thinkpool

http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/11/14/BU235014.DTL Dialpad looks like dot-bomb David Lazarus Wednesday, November 14, 2001 -------------------------------------------------------------------------------- That gasping sound you hear is Santa Clara's Dialpad Communications, the leading provider of dirt-cheap phone calls via the Internet. Company insiders tell me that an announcement could come as early as today that Dialpad will either shut down or declare bankruptcy after burning through about $67 million in investment funds through two years without ever making a dime. A last-minute buyout by South Korean investors remains possible, the insiders said, but the greater likelihood is that Dialpad will call it quits. "Currently, the company is operational," Dialpad spokesman David Gilcreast said yesterday. "Other than that, we have no comment." Employees had been expecting the company's acting chief executive, Craig Walker, to announce Dialpad's demise yesterday afternoon. But an expected staff meeting was called off, leaving workers guessing as to the firm's future. In many ways, Dialpad's story is no different from that of many other Silicon Valley startups. The company has its foosball and pingpong tables, and plenty of junk food to keep its young employees buzzing. But Dialpad also has something that most dot-coms could only dream of: technology with genuine real-world viability. By using the Net as a phone service, Dialpad was able to save customers as much as 75 percent on their long-distance bills. The trick is that telephony users log on to the Net through their PCs with flat-rate local dial-up numbers. Long-distance phone connections then can be made at a fraction of the usual cost. The drawback, and it's a big one, is that users must be reasonably computer savvy and have special equipment and software installed on their systems. While a good idea in theory, Dialpad and other telephony providers discovered that too few people are keen to jump through such hoops, leaving Internet telephony, like satellite-based wireless phones, as one of those nifty telecommunications technologies that never quite caught on. At its peak earlier this year, Dialpad had about 14 million registered customers worldwide racking up 80 million minutes of telephony time per month - - well ahead of second-place Net2Phone of New Jersey, which said last week that it will slash nearly 50 percent of its workforce. But even that level of activity could not bring Dialpad close to making a profit, prompting the company's managers to switch course a few months ago and focus the service instead on large corporations. "All our resources were pushed in that direction," one insider said, "but the business never took off." Moreover, the employee added, "the wrong people were hired to run that division. They had no idea what they were doing." And Dialpad's money continued to bleed away. Finally, the company's former chief executive, Brad Garlinghouse, attempted to salvage Dialpad by selling off the firm. Negotiations were held this summer with Sunnyvale's Yahoo, which Dialpad insiders say was interested in an acquisition. But the talks collapsed when South Korea's Serome Technology, which already held a stake in Dialpad, said it wanted first crack at a buyout. Dialpad's founders, Hyunduk Ahn and Wongyu Cho, both have backgrounds with Serome. Dialpad also counted former tech-industry heavyweight CMGI among its investors. "The talks with Serome went back and forth and back and forth," one Dialpad worker said. "Serome said as recently as last Tuesday that a deal would be done and that they'd be buying the company. Then on Wednesday they backed out. Nobody knows why." Dialpad, which has been laying off workers since August, handed out another round of pink slips Friday. By yesterday, the 40 or so employees remaining -- out of about 130 at the company's peak -- were passing their time trying to guess when the ax would hit them as well. "It's really depressing," one worker said. "And this company has a real robust piece of technology that really seemed to have a place in the future of communications. People here were very close and very passionate." And very hopeful that their stock options would soar in value either by going public, as Net2Phone did, or being bought. But high hopes won't pay the bills. "The money was spent too quickly," one insider said. "We had too many people burning through too much cash." And that looks like it has sealed Dialpad's fate. Serome could still come riding to the rescue, but the betting line around Dialpad is that the company will cease operations by the end of the week. Internet telephony? A good idea. While it lasted. David Lazarus' column appears Mondays, Wednesdays, Fridays and Sundays. Send tips or feedback to dlazarus@sfchronicle.com.