK) tales two years ago.

Although Net2Phone and its Internet telephony may sound revolutionary, it isn't and the track records of competing companies' stocks are not comforting. Net2Phone, a spin-off from telecommunications company IDT Corp. (Nasdaq: IDTC) has been working on Internet telephony since 1996. In 1997, IDT shared the Internet telephony field with VocalTec and NetSpeak. Net2Phone shareholders better hope history doesn't repeat itself when it comes to Internet telephony stocks.

VocalTec was a big Internet telephony player with friends in high places. In 1997, Internet telephony was the next frontier. It didn't work out that way, but that's what the visionaries at the time were claiming.

In October 1997, VocalTec was trading at $32. That VocalTec rally in 1997 was triggered after Deutsche Telekom bought a stake in the company. The company's shares haven't come close to that mark since and closed at 9 3/4 Monday .

Another history lesson can be found in NetSpeak (Nasdaq: NSPK). At the same time, VocalTec was becoming the next big thing, NetSpeak was making noise with its WebPhone product. NetSpeak, which went public in May 1997, also had friends in high places. Motorola Inc. (NYSE: MOT) bought a 11 percent chunk of the company in June 1997 and pushed shares higher. NetSpeak, like VocalTec topped out at $32 a share, after Motorola upped its stake to 32 percent in April 1998.

NetSpeak now trades at about $10 and focuses on "solutions." What happened? The same thing that will happen to Net2Phone. Internet telephony will be packaged into existing software from companies like Microsoft Corp. (Nasdaq: MSFT).

In its regulatory filings, Net2Phone cites VocalTec's Internet phone, NetSpeak's WebPhone and Microsoft's NetMeeting as competition. Net2Phone also states the obvious in its filings: "A number of large telecommunications providers and equipment manufacturers, such as Alcatel, Cisco, Lucent, Northern Telecom and Dialogic (which has entered into an agreement to be acquired by Intel), have announced that they intend to offer similar products."

That competition talk doused enthusiasm for VocalTec and NetSpeak and could bring Net2Phone down. If VocalTec and NetSpeak couldn't find first mover advantage in Internet telephony how can Net2Phone be a star with third mover advantage? Start talking Net2Phone. We're listening.

Net2Phone's last pop?

Although the Internet telephony history lesson could be disconcerting for Net2Phone shareholders, the stock could get a boost real soon as underwriters start coverage of the stock.

Gee you think those ratings will be of the "buy" variety.

We'll go out on a very short limb here and predict at least "buy" ratings from Hambrecht & Quist, BT Alex. Brown, and Bear Stearns, Net2Phone's three IPO underwriters.

Just remember that these underwriters are paid to say nice things about the company.