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Not yet. But as the head of the hottest new Internet phone service, the 29-year-old executive harbors dreams of building his generation's AT&T -- and making competitors quake. By accessing the Internet through a PC equipped with a microphone and speaker, customers can call any phone in the U.S. for free, thanks to Dialpad's advertising-supported service. First, though, they must register online and answer some typical direct-marketing questions -- demographic data and information about hobbies, for example -- so Dialpad can deliver targeted ads. The service has grown at near optical-fiber speed. Dialpad, based in Santa Clara, Calif., has signed up 10 million users since it launched a year ago. Of those, it counts 1.5 million as regulars who have placed a call at least twice during the past 30 days. One of its chief rivals, Net2phone, claims 1.2 million active users but defines regulars as those who have used the service at least five times in the past three months. EASY ACCESS. Dialpad claims a tech edge over other Internet phone companies in that it doesn't require users to download a chunk of software to place calls over the Internet. With Dialpad, customers simply go to the company's Web site -- www.dialpad.com -- to place the call. Dialpad uses Web-based technology that was developed by its founders, 35-year-old Hyunduk Ahn and 34-year-old Wongyu Cho, now chief technology officer. The two computer scientists worked at Korean modem maker Serome Technology in the 1990s. It was there they launched Dialpad, which Serome spun off in 1999. "Over the long run, I believe all communications will be based on IP [Internet Protocol]," predicts Garlinghouse, who has worked for SBC Communications and CMGI, a public company that invests in Internet firms and owns 16% of Dialpad. "The opportunity is huge." The twist that makes Dialpad different is taking the intelligence other Internet phone companies require customers to put on their personal computers and burying it instead deep inside the network on a Web site. That way users don't have to see -- or worry -- about mastering the technology. That ease of use is Dialpad's strategy for making Internet telephony as popular as e-mail. "We're not just targeting the hobbyists and early adopters, but everybody," says Ahn, who stepped aside as CEO one year ago but remains president. (CMGI wanted one of its own in charge.) MISSING LINKS. Dialpad's lines may be free of charge, but like most Internet phone lines, they're not free of static. Analysts maintain that the company needs to improve the service's sound quality. All of Dialpad's calls travel over the public Internet, and quality can vary depending on the number of "hops" a call makes from one Internet point to another. Dialpad says it is working with ISPs to limit those hops. Net2phone has more control over that process because it owns its own private network. That should make its calls clearer, says Dylan Brooks, an analyst at Internet researcher Jupiter Communications. By comparison, he says: "It's not uncommon to lose some bits at the beginning and the end of a phrase," on calls routed over the public Internet. For Dialpad, he says "there are ways to engineer around that," but not completely. A fast start notwithstanding, it remains to be seen if Dialpad can make its business plan work. The privately held company derives most of its revenue from ad sales, says Garlinghouse, who would not release revenue figures. Jupiter's Brooks believes Dialpad must diversify its revenue stream by licensing its technology to other Web sites. In fact, Brooks believes the company should drop its advertising model altogether. He suggests the company leave the marketing to experts and focus on its strength, which is technology. If others provide the phone service, Dialpad wouldn't have to pay carriers to complete calls that begin on its network and end on someone else's. PROFITS AND PARTNERS. Dialpad says it has plans to diversify revenue, but without giving up ad sales. The company believes that it can become profitable by the second quarter of 2002 by deriving one-third of its revenue from advertising, one-third from premium services such as calling cards and voice mail, and one-third from licensing fees from corporate users for services like conference calls. Dialpad has partnered with eVoice, a Web-based voice-mail company that pays Dialpad for steering customers its way. Revenue from that relationship is minimal, but Garlinghouse concedes the company needs to develop similar relationships in other premium areas. In the race to diversify, Net2Phone is ahead of Dialpad. Net2phone says most of its revenue comes from international long-distance and enhanced services, such as fax over the Internet. Only 3% to 5% comes from domestic long-distance, spokeswoman Sarah Hofstetter says. Dialpad doesn't yet offer international calls but plans to add them as a premium service. If Dialpad can maintain its technological edge and broaden its revenue stream, then it stands a good chance of fulfilling Garlinghouse's grand ambition. And that would certainly make his grandfather proud. Steven Rosenbush covers telecommunications for Business Week in New York |
