BUSINESSWEEK ONLINE : MAY 1, 2000 ISSUE
SPECIAL REPORT Where the Money Will Be It's little wonder that companies making the equipment for voice-on-the-Net are catching investors' attention. Even after the recent market tumble, many of their stocks have enviable long-term returns. Check out VocalTec Communications Ltd. (VOCL) The Israeli company that sells innovative gear for sending telephone calls over the Internet has racked up a 40% return in the past year. ''Now that the quality [of Internet telephony equipment] has improved, it's clear that it's going to be the backbone of the international telecommunications world,'' says Elon A. Ganor, the company's chief executive. Wall Street seems to agree. Over the past three years, the stocks of the 55 companies in Piper Jaffray's Net Telephony Index have surged sevenfold, while the Standard & Poor's 500-stock index has doubled. Look for more stellar returns in the future as the service becomes more popular. Market research firm Probe Research Inc. predicts that revenues from Internet telephony services will soar from $332 million in 1999 to $5.3 billion in 2003. ''Money will be made there,'' says Brian Hayward, manager of the $4 billion Invesco Telecommunications Fund. In fact, Invesco counts Nortel Networks (NT) and Cisco Systems (CSCO) among its top stock market holdings, in part because of the potential of their Internet telephony businesses. MOST LIKELY STANDARD. Where are the best investments? Bet on a couple of key trends. For starters, the companies that are rolling out Net telephony need to agree on standards. Right now, you can't use Yahoo! Inc.'s (YHOO) technology to talk to somebody who's using Netscape Communications Inc.'s voice-ready browser. The company that is most likely to emerge as the standard-bearer for Net telephony is Net2Phone Inc. (NTOP) Just last month, AT&T (T), British Telecommunications (BTY), and Liberty Media agreed to invest $1.4 billion in the company as part of their plans to use its technology. Separately, Web giants America Online Inc. (AOL) and Yahoo have invested in the company. With such heavyweight backers, Net2Phone has a head start on the contenders. ''We think Net2Phone is the world-class company in this market--it will become the standard,'' says John C. Petrillo, AT&T's executive vice-president for corporate strategy. There are other innovative companies as well. Phone.com Inc. (PHCM), based in Redwood City, Calif., has been a leader in developing software that will let cell-phone users browse the Web. Now it's pushing into new voice applications. On Feb. 10, it paid $300 million for @Motion Inc., a Redwood Shores (Calif.) maker of software that links Web sites to mobile phone networks. Together, the two companies hope to develop the technology that will let someone start a conversation on the Web, then transfer the call to their cellular phone--all without breaking the connection. ''We are a good bridge,'' says Dave Weinstein, co-founder of @Motion. Indeed, companies that straddle the old telecommunications world and the new cyberspace frontier have bright prospects. Nortel Networks is a prime example. The Canadian company has racked up a sizzling 189% stock return over the past year because it has been able to combine its telecom expertise with the networking knowhow of Silicon Valley's Bay Networks, which it acquired in 1998. Partly because of its growing voice on the Internet business, analysts expect its earnings to rise 25% over the next two years. There are more promising companies on the way. Sonus Networks Inc. in Westford, Mass., filed for an initial public offering in March and analysts think the company is strong enough to go public in the current market turbulence. The company makes gateways that connect the old telephone networks and the Internet. It has deals with Williams Communications and Global Crossing Ltd. (GBLX) and more deals are expected soon. ''They are at the accesss point (to the Internet), and that is where everything is happening,'' says Edward Jackson, a managing director and senior equity analyst at U.S. Bancorp Piper Jaffray Inc. (USB) With that kind of backing, the company may just keep up the hot track record of Net telephony stocks. By Jim Kerstetter in Silicon Valley _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS The Talking Internet TABLE: Birth of a New Communications Network CHART: Booming Voice on the Net TABLE: Telephones on Steroids Yahoo! Look Who's Yakking Away Europe Swoons for Voice-on-the-Net Where the Money Will Be CHART: Investing in Voice on the Net TABLE: Stock Stars INTERACT E-Mail to Business Week Online

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