Posted: 09/1998

For VocalTec, the Startup Phase is Over

By Ken Branson

If Sir
Winston Churchill came back as vice president of marketing for VocalTec Communications
Inc. and surveyed the Internet protocol (IP) telephony software company’s current
situation, he might well recycle one of his great quotes from World War II: "This is
not the end. It is not even the beginning of the end. But it is the end of the
beginning."

But since Ido Ganor has the job, he says it this way: "We believe that this market
(IP telephony) is really going to take off to the mainstream in the next six months to
three years, actually. So right now we’re in the end-phase of the early adoption market.
And as soon as we become a major market, we (VocalTec) will enjoy our fruits."

Ganor is full of enthusiasm and energy, full of conviction that the business of sending
voice using IP is…well, about to become a business. A big business. Analysts at
ATLANTIC-ACM, Boston, say the global IP telephony services market should top $1 billion by
1999. And VocalTec, an Israeli startup that lost $7.6 million last year and has already
lost more this year, thinks it has the software products to drive that business.

VocalTec makes IP telephony software for Windows NT servers, bundled with digital
signal processor (DSP) boards from Dialogic Corp. It has an architecture, called the
Ensemble Architecture, which its managers believe contains all the pieces of the IP
telephony puzzle: the gateway, a gatekeeper, client software and a network management
system offering centralized and remote management of the entire IP telephony network.
"IP is not about free calls any more," Ganor says.

It most emphatically is not about free anything, according to Hillary
Mine, senior Internet analyst for Probe Research Inc.

"The (VocalTec) vision is of an IP-based public network," Mine says. "It
could be [asynchronous transfer mode]-based, but it doesn’t matter. Voice is treated as
data, and you can therefore do things with it that you couldn’t do before. And it has to
be backward compatible so you can use existing devices. The other guys made toy software
that allow you to call your brother-in-law for free, and Elon (Ganor, founder, CEO and Ido
Ganor’s older brother) said, no, this is about a new public network."

To this end, VocalTec has assembled a suite of products (see inset, page 50) ranging
from the consumer-focused Internet Phone that sells for $49.95 to commercial-grade gateway
services, network managers and multiparty voice and data conferencing that are priced to
size. The breadth of the offering enables the company to target not only the consumer
market, the but carrier and enterprise markets as well.

Ganor says carriers, which he describes as ITSPs (Internet telephony service
providers), are a primary target. These companies might be new, relatively small players
such as IXTC Corp.; they might be backbone Internet service providers (ISPs) such as
PSINet; or they might be big carriers, such as AT&T Corp. or Bell Atlantic Corp. One
might think that big, established carriers would see IP telephony as a threat, but one
would be wrong, according to Ganor.

"When telcos first came to us, we explained our vision to them," Ganor says.
"We told them that IP telephony is actually a huge opportunity for the telco
environment. Many telcos understand the opportunities…are financing new services,
expanding the market."

VocalTec also is going after the enterprise market, which Ganor says will be only
slightly less important than its carrier market. The VocalTec Gateway, with minor
modifications, will serve for both enterprises and carriers, according to Ganor.

VocalTec may not be first to market with a gateway (Norwegian carrier Telenor AS is
deploying Telefonaktiebolaget LM Ericsson’s gateway), but Ganor predicts it will be the
first to market with a total package. Ganor says that several telcos are involved in
"paid field trials" of the complete Ensemble Architecture.

While analysts give VocalTec credit for rescuing Internet telephony from sheer geekery
and launching toward commercialization, they see some pitfalls ahead. Mark Winther, group
vice president for telecommunications at IDC Link, believes that VocalTec may be spread
too broadly.

"Going forward, the market will increasingly specialize," Winther says.
"And VocalTec is very broadly structured, in the sense that they go after a lot of
different things. In their core business they go after both carriers and enterprises.
That’s a very challenging thing to do. Most major players go after one thing or the
other."

Probe Research’s Mine is a bit skeptical about VocalTec’s ability to make carrier-class
products out of its vision.

"When I talk about carrier-class, I’m not talking about four ports (on a gateway),
or eight ports, or 32 ports, or even 1,000 ports," she says. "I’m talking about
the ability to handle 100,000 ports."

Ido Ganor insists that the Ensemble Architecture is up to the task, that his designers
and developers were thinking big as they worked.

"What we did with all this architecture is, we built this architecture in order to
support millions of subscribers to really make it commercialized," he says. "And
that’s what makes us believe that we are the first to market with all these
functionalities."

Winther has no doubt about which choice VocalTec should make: It should concentrate on
serving carriers, he says.

"I think where they’ve got an angle is the service provider marketplace," he
says. "They’ve got a name there; they’ve done a great job. They had their fist client
back in 1995. They’ve got good partnerships with companies like Deutsche Telekom [AG] and
ITXC, so I wouldn’t worry about specialized business-to-business features. [They should]
focus on enabling service providers to create mainstream IP telephony products."

Deutsche Telekom purchased 20 percent of VocalTec last year. ITXC, the Internet
telephony carrier based in Princeton, N.J., was the network anchor in a three-way
interoperability agreement earlier this year. IP telephony users with VocalTec or Lucent
Technologies Inc. gateways will be able to talk to each other seamlessly through ITXC’s
network.

VocalTec Communications Inc., headquartered in Northvale, N.J., is the North American
subsidiary of VocalTec Communications Ltd., headquartered in Herzliya, Israel, just
outside Tel Aviv. It is one of dozens of Israeli technology start-ups that have sprung to
life in the past few years. Ido Ganor, a former tank officer in the Israeli army, says the
Middle East peace process, though full of ups and downs over the past few years, is at the
root of these startups. Some of the talent and money that formerly went into developing
and maintaining the Israeli armed forces has been freed to pursue other ends.

About 270 people work for VocalTec in all its guises, including 160 people in Herzliya
whose main job is software development. There are a few dozen people in London
who–Winther’s advice to the contrary notwithstanding–are developing the business version
of the Internet Phone. Three VocalTec people run a sales office in Japan, and the
remainder work in a barely visible building on a nondescript street in Northvale. They
include Ido Ganor, the corporate communications department, the North American sales group
and some international marketing people. All the new Israeli startups are internationally
minded, and any that are serious about the international market need to be in North
America, Ganor says.

VocalTec is publicly traded, and its stock has been up and down, and up and down again,
over the course of the past two years. Elon Ganor, Ido’s brother and the founder and chief
executive officer, says this is typical of the industry and of startups.

"If you look at the stock price over the last two years, we started out at 19 in
1996," Elon Ganor says. "Then, the stock was coming down…At the worst point,
October 1996, it was 3 7/8. We continued to execute our business plan…Toward the summer
of 1997, we had the Deutsche Telekom deal, and the stock went up to 33, the highest point.
Then, this company is an early player in a new market. We actually created the market.
Competition is getting fierce."

Fierce, indeed. One measure of VocalTec’s evolution is that it has a better class of
rivals.

"They continue to impress me," Mine says. "Two years ago, if you had
asked me if these guys would still be around today, I would have told you that, as soon as
Nortel and Lucent got into the market, you could kiss these guys goodbye. But it hasn’t
happened."

But there is another shadow on the horizon–that sincerest form of commercial flattery,
acquisition. As this story was going to press, the stock-watching Internet newsgroups were
full of rumors about Lucent buying VocalTec in the fall. Asked about these rumors, Elon
Ganor sighs as he denies them. "Ah, rumors," he says. "What can I say?
Rumors are always there."

And, so far, so is VocalTec.

Ken Branson is East Coast Bureau Chief for PHONE+ Magazine.

VocalTec’s IP
Telephony Products

VocalTec At a Glance

VocalTec
Communications Ltd.

Headquarters
Herzliya, Israel
North American subsidiary: VocalTec Communications Inc., headquartered in Northvale, New
Jersey)

Business
Provides Internet telephony software

Sales

Profits

Executives
Chairman and CEO: Elon Ganor
President: Doron Singer
CFO: Yahal Zilka

Info
www.vocaltec.com