Intellectual Capital September 2000

Posted: 09/2000

Intellectual Capital

Evslin Owes Success
to ‘Smart Lucky’
By Ken Branson

For the past three decades, Tom Evslin has missed a few things. He was late realizing the potential of voice on the Internet, he admits.

But he hasn’t missed much. He’s been smart and lucky–sometimes both at the same time.

Evslin is chairman, founder and CEO of ITXC Corp.
(www.itxc.com), the world’s premier wholesaler of Internet telephony minutes. ITXC is his second startup–the first was Solutions, a software company.

He and other smart people at Solutions developed the first background fax software for personal computers in the 1970s. On the opposite end of the scale, they developed mainframe software that connected banks to automated clearinghouses.

And he was lucky enough to see Microsoft Inc.
(www.microsoft.com) buy Solutions in the early 1990s. With that purchase, Evslin went to work for the software company and led the group that developed Microsoft Mail, Microsoft Mail Remote and Microsoft Gateways.

“I worked there for three years, and toward the end of that time, I was a fervent Internet radical,” he says. “Unfortunately, this was before Bill Gates was a fervent Internet radical.”

But Evslin’s luck remained with him. At Microsoft, he worked constantly with carriers, and it was while dealing with AT&T Corp.
(www.att.com) that the company’s then-president and COO Alex Mandl gave him “an offer impossible to refuse.”

“He told me that AT&T had realized–which meant, actually, that Alex had realized–that the Internet was going to be really important,” Evslin says. “He asked me to come to AT&T, build their [Internet] strategy, and implement it. I didn’t understand about the importance of voice on the Internet in those days–should have, but I didn’t. Anyway, I put together a strategy to launch the WorldNet service, and kill about 10 services that weren’t Internet relevant.”

Mandl, however, left to become president and CEO of Teligent Inc.
(www.teligent.com), the startup fixed-wireless telecom carrier, and AT&T decided that quarterly and annual earnings were at least as important as anything that happened on the Internet.

Evslin was convinced that voice over the Internet would make not only a business, but would make an industry. He was in the right time, but the wrong place.

“They [AT&T] were under a lot of earnings pressure then, and they asked me, ‘Will this help our earnings this year?'” Evslin remembers. “I told them, ‘No, it will hurt earnings this year, because we’ll have customer acquisition costs.'”

AT&T and Evslin parted ways. The separation provided the seed money
for ITXC.

Evslin discovered that his record of being smart and lucky begat more luck. While it might not have been the time to sell Internet telephony to AT&T, it was the time to ask venture capitalists for money.

In his last tour as an entrepreneur, the condescending attention of a venture capitalist was all but impossible to get short of reclining in their doorways. Now he and his colleagues discovered venture capitalists in their doorways, and they could pick the ones they wanted. The fledgling company forged an alliance with VocalTec Communications Ltd.
(www.vocaltec.com), the maker of the first commercial Internet telephony gateway, and ITXC was off and running.

ITXC and Internet telephony have run a long way since then. Evslin and his colleagues are carrying traffic that originates with
RBOCs, and AT&T is a major investor in voice over the net through its stake in Net2Phone Inc.
(www.net2phone.com).

“It’s just the beginning, but a very significant beginning,” Evslin says about the RBOC traffic. “The
RBOCs, unlike traditional long-distance carriers, have no network outside their territories. So, as they get into long
distance, they’re going to be buying call completion. They could buy from long-distance companies, but then they’d be buying from their competitors, and they’re not going to want to do that. With Internet telephony, they can get lower prices and bundle services that would distinguish them from the
PSTN."

Evslin says he can’t tell what sort of traffic the RBOCs are moving through his facilities. And as to which RBOCs are moving it, “I can tell you even less.” Large carriers use the services of Internet telephony carriers, but, like a preacher buying racy magazines or the mayor buying moonshine, they require Internet telephony carriers to be quiet about it. Internet telephony may have arrived, but in some circles, it still isn’t entirely respectable.

The ITXC business model is this: It is a wholesaler of Internet telephony minutes through distributors who have installed ITXC gateways made by VocalTec or other vendors supported by ITXC. Depending on the locale, ITXC’s distributor could be a local entrepreneur fighting an entrenched monopoly, or it might be the monopoly itself.

For example, ITXC has worked for the past two years with China Telecom Ltd.
(www.cthk.com), the erstwhile Chinese monopoly carrier. Their agreement isn’t exclusive. In theory, ITXC could work with China Telecom’s competitors too. But the idea clearly makes Evslin uncomfortable.

Another ITXC partner, as much a monopoly but on a smaller scale, is Gambia Telecommunications Co. Ltd.
(www.gamtel.gm), the soon-to-be-privatized telecom monopoly in the tiny West African republic of Gambia, which consists mainly of the river of the same name and a few miles of shoreline on either side.

Through it all, Evslin has retained his capacity to be surprised without being flustered. His company’s life since the beginning of 1999 has been full of surprises–so far, pleasant ones.

“In the beginning of 1999, I wouldn’t have guessed that we would do an IPO, have the stock go to twice the IPO price, then go to 10 times the price, then settle back to three times the price,” Evslin says. “We’ve done a second offering; we have $200 million in the bank, and are extremely well capitalized.”

On Sept. 28, 1999, the company announced its IPO of 6.25 million shares, priced at $12 per share. The stock quickly rose into the $30 range. On Feb. 8, the stock closed at $111 7/8. In midsummer 2000, ITXC was trading at about $36.

“I hoped, but certainly didn’t know, that the traffic would grow as fast as it has,” Evslin says. “From the third to fourth quarter of 1999, it grew by 70 percent. From the fourth to first quarter of 2000, it grew by 80 percent. To put it in another context, we had our first 1 million-minute month in October 1998. In November of 1999, first million-minute day.”

Evslin also says he never saw the advertising-driven model of Internet telephony service coming until it was upon him.

He says, “Free is a powerful way to sell.”

The model does not disconcert him, however. As a wholesaler, ITXC has to adapt to all retail models.

Evslin says he thinks ITXC is exactly where it should be strategically.

“It looks like there will be three competitors for consumer long distance,” he explains. “There will be the traditional ones like AT&T; the
RBOCs; and the web-to-phone companies, like MediaRing.com [Inc., www.mediaring.com] and Dialpad.com [Inc.,
www.dialpad.com]. Now that we’re carrying traffic for the
RBOCs, we’re selling to all three combatants.”

Evslin does think he sees the next bend in the road, however: “e-calling.” By e-calling, Evslin refers to the use of the Internet for integrated communications–voice, data, enhanced services, all running through whichever device the user finds most convenient. “E-calling is the successor to telephone calling, just as email is the sucessor to snail mail,” he says.

In July, ITXC agreed to buy eFusion Inc.
(www.efusion.com) a maker of VoIP applications software for about $153 million in stock. (The actual price will depend on ITXC’s stock price at closing). eFusion’s products enable real-time PC-based voice communications between website merchants and their customers, and PC-based call management by those merchants. The idea is that eFusion’s applications will ride on ITXC gateways, which serve about 200 POPs in 60 countries. From the comparatively pedestrian business of providing Internet connectivity to carriers, ITXC will find itself in a position to offer applications to end-users through those carriers.

While Evslin has founded two small companies (ITXC employs 170 people) and worked for two big ones, he prefers the smaller ones every time.

“I like to translate ideas into reality as quickly as possible, and there’s no place where you can do that as quickly as at a small company,” he says. “If they don’t work, you don’t spend days apologizing in meetings. You just make them work.”

ITXC still may be small, but how long can it stay that way? At what point will it be too big to be fun?

“Let me put it this way–when it stops being fun, it’s too big,” Evslin says.

Ken Branson is business and financial editor for PHONE+ magazine.