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IP telephony lures the Street

Wall Street is pinning its hopes on a new cottage industry: Net telephony.

Wall Street is pinning its hopes on a new cottage industry: Net telephony.

This week, Level 3 Communications, which was founded last year to provide voice and data services using Internet protocol technology, said it will trade under the symbol "LVLT" starting April 1 as part of its previously announced spin-off. Level 3's executive team includes management from MFS Communications, which was bought by WorldCom two years ago.

In addition, Motorola said it was increasing its stake in NetSpeak, which makes software for IP telephony. The company also committed to buying $30 million worth of products from the publicly held company. (See related story)

The Internet protocol, or IP, is the open standard that allows computers to communicate over the Internet. The protocol, which breaks data up into packets and then ships them to remote locations, has a number of advantages over the more traditional phone systems. Among them: lower cost.

With forecasts that the IP telephony will generate billions of dollars annually by the year 2000, Wall Street is growing more enthusiastic about companies that are entering the market, according to industry watchers. In Level 3's case, the company decided to convert its private stock into publicly traded shares because it was so heavily traded. This marks the second time that Level's 3 parent, Peter Kiewit Sons, has sold or spun off a data communications unit; the first was MFS.

The strong demand for the Omaha, Nebraska, company's private stock is due to the bullish projections for the industry as a whole, said Level 3 spokesman Steve Ingish. "Within the industry, it has generally been accepted that there is going to be fundamental shifts in how telephone services are provided," he added.

Surging demand for Level 3 shares is no fluke. Just take a look at some other industry players. The stock price for Hackensack, New Jersey-based IDT (IDTC) has risen by more than 430 percent in the past year. In the same period, National MicroSystems has watched its stocks go from just over $22 to more than $45.

"People see this as the wave of the future, and I think that a firm that is present in this market can take a piece of the action," said Francois de Repentigny, an industry analyst at Frost & Sullivan.

In some cases, start-ups like Level 3 are being funded by entrepreneurs from the energy, construction, and railroad businesses, not telecommunications or high technology. Examples include Peter Kiewit Sons, which backed Level 3 and MFS; and Denver billionaire Philip Anschutz, who backed Qwest Communications. The companies also are hiring seasoned telco executives from the likes of AT&T to run day-to-day operations.

The Net telephony gold rush isn't limited to start-ups, however. Tele-Communications Incorporated also remains interested in getting into the Net phone business, most likely with a partner, a company spokeswoman said. TCI couldn't offer a time frame, she added.

Other giants such as 3Com, Cisco, and Lucent Technologies are moving aggressively into the market as well.

De Repentigny estimated that sales of IP telephony equipment alone will top $3 billion by 2002. While phone calls based on IP accounted for less than 1 percent of total phone traffic last year, he predicted that more than 10 percent of calls will be based on the technology by 2002.

Harvey Kaufman, cofounder and executive vice president of NetSpeak, said much of the money to be made from IP telephony will be in the form of "value-added services," such as sophisticated messaging systems and features that integrate telephone, video, and computer capabilities into one seamless package. He called the IP technology "a new paradigm in switching that allows you to provide a whole host" new moneymaking services. "Everybody sees gold at the end of the rainbow."