Michael Egan and theglobe.com are back with new technology

By Patrick Danner
June 9, 2003

Theglobe . com is hoping its latest stab at tapping an emerging technology goes better than its first.

The one-time high-flying Internet company is banking its comeback on Voice-over-Internet-Protocol, a technology where voice calls are routed cheaply over the Internet rather than the traditional phone system.

''We see this turning into a very big business, let me put it that way,'' says Michael S. Egan, theglobe . com's chairman and chief executive. ``I don't want to quantify it because then I've stuck the yardstick in front of us.''

Telephone service via the Internet, using high-speed cable or wireless connections, could revolutionize communication. Its biggest selling point is significantly reduced pricing, and callers can avoid certain fees and surcharges that fatten a regular phone bill.

The Voip landscape is growing more crowded by the day, though. And margins in the long-distance telephone industry already are thin, with a host of upstarts and calling-card services charging just pennies per minute for calls.

''There are a lot of phone companies out there that are offering very competitive rates,'' says Stephan Beckert, research director of TeleGeography, a Washington-based telecommunications research and consulting firm. ``I can't guess how they will do. International rates are already tremendously competitive. If their primary lever is to try to open doors by competing on price, they are going to have a hard time.''

Nevertheless, theglobe's management believes it has a way of standing out. It has acquired technology that it says can assign customers a telephone number that they can take with them anywhere in the world. The service is called voiceglo.

''It allows us to find you wherever you are at on the globe, and deliver a phone call to you,'' explains Edward A. Cespedes, theglobe's president. The company is seeking a patent on the technology.

Voip represents a dramatic shift for theglobe, which, maybe more than any other company, epitomizes the boom and bust of Internet stocks.

Theglobe was founded by two 20-something graduates of Cornell University. Egan, a Cornell alum who had built Alamo Rent-A-Car into an industry giant, invested $20 million in the summer of 1997 to jump-start the company, which operated an online community of message boards and chatrooms.

It expected to make money by capturing advertising dollars.

Investors, dazzled by anything connected with the Internet, bid theglobe's shares up a then-record 600 percent from a split-adjusted $4.50 to $31.75 the day of its initial public offering in late 1998. (Shareholders filed a class-action lawsuit in 2001 in New York alleging some shares were allocated to certain investors in exchange for excessive and undisclosed commissions. The company disputes the charge.)

Ad spending on the Internet, though, dried up, along with the fortunes of many Web-based firms. ''The collapse of the advertising model, as well as the Internet space, was a huge disappointment,'' Egan says now. Even so, he sold about a fifth of his shares in early 1999 for $50 million.

With its stock trading under 15 cents in August 2001, theglobe pulled the plug on its online community. It sought buyers for its remaining assets, primarily game-related businesses, with the intent of liquidating.

But last June, Egan, theglobe's chairman, and Cespedes took over management. Egan is best known for growing Alamo into the nation's fourth-largest rental car company before selling to what is now AutoNation for $625 million in stock 1996.

AutoNation spun off its rental-car business into a separately traded public company, ANC Rental Corp., in 2000. With ANC struggling, Egan returned to try and get it back on course in early 2001. However, ANC ended up filing for bankruptcy later that year. Egan also controls Certified Vacations Group, a Fort Lauderale provider of vacation packages. Among his investment successes: a stake in Nantucket Nectars, a juice company that he later sold to Ocean Spray.

After considering whether to continue theglobe's liquidation or sell the business in whole, Egan and Cespedes opted to use theglobe as a vehicle to make investments in other businesses. They moved the company's headquarters to Fort Lauderdale from New York.

There were a few reasons for keeping theglobe going, Cespedes says. First, theglobe had racked up more than $200 million in losses that it could use as a tax shield. Second, theglobe remains publicly traded, which Cespedes says provides more financing flexibility. ''Three, there's this desire to return value to shareholders,'' Cespedes says.

''Including ourselves,'' Egan adds. Egan and Cespedes, individually and through two investment entities, own the most shares and have provided financial support to theglobe that could mean substantial dilution for other shareholders. Cespedes agrees, but adds those minority shareholders would be holding a worthless stock otherwise.

Theglobe, which still owns Computer Games magazine and a games-distribution business called Chips & Bits, lost $681,747 on about $1.7 million in revenue in the first quarter.

In November, theglobe made its first investment since Egan and Cespedes took control when it acquired Voip technology developed by a 31-year-old Canadian entrepreneur.

''I was looking for a way to take on Bell Canada,'' says Brian A. Fowler. ``I wanted to become a full-service telephone company. That's basically where this all started.''

Fowler's search for a venture capitalist led him to Egan and Cespedes.

''The thing that interested me the most was the size of the market was huge,'' Cespedes says.

``Everybody used it. And more importantly, everybody was used to paying a lot for it. People are paying $54 a month on average for their phone.''

Theglobe stock has risen from the teens in late April to Friday's close of $1.29. That's good news for Fowler, now theglobe's chief technology officer. He received warrants to buy 1.75 million shares of theglobe for 6.5 cents each, meaning he has registered a gain on paper of about $2.1 million. He also received warrants to buy another 425,000 shares if theglobe hits certain performance targets.

Theglobe is at least a month or so away from rolling out three voiceglo products. It is still refining its pricing and didn't want to publicly share details, but the voiceglo service comes in two formats.

Subscribers to Voiceglo 99* can talk with each other for a flat monthly rate and no per-minute charges. A small per-minute charge is assessed if a subscriber calls someone who is not a customer. Subscribers receive a nine-digit telephone number, preceded by 99*, that they can take with them anywhere and keep forever, Cespedes says. Internet service is required.

Voiceglo usa service essentially is an alternative to the home phone, Cespedes says. With a broadband connection, users can have voice mail, call waiting and other features for significantly less than what a traditional phone company charges, Cespedes says. Residential subscribers receive unlimited local and long-distance calls in the United States and Canada for a flat fee and no per-minute charges.

Subscribers to either service also get a free USB phone with activation, but users can use existing phone sets in their home with the service. Both services will offer low international rates as well, Cespedes says.

Among the players offering phone service over the Internet are Net2Phone and Vonage.

Theglobe ''will be able to compete for a certain segment of the marketplace,'' predicts Jeff Kagan, an independent telecom analyst based in Atlanta.

``But they are going to be competing for a niche. They could survive and be profitable. That doesn't mean they will become a huge company.''

Marketing will be costly, Kagan adds. In a recent filing with securities regulators, theglobe notes it doesn't have access to other funding sources and it has limited operating capital. In fact, it says current capital won't sustain operations through the end of the year.

Egan dismisses that as boilerplate language required by regulators.

Last week, a privately held investment firm controlled by Egan and Cespedes agreed to loan theglobe $1.75 million -- part of which funded the acquisition of a Fort Lauderdale telecom company.

''I think you have to look at it this way,'' Egan says. ``We wouldn't have put a year's worth of our time to see it fizzle and fade for lack of sufficient funds.''