Building the brand: Is Net2Phone headed to Xerox status?

It is the Holy Grail of business - a company so successful that its name becomes synonymous with a lucrative industry or product, as Xerox was linked with copiers and Kleenex with tissues.

Whether people will refer to Internet phone calls as "Net2Phone calls" in the future is debatable, but Net2Phone's new relationships with and investments from AT&T, Yahoo! and Netscape certainly make it the most recognizable - and most capitalized - company in the IP telephony market.

"It's clear that we're getting positioned in a way that establishes us as a leader in Internet telephony," said David Greenblatt, Net2Phone's chief operating officer.

One reality that can be problematic for IP telephony carriers is grabbing customers' attention and getting them to download the software needed to make calls. Net2Phone received a boost in these areas when its software was embedded in Netscape 6, the recently released Web browser that has a Net2Phone button on its toolbar.

Last week, Net2Phone also unveiled its first line of hardware products designed for retail distribution. While the hardware line gives Net2Phone another potential revenue source, Greenblatt said its greatest value may be in the name recognition that comes from having a product on store shelves.

"It has a significant value that way, but it's hard to quantify, dollar-wise," he said.

Easier to quantify is the $1.4 billion that an AT&T-led consortium last month announced would pay for a 32% stake in Net2Phone (Telephony, April 10, page 12). The consortium, which includes Liberty Media and BT, will have a 39% voting stake in Net2Phone. The same day, Yahoo! paid $150 million for 5% equity in Net2Phone.

While many speculated that AT&T invested in Net2Phone to prevent America Online - already a 5% shareholder in Net2Phone - from controlling the IP telephony company, an analyst said that AT&T also benefits by controlling the leader in an industry that could threaten traditional long-distance service.

"You definitely want to compete with yourself before others compete with you," said Rob Norcross, an analyst with Mercer Consulting.

AT&T quickly used the Net2Phone relationship, announcing last week that it is offering subscribers of its AT&T WorldNet Internet service 1000 free minutes via Net2Phone. But AT&T will not help Net2Phone by aligning with it, said the chief of another IP telephony service provider, who called the AT&T WorldNet promotion "classic old-telephony marketing."

"[AT&T's interest] should allow Net2Phone to move even slower than they are now," said Jan Horsfall, CEO and president of PhoneFree. "[AT&T] failed to sell minutes online. They've failed to make a dent with WorldNet. The fact is that a new telco married to an old telco is still a telco."

Greenblatt calls such an assessment "ridiculous." "That's like saying it's bad for a guy to win the lottery because he'll have to pay more in taxes," he said. "There's so much these guys [from the AT&T consortium] bring to the table."

For example, the alliance should help Net2Phone accelerate its research to make IP telephony available over cable and DSLs, something Net2Phone hopes to achieve by the end of the year, Greenblatt said.

And AT&T's vast network should allow Net2Phone to offer IP calls to more than the 30 foreign countries Net2Phone currently serves, Greenblatt said.

Though Net2Phone continues to dominate headlines in the IP telephony industry, Norcross believes the company will face stiffer competition in the future from companies focusing more attention on IP voice services.

"There will be a lot of different deals by a lot of different companies," Norcross said. "I wish Net2Phone well, but I don't think the race is over."