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Gold rush to VoIP may not pan out

By Jon Van
Chicago Tribune

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But these days, when the conversation turns to the business of making phone calls over the Internet, a telecom executive can become the life of the party.

"When someone heard I was in telecom, they'd ask what they should buy to invest" in Internet phone calling, said Van Cullens, president and chief executive of Westell Technologies, of a trip back to his hometown in Georgia. "It's a hot topic."

It is more like a gold rush, and many are looking for nuggets.

VoIP, or voice over Internet protocol, has generated a powerful buzz. Phone giants like AT&T are building a new business around Internet telephony, startups are abundant and cable companies are beginning to launch phone services through high-speed Web connections.

Entrepreneurs and investors are drawn to Internet telephony because there's no clear industry leader and the technology is in its infancy.

Yet the sudden interest in VoIP is reminiscent of the dot-com euphoria that led to an ever-escalating stock market in the late 1990s and into 2000.

The what and who of VoIP VoIP, or voice over Internet protocol, allows voice communications through the same technology used to package and send data, such as e-mail, over networks. Nearly every company involved in telecom is adopting Internet telephony technology in some way. Here is a sampling: AT&T is withdrawing from offering traditional long-distance and local phone service to consumers but has moved aggressively into offering VoIP. Cisco Systems is the leading supplier of VoIP equipment to the enterprise market and seeks to supply carriers as well. Comcast, the country's largest cable-TV operator, is testing VoIP in several markets and plans to roll out service next year. Covad, a competitive telecom carrier, recently launched a VoIP product aimed at small to medium-size businesses. Source: Chicago Tribune

And that worries veteran telecom executives like Cullens, who fears the hyperbole percolating through the media and Wall Street is starting to put air into another bubble.

"Everybody's running around thinking there's going to be a quick buck here," he said. "But this isn't a revolution, it's an evolution. There are too many unresolved issues for this to happen quickly."

Still, Cullens thinks Internet telephony is the industry's future.

His Aurora, Ill., company said last month it was joining with a pioneering VoIP company to develop a suite of Internet telephony equipment for carriers such as SBC Communications and Verizon Communications.

The telecom industry, only now emerging from the deep slump after the bust of the dot-com bubble, both craves and fears VoIP.

Internet telephony moves voice over networks in data packets identical to how information moves for e-mail and Web pages. It offers lower costs and versatility that could inject telecom with new vitality.

But implementing VoIP will cost billions, and no one has devised a business plan of how carriers can make big money.

That deficiency, which was the hallmark of the dot-com boom, is making insiders nervous.

Big phone companies make three-fourths of their money with voice service, and those revenues are shrinking.

Long-distance companies, including giants like AT&T and MCI, are financially shaky because calling revenues are declining. Local companies like SBC and Verizon, once accustomed to adding new phone lines, are now subtracting them.

If anything, VoIP will accelerate these trends, according to Rob Marano, director of global restructuring services for PricewaterhouseCoopers.

Most recognize there is no way everyone jumping into VoIP — even a majority — can succeed.

"It's a dangerous space," said David Helfrich, managing director of Garnett & Helfrich Capital, a Silicon Valley, Calif., investment partnership. "VoIP is going to happen because it's great technology and clearly the future.

"But it's visible to everyone in the marketplace, and there's a lot of competition. I prefer to find a niche with less competition and use that as a base and grow from there."

Because so many businesses and investors were burned by dot-com mania, entrepreneurs are seeking new strategies.

"To innovate and produce new, disruptive technology, you have to be small and agile," said Marty Hahnfeld, president of HyperEdge, a small Itasca, Ill., telecom company more than a decade old.

"But doing this with a startup company would be difficult because large carriers don't like doing business with startups."

"Too many carriers got burned recently when they bought technology from companies that went out of business ... ," Hahnfeld said.

Larry Strickling, a former SBC executive who headed the telecom agency at the Federal Communications Commission, said, "The problem for any startup trying to work for a Bell company is the lack of a track record. The Bells don't want any undue risk and are always more comfortable working with a company they already know."

While established vendors like HyperEdge and Westell work to develop VoIP technology, there's no shortage of entrepreneurs using the same startup route so many traveled during the dot-com run-up.

"We're pursuing VoIP ourselves," said Joseph D'Angelo, managing partner of Alvarez & Marsal, a New York restructuring firm. "There are lots of startups out there. Some have enough critical mass that I think they'll succeed."

While carriers fret over revenue potential, consumers may be disappointed that VoIP underdelivers on promises of cheaper calling rates.

That's because most calls made from a VoIP service end up going to someone with traditional phone service, said Jim Andrew, vice president with Adventis, a telecom consultancy in Boston.

"The real benefits of VoIP won't be felt until a majority of people use it," Andrew said. "Whether that'll be 10 years from now or 30, I'm not sure. But it won't happen in two years. A lot of people are acting as if it will."

Copyright © 2004 The Seattle Times Company

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