Hackensack, New Jersey-based Net2Phone Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NTOP)") else Response.Write("(Nasdaq: NTOP)") end if %> offers consumers and businesses a broad suite of products enabling telecommunications services over the Internet. Spun off from international telecommunications and Internet telephony services firm IDT Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IDTC)") else Response.Write("(Nasdaq: IDTC)") end if %> this summer, the shares caught fire last month, rising about 200%.
TMF: For somewhat obvious reasons over the past month or so a lot of people are starting to know your story, but maybe you could give us an idea of the company and what exactly it is you all are doing.
Fram: Net2Phone is today what we believe to be the leader in Internet telephony. The firm actually carries today in excess of a million minutes every day of voice over the Internet -- Internet IP telephony. We think that what the Internet has meant to media, what the Internet has meant to retail... It's going to have that effect on telephony.
TMF: Who is using your service? Who are your customers right now?
Fram: We have hundreds of thousands of customers around the globe, two-thirds of which are outside the U.S. or calls that originate or terminate outside the U.S., because in effect what we do is we eliminate the notion of long distance. With Net2Phone the whole world is a local phone call away. You can call Shanghai to Shaker Heights or Milan to Milwaukee all for 9.9 cents a minute -- 10 cents a minute around the globe. In fact, in some parts of the world less than five cents a minute. Because once you're connected to the Internet the world becomes distance insensitive. The paradigm is shifted so no longer do you pay more for the farther that you go.
TMF: What would happen to your business if users begin to have to pay long distance charges for Internet access?
Fram: The first thing you have to realize is the trend is the opposite of that. In the U.S., if you have Internet access you pay a fixed fee generally for your phone line -- maybe $20 a month or something like that for your Internet and your Internet fixed fee. Once you're connected to the Internet you have a duration insensitivity and that's the trend around the globe more and more as countries are opening up and encouraging Internet access. So, when you go on the Internet you don't pay more if you go to a website that happens to be in Pasadena or the Philippines.
TMF: Do you consider yourself then not really part of the traditional long distance industry, more kind of an adversary to it?
Fram: Well, we have some excellent partners that are telco providers so we don't consider ourselves to be adversarial, however we do see ourselves as a catalyst for a fundamental new cost and pricing structure to the industry. Now, that's on the telephony side. We have some major opportunities and activities going on in voice-enabling the Web itself. For example, the concept in terms of voice enabling e-commerce. We saw recently that 89% of the people who actually shop on the Web really buy on the phone. People like to talk to another person. The idea of being able to shop and browse a site and get connected directly to a customer service center is something we do today -- on over 300 sites.
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"If the quality weren't there, you'd see people aborting their call sooner."
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You can go to 1-800-Flowers.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FLWS)") else Response.Write("(Nasdaq: FLWS)") end if %> or you could go to Land's End <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LE)") else Response.Write("(NYSE: LE)") end if %> and you'll see the Net2Phone, what we call, the "click to talk" button. That is a significant new paradigm much in the way that 800 numbers were a must-have in the direct marketing space.
TMF: That was definitely going to be one of my questions. I think when I read about the talk about your service a lot of people just think about the person-to-person aspect of it, but it seems like there would be the opportunity for person-to-business and business-to-business might even be greater.
Fram: Oh, yes. In fact, we actually market a product for businesses that is a hardware adjunct where they take a PC [and] put in one of our hardware cards called Net2Phone Pro and what it in effect does is it's their gateway to the world of long distance.
So once you take that PC and connect it to the Internet we actually let you plug a phone right into the back of your PC, or several phones, and all of a sudden you have a long-distance gateway so you can do long-distance telephone calls literally for the price of a local call.
The other thing we are adding is the free PC-to-PC calls, IP-to-IP calls, conference calls over the Internet. It's one of the elements of our recent partnerships that we announced with America Online's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AOL)") else Response.Write("(Nasdaq: AOL)") end if %> ICQ unit. So we were selected to provide the PC-to-PC as well as conference calling, as well as phone-to-PC. Your PC will ring, instead of your phone, because people just want to call people, and that's part of our unified messaging offering.
TMF: So it sounds like what you're saying is that consumer-to-consumer maybe is not going to be the biggest part of your business going forward.
Fram: It is a big part and I think it will continue to be a big part. Consumer-to-consumer, we probably do 100,000 minutes every day from Lebanon or Korea. Consumers are a big part of the business because we make the price so cheap.
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"We have nearly a hundred people answering the phone in nine languages and that's a key element to any firm's success in the Internet space."
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The fact is, businesses, though are a big part of our opportunity and we've seen a lot of growth from business -- the click-to-talk discussion we just had -- as well as from using it as an alternative to long-distance telephony. Especially if you're in the import/export business and you have a branch office in India. That you'd be able to call New York for less than 10 cents a minute opens up major markets for these people. We also do the connectivity not just for voice, but for fax as well.
TMF: I would think, particularly where businesses and maybe conferencing is concerned, the issue of audio quality has become more and more important. Can you talk about where you are headed on that and where you think it is now and where it needs to be?
Fram: Well I think of what we have done and we have four major assets, one of which is our technology. We're up to what we call Version 10 of our client [application] where we break through what has been heretofore viewed as a barrier to quality, namely the 400 millisecond latency time. We, through our technology, have programmed through that with our new version. I think the testimony to the quality is the fact that we do have a million paid minutes every day with an average international call duration of eight minutes, whereas the typical long distance company might see it in the range of five minutes. Now if the quality weren't there, you'd see people aborting their call sooner.
So, we have several versions of our product. One is PC2Phone. We have another version which is called Phone2Phone which is about a third of the business and that takes the call directly from one phone and it rings another phone. You call an access number, we carry that phone call either through the Internet or through our own IP network. PC Magazine did a review and their testimony was that it was the same as a regular phone call.
TMF: Do you consider some of the free voice messaging programs -- like Excite has a voice chat offering -- how do things like that affect some of your prospects?
Fram: In terms of our business model where our revenues largely come from per-minute fees... it's not clear how such companies actually will generate revenue, whereas because we bridge to the telephony network where there is a consumer willingness to pay per minute, we find that the PC-to-PC market is certainly to some degree voice telephony, although I think in the case of Excite there's a 90-second voice message duration. It does not impact our per minute business because again that's PC-to-PC and doesn't give you PC-to-telephone.
TMF: Can you talk a little bit about your competition and also your promotional efforts?
Fram: OK. Well, our competition is the large telephone company. There are a lot of startups out there, but the fact of the matter is [our competitors are] Telecom Italia <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TI)") else Response.Write("(NYSE: TI)") end if %>, or TeleCo in France, or other big, large telcos where you have prices that are basically set based on internal cost rather than the competitive market. So the competition is all the telcos around the globe and that's where we are really drawing most of our market share gain. Those are price-structured internationally where we think we have a significant advantage. We've got a convenience advantage.
Right now we have, of our four main assets I talked about, our technology and to some degree our network. One of our key assets is our distribution agreements with Netscape where they write into the browser for the Version 5 and all versions for the next two years. We're banked right into InfoSpace.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INSP)") else Response.Write("(Nasdaq: INSP)") end if %> which touches probably 80% of the people on the Web in terms of their directory and other services. We have every phone number in InfoSpace's white pages, yellow pages, and address books locked up with one click. Our strong presence on the Web is really the cornerstone of our marketing and branding efforts and that's the cornerstone of our market share gain. The online marketing is bolstered by print, and radio, and television offline, and we're embarking now on a significant international offline marketing program where we have actually begun our first print ad in places like USA Today and those kinds of papers internationally.
TMF: Another two-parter. Two deals that you guys have going right now, I was wondering if you could break up a little bit for us: AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> and also your international trial with Sprint <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FON)") else Response.Write("(NYSE: FON)") end if %>.
Fram: AT&T is going to co-locate our points of presence, our gateway at the terminating points of their own network and then include us in their beta site for IP telephony users. So, I think it's AT&T's embrace and adoption of our technology that gives testimony to the acceptance of our product.
With Sprint we actually provide a service to the marketplace called Callternatives where our network and our customer service people actually provide the end-to-end product to certain markets. In Asia, where we have customer service people picking up the phone and speaking in Mandarin and Cantonese, we actually provide phone-to-phone services to certain Sprint markets. So, again, it kind of bears to your earlier question of the quality and the endorsement of these larger firms of the technology. I think that again also is a testimony to it for embrace and acceptance in the market.
TMF: As you move into international markets, and obviously you already have a significant presence in many places, how does that affect your efforts in terms of customer service and the ways you have to go about doing that?
Fram: The issue of customer service is that we do customer service now in nine languages: including Spanish, Hebrew, and I mentioned Mandarin and Cantonese. In order to be a vendor in international markets, customer service, it turns out, is what we consider to be the fourth element to our proprietary advantages. We have nearly a hundred people answering the phone in nine languages and that's a key element to any firm's success in the Internet space.
TMF: Is there anything you would like to add that maybe I haven't brought up?
Fram: I think you did a very thorough interview. The four key elements of our strength and strategy that have come out -- our technology, our network, our customer service, and our distribution agreements -- really, we think, differentiate ourselves and cause us to be the leader in the market, and I think you've actually gone through and drawn out all of those elements.
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