By Jon Van, Chicago Tribune Knight Ridder/Tribune Business News
Aug. 22--Running a telecom equipment company seldom elicits much excitement from ordinary people.
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 Westell Technologies' Van Cullens of a recent trip back to his hometown in Georgia. "It's a hot topic."
It is more like a gold rush, and a lot of people are looking for nuggets.
Commonly known as VoIP, for voice over Internet protocol, the technology that routes phone calls over the Web has generated a powerful buzz. Phone giants like AT&T Corp. are building a new business around Internet telephony, start-ups 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, providing an attractive target for innovation--and investment.
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. 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 believes Internet telephony is the industry's future.
His Aurora firm said two weeks ago it will partner with a pioneering VoIP company to develop a suite of Internet telephony equipment for carriers like SBC Communications Inc. and Verizon Communications Inc.
The telecom industry, which is only now emerging from the deep slump following 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 it's unclear how carriers will generate new revenue. No one has devised a business plan outlining 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 significantly. Long-distance companies, including giants like AT&T and MCI, are financially shaky because their calling revenues are rapidly 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, said Rob Marano, director of global restructuring services for PricewaterhouseCoopers.
"So when vendors roll out VoIP, with prices going down, where is the revenue going to come from to pay for the new equipment? That's the big unknown."
While VoIP has been around for several years, users comprise only a few percent of the tens of millions using traditional phone service. Even so, the new technology has generated a powerful buzz.
The buzz began last year with Vonage, an upstart offering inexpensive calling packages through an Internet voice service. VoIP recently was embraced by AT&T, which is exiting its traditional consumer phone business, and now promotes VoIP as an alternative.
Most recognize there's no way that everyone jumping into VoIP--or even a majority--can succeed.
"It's a dangerous space," said David Helfrich, managing director of Garnett & Helfrich Capital, a Silicon Valley 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.
HyperEdge Corp., a small telecom company in Itasca, brought in a new president and vice president with experience in Silicon Valley-style start-ups. The company wants to develop VoIP technology and sell it to the likes of SBC and Verizon.
The new executives went to HyperEdge as a vehicle to create VoIP technology because it's been in business for more than a decade. The company has a history of selling dull but profitable equipment to telecom carriers.
"To innovate and produce new, disruptive technology, you have to be small and agile," said Marty Hahnfeld, HyperEdge's new president. "But doing this with a start-up company would be difficult because large carriers don't like doing business with start-ups.
"Too many carriers got burned recently when they bought technology from companies that went out of business. Also, by working through HyperEdge, we can develop technology more quickly and with less expense because we don't have to raise funding," he said.
"We call this an inverse start-up."
Hahnfeld's strategy makes sense, said venture investor Peter Fuss, former president of Tellabs International.
"We used to call it a restart," Fuss said. "It's a good strategy because customer relationships are very important."
Larry Strickling, a former SBC executive who also headed the telecom agency at the Federal Communications Commission, said "the problem for any start-up 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 start-up 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-based restructuring firm. "There are lots of start-ups out there. Some have enough critical mass that I think they'll succeed.
"Some late entry start-ups may need to go to established companies to partner just because they're a little late to the race. No one has cornered the VoIP market."
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 cost of carrying a VoIP call isn't significantly lower than for a traditional call," Andrew said. "That's because 96 percent of VoIP calls end up on a traditional phone line.
"The real benefits of VoIP won't be felt until a majority of people use it. 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."
TELECOM GIANTS HOOK UP WITH VOIP
VoIP, or voice over Internet protocol, allows voice communications using the same technology 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 Corp. is withdrawing from offering traditional long-distance and local phone service to consumers, but has moved aggressively into offering VoIP.
--Cisco Systems Inc. is the leading supplier of VoIP equipment to the enterprise market and seeks to supply carriers as well.
--Comcast Corp., the country's largest cable TV operator, is testing VoIP in several markets and plans to roll out service next year.
--Covad Communications Group Inc., a competitive telecom carrier, recently launched a VoIP product aimed at small to medium-size businesses.
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