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NetSpeak bets on Net phones

The nascent Net telephony software firm is getting investments from heavy hitters--an indication that many want a piece of the relatively uncharted area.

Place your bets.

That is the status of most companies when it comes to the emerging Net telephony tool market, and there may be no better example than software provider NetSpeak (NSPK).

The nascent firm, which went public last June, recently announced large investments by computer networker Bay Networks and electronics giant Motorola totaling about 45 percent of the company, a clear indication that an array of firms want a piece of the action, no matter how remote wide adoption is from current market realities.

NetSpeak makes a combination of client- and server-based software applications that allow customers to offer a variety of functions on top of basic IP-based voice service. For example, this week the company rolled out a new version of its WebPhone software that allows users to make calls via their PCs and adds the capability to take calls while users are surfing the Net on a single telephone line. It also allows third parties to provide an icon for users to click so they may call a company during an electronic commerce transaction.

Using IP (Internet protocol)--the dominant transmission method for the Net--for voice calls has several benefits, most notably the cost reductions gained by using pipes meant for data transmissions for long distance calls in business and residential settings. NetSpeak is focused on the corporate side of the opportunity, where high-speed network infrastructure makes IP telephony a natural--though adoption is in its early stages.

Various market researchers have pegged the market for hardware, software, and services that take advantage of cheaper IP-based voice transmissions for huge growth. International Data Corporation predicts a $20.5 billion opportunity for carriers in the IP telephony space by the year 2002. Another player in the market to provide the enabling software to the industry is VocalTec Communications.

The company's stock is trading near a 52-week high at more than $31 per share, despite yearly revenue for 1997 of only $5.4 million and losses of $5.1 million for the year. The company's chief financial officer, John Staten, said NetSpeak is unlikely to make money in 1998, choosing to bet its future on a nascent market that is expected to bloom in two to three years at the earliest.

"We have the belief that when IP becomes the communications infrastructure for the future, any connection to that infrastructure has to have some kind of IP software module," said Staten. "But the future of IP telephony is not now."

NetSpeak has attempted to spread its software across various segments of the networking industry to cover itself during the expected "fight for the pipe," according to Staten. Thus, NetSpeak has deals to embed its software in equipment from Bay and Siemens, to offer its tools to service providers such as MCI Communications and Infonet Services, and to develop combined products for the cable and wireless markets with Comcast and Motorola.

The company also has targeted other aspects of the telecommunications infrastructure sector via deals with Siemens and Rockwell.

The $37.6 million investment by Bay was announced in January. The deal allows the networking firm to utilize NetSpeak's software in its remote access and routing hardware, as well as resell the company's IP telephony server-based software.

Bay soon will roll out a Voice Gateway 4000 product that allows users to take advantage of NetSpeak's technology and also will add support for IP telephony via voice "agent" software for the Versalar 5399, its dial-access hardware.

"To be honest, NetSpeak is the only player out there today with viable services," said Jon Sieg, vice president of voice- and fax-over-IP services at Bay. "Where we see them going in the long term is providing the software that enables IP telephony-based applications.

"Bay needed a partner like them, they needed a partner like us," Sieg added. The executive expects voice-over-IP usage to take off in 1999.

Bay now owns 11 percent of NetSpeak and executives have high hopes for the firm. "They're a small company, but they're very, very good at what they do," said Sieg.

With such deep-pocketed investors, some may view NetSpeak as an inevitable acquisition target, but NetSpeak's Staten squelched any merger discussion. "We have no desire to be purchased. These investments signify their commitment," he said.