AT&T fights back with Net2Phone investment

AT&T is putting together the last pieces of an Internet strategy aimed squarely at America Online and rival Time Warner.

John Borland Staff Writer, CNET News.com
John Borland
covers the intersection of digital entertainment and broadband.
John Borland
4 min read
The phone giant is putting together the last pieces of an Internet strategy aimed squarely at America Online and rival Time Warner.

With today's $725 million investment in Internet telephone player Net2Phone, AT&T is in a race against AOL and Time Warner for the Internet business of the average consumer. AOL and Time Warner also are moving quickly toward their own high-speed Net and Internet telephony packages.

Today's purchase marks an admission that the company needs to move quickly on this front, and can do that more easily by buying into an industry leader instead of relying on its own technology, analysts say.

Internet telephony is thought to be a worthy rival to traditional phone networks since it allows a call to be sent across the public Internet, rather than a dedicated connection on a phone network. An Internet phone call allows a transmission to be broken into "bits" as it is sent, then put back together at the other end, eschewing traditional methods that require dedicated copper phone lines between each calling party. But the quality of calls has not yet reached that of traditional phones, analysts said.

The phone giant has flirted with Internet telephony features for several years, but it hasn't created the technology to bring Net voice services directly to customers' personal computers or to integrate the products with high-speed Internet service Excite@Home, analysts add.

"They're saying, 'We realize we don't have the ability to do these assets in house,'" said David Eiswert, an analyst with the Strategis Group. "AT&T is taking advantage of a moment in time to make things happen sooner rather than later."

The move marks one of several made in the last few days that solidify AT&T's see story: AT&T consolidates control over 
Excite@Home strategic direction inside its Internet business. It acted early this week to bring the Excite@Home service under direct control, streamlining the line of command at the struggling cable Internet service. The Net2Phone stake will add a Net voice component to the giant's voice, video and data package that AT&T can't currently offer on its own.

AOL has already struck deals to add Net2Phone services to its instant messaging software, and it owns a 5.4 percent stake of the company. AT&T's action blocks the online giant from moving further down this path with Net2Phone, analysts said.

The deal marks the first time that AT&T has moved into the business of providing Internet based phone calls from a personal computer, instead of simply between regular telephones.

"This is a serious phenomenon that is gaining momentum," said AT&T spokesman Mark Siegal. "We want to participate."

AT&T has been experimenting with Internet-based telephone services for several years, but without ever reaching the high profile of Net2Phone or its peers in the industry.

Net2Phone, along with other players such as MediaRing and DialPad, has built a relatively small but loyal following of people who use the services to make cheap calls using their computers. The services have been most attractive to international callers, because the Internet companies can offer far lower prices than the still-high overseas rates. But as the quality of Net calls has gone up, more people have begun using them for ordinary long-distance service as well.

While the Net companies have been targeting the online audience, AT&T and the other carriers have been working on adding Internet-based telephony services into their own networks, seeking the considerable cost savings this technology allows.

AT&T has offered its own cheap Internet calling service in a handful of cities around the United States for several years, called "Connect and Save." But unlike the Net2Phones of the world, this service simply used ordinary telephones: consumers dialed a few extra digits to get into the system without ever having to know they were using Internet technology.

The company also has launched a plan to bring cable local-telephone services, which began to reach consumers last year, into the Internet world. The company has said it plans to start switching this cable-phone network to an Internet Protocol (IP) system by the end of this year, but that commercial use of the service probably won't happen until 2001.

It's this slow-moving time frame that some analysts say has driven AT&T to You've got 
Time Warner the Internet company's door. While the company works on building the Internet features into its infrastructure, it can offer the Net2Phone services directly to consumers.

"It's often cheaper to buy rather than build things yourself," said Amanda McCarthy, a Forrester Research analyst. "Time to market is an important factor."

AOL, which is viewed as the chief rival to the Excite@Home service, has also been interested in a Net2Phone stake, and has recently moved ahead with its own telephone and Net voice communications strategy.

Today's investment also helps ameliorate any competitive threat the PC-based telephony industry might have raised to AT&T, some analysts say.

"They're trying as much as possible to get a foot in the door at companies that might pose a threat to them," said Laurent Guengant, an analysts at telecommunications research firm TeleChoice.