Posted: 05/2000

AT&T Group’s Marriage to Net2Phone Shows Industry Strength
By Stacy Lane Linkmeyer

marriage of “old” companies with large customer bases and revenues with a “new” firm that boasts cool technologies makes perfect sense in the constantly evolving telecommunications industry.

In late March, an AT&T-led
(www.att.com), consortium, comprising global partner British Telecommunications plc
(www.bt.com) and Liberty Media Group (www.libertymedia.com), announced it will pay $1.4 billion in cash for a 32 percent stake in Net2Phone Inc.
(www.net2phone.com), an Internet telephony company that is turning industry ears its way.

Yahoo!
(www.yahoo.com) also agreed to buy 5 percent for stock valued at $150 million.

In a business where big investors seems to equate to immediate validation, the transaction seems to say this is a perfect time to listen to what Net2Phone has to say.

“The Yahoo and AT&T investment is a continued validation of the strength of the industry,” says Sarah Hofstetter, vice president of corporate communications at Net2Phone. “Everybody has been talking about Internet telephony for the past four years, and they are waiting for it to grow up. Well, what further proof do you need? Ma Bell is sending calls over the Internet. That is huge.”

Much like the recent Qwest/US WEST and Time Warner/AOL partnerships, dealing with emerging companies like Net2Phone is the name of the game. It’s blending the old and the new.

“We’re starting to see not just a stand-alone new media company and a stand-alone old media company, Yahoo and AOL are going to be simultaneously competitors and allies to AT&T,” says Jeff Kagan, a telecommunications industry analyst. “That’s just the way the new marketplace will unfold. It’s getting very difficult to have a conflict-free existence today. On one battlefield they’ll be competitors and on one they’ll be partners.”

Although Internet telephony remains in its early stages, millions of dollars from major players can’t hurt its push for acceptance.

AOL
(www.aol.com) has been an investor in the metamorphosing telephony company since July, when it came in at the company’s IPO with 5.4 percent ownership. SOFTBANK Inc.
(www.softbank.com), a Japanese company that owns Ziff-Davis Inc.
(www.zd.com), bought into Net2Phone before that. And, GE Capital
(www.gecapital.com), one of the largest investors behind AT&T, owns a 5 percent chunk.

For AT&T, the investment comes at a time when many say the company has to please its old customers as well as keep up with market changes without bypassing what new customers want.

“They have to reinvent themselves, and in the mind of the marketplace, they have to be a provider that is up to speed” Kagan says. “This is a way for them to offer new services in what is going to become an important industry segment.”

Net2Phone currently handles about 40 percent of all phone calls routed over the Internet.

“Either they can spend a billion dollars on research and development and be three or four years behind the curve, or spend a billion dollars on buying an Internet telephony company–they chose the latter,” Hofstetter says. “AT&T, as big as they are, they can’t be everywhere all the time.”

Saying that the new deals will have no effect on staffing or management, Hofstetter seems full of energy and says the Net2Phone team welcomes the excitement.

“We are now the standard on the web, the way RealNetworks Inc.
(www.realnetworks.com) has become the standard for audio and music video,” she says. “This is the way it is going to be for voice. No question.”