AT&T Buys Stake in Net2Phone - Company Business and Marketing

AT&T Corp. beat America Online Inc. last month when it led a consortium of phone companies in buying a 32% stake in Net2Phone, which provides cheap phone calls via the Web.

The consortium paid $1.4 billion in cash for a 39% stake, and they also received an option to take control, of Net2Phone. On March 31 Yahoo! announced it spent $150 million for a 5% investment in the firm.

Net2Phone executives said they expect to expand their relationship with AOL, which already owns 5% of Net2Phone. AOL is using Net2Phone to add voice capabilities to its Instant Messenger service. It had been trying to secure a majority position in the company when AT&T stepped in.

Net2Phone executives said they're working on an agreement with Microsoft, which could be announced soon.

Some analysts theorized that AT&T beat out AOL because Net2Phone executives feared such a large AOL stake could keep Yahoo! or Microsoft from investing in the firm.

AT&T is putting up $725 million for 51% of the consortium's financial obligation. Other investors in the group include AT&Ts programming arm Liberty Media and British Telecom.

Liberty already owns a 10% stake in Net2Phone parent IDT Corp.

The deal gives AT&T another way to avoid the high costs it must pay local phone networks to deliver its services. AT&T could save up to $20 billion once it incorporates Net2Phone technology throughout its networks by avoiding access charges to Bell companies for terminating calls, particularly on international calls, IDT chairman Howard Jonas said.

The new ownership deals will help make Net2Phone's technology a standard for Internet telephony (IT) technology, analysts said last week. However, Net2Phone carries less than half of the IT traffic, and Wall Street observers said last week's deals will spur similar investments in other IT firms.

Other players in providing Internet phone calls include deltathree.com and PhoneFree. A new upstart named dialpad.com is offering free calls in hopes of winning enough customers to make money from advertisements on its Web site.

"This technology is going to be pervasive," said AT&T chairman C. Michael Armstrong, a skeptic of IT technology in the past. The converted Armstrong said he now believes "minutes will migrate over time" to IT, although "I don't see a mass substitution or a great big cliff in front of us."

Armstrong said AT&T and Net2Phone will work together to customize Net2Phone's technology to fit with AT&Ts structure.

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