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Phone Service Via Net Grows
Consumers Like Flexibility And Low Cost - Telecom Firms Avoid Access Issues


September 24, 2004

By Clint Swett

When Shawn Cheris talks on the phone in his Sacramento home, he easily could forget his calls are being routed over the Internet, rather than via SBC's network.

"It's crystal clear," he said of the conversations he has over Vonage's Internet phone system that's hooked to his cable modem. "If anything, it's better than what I had before."

Although there are about only 1.1 million customers like Cheris in the United States, according to Frost & Sullivan analyst Jon Arnold, experts are predicting that Voip (voice over Internet protocol) soon will gain enough traction in American households to pose a serious threat to traditional telephone service.

And as California regulators finally settled a heated battle Thursday over the price of access to phone lines between SBC and the company's competitors, it seems clear that Voip could make such disputes less relevant.

Unlike traditional telephone service that moves voices over a circuit from one phone to another, Voip routes calls over the Internet, breaking the voice into packets of 1's and 0's at the calling end and reassembling them at or near the receiving end.

Despite its techie-sounding name, Voip no longer is the province of computer geeks. AT&T is heavily marketing its CallVantage Voip service to consumers in 39 states as it retreats from trying to sell traditional phone service to residential customers.

Cable companies like SureWest Broadband routinely offer a hybrid of Voip and traditional phone service as part of their cable television and Internet package. And Comcast expects to offer a similar service in Sacramento late next year.

Even SBC is hedging its bets by working to develop a consumer Voip system, though no timetable has been set for its rollout.

The gathering momentum prompts Michael Greeson, president of The Diffusion Group, a Dallas-area market research firm, to estimate that Voip could grow to 8 million residential users by 2008. Arnold of Frost & Sullivan pegs the number at 16 million.

Voip isn't too difficult to set up, requiring only a telephone, broadband Internet service and a cigar-box-size device that digitizes the voice.

More important, voice quality approaches that of standard phone service.

Chuck Bane, a Hewlett-Packard sales manager and Natomas resident, said his Vonage service generally is quite clear and always better than a cellular phone call.

"The quality isn't always perfect, but most people I talk to can't tell I'm on an (Internet) line," he said.

As the technology continues to improve, it's expected to draw more customers.

"We will see traction in this market fairly quickly," said Greeson. "This will make serious inroads into the telephone business."

Voip has several advantages over traditional telephone systems, including price and flexibility. For phone companies, it requires much less investment than a traditional phone network.

Industry pioneer Vonage, with more than 200,000 customers, offers a $30 monthly package for unlimited local and long-distance service and a host of features that include caller ID, voice mail, three-way calling, call waiting and call forwarding. Primus, a newer entrant in the market, offers essentially the same thing for $20 a month.

In contrast, a similar plan from traditional phone company SBC is $48.95 a month.

Price is what prompted Cheris to switch from SBC to Vonage about a year ago. "For what you pay and what you get, it's kind of a no-brainer," he said.

Voip providers also expect the flexibility of being able to program phone features will appeal to users.

Customers of AT&T's CallVantage system, for instance, can program their services via the Web, setting up conference calls, forwarding their calls to up to five phones and tracking their telephone activity online.

Because Voip providers piggyback on an established network - the Internet - they can avoid the huge capital investments needed to build and maintain a traditional phone network. Nor do they have to wrangle with established phone companies to lease portions of their systems.

With an estimated 30 percent of American households equipped with broadband connections, Voip companies have a built-in market. In addition, Voip has avoided the taxes and regulations levied on traditional phone companies.

Although the taxes might add a few dollars to a phone bill, observing regulatory rules can be a greater burden.

Lou Holder, vice president of product development for Vonage, says the company can deal with federal regulators. "Our fear is that states will get regulatory control," he said. "Then you have 50 different states applying 50 different sets of rules."

It's unclear how that might play out. The California Public Utilities Commission has claimed jurisdiction over Voip service that connects to the local phone network. But a bill in a congressional committee would deny states the right to regulate VOIP, reserving such control for federal authorities.

Because Voip isn't part of the traditional phone network, the technology remains foreign to many customers.

According to a study by The Diffusion Group, nearly 35 percent of Internet households have never heard of VOIP, and nearly 40 percent that have heard of it are not familiar with it.

Even with more familiarity, potential users could be put off because Voip lacks some features that most phone users take for granted.

Traditional phone systems continue to operate during a power outage, but Voip would not without a battery backup for the modem and other gear.

In many cases, a Voip customer's address doesn't register with calls to emergency 911, as it would over the regular phone network.

"While that may not seem important, it never does until an (emergency) event occurs," said Teresa Mastrangelo, an analyst with RHK Inc., a technology consulting firm in South San Francisco. She said those issues must be solved before Voip can become ubiquitous.

In addition, the Voip phones can't be plugged into traditional phone outlets throughout the house, meaning those who want extension lines must use cordless phones linked to a central-base station.

And there's the matter of Internet access. People with cable-modem service can either get Voip from their cable company or through a company like Vonage or AT&T.

But those with DSL, which comes over a phone line, must pay for regular voice service on that line, even if they use Voip instead. In Sacramento, that would be about $10.69 a month, plus taxes and other fees.

"That (extra cost) will tend to discourage people," Greeson said.

Those roadblocks aren't expected to stifle VOIP's long-term growth. "I've recommended this to a lot of people," said Cheris, a self-described computer geek. "Everyone seems pretty happy with it."



 
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†AK and HI residents pay $29.95 shipping. ††Limited time offer. Valid for residents of the United States (&DC), 18 years or older, who open new accounts. Offer good while supplies last and only on new account activations. One kit per account/household. Offer cannot be combined with any other discounts, promotions or plans and is not applicable to past purchases. Good while supplies last. Allow up to 2 weeks for shipping. Other restrictions may apply.

1Unlimited calling and other services for all residential plans are based on normal residential, personal, non-commercial use. A combination of factors is used to determine abnormal use, including but not limited to: the number of unique numbers called, calls forwarded, minutes used and other factors. Subject to our Reasonable Use Policy and Terms of Service.

2Shipping and activation fees waived with 1-year agreement. An Early Termination Fee (with periodic pro-rated reductions) applies if service is terminated before the end of the first 12 months. Additional restrictions may apply. See Terms of Service for details.

HIGH SPEED INTERNET REQUIRED. †VALID FOR NEW LINES ONLY. RATES EXCLUDE INTERNET SERVICE, SURCHARGES, FEES AND TAXES. DEVICE MAY BE REFURBISHED. If you subscribe to plans with monthly minutes allotments, all call minutes placed from both from your home and registered ExtensionsTM phones will count toward your monthly minutes allotment. ExtensionsTM calls made from mobiles use airtime and may incur surcharges, depending on your mobile plan. Alarms, TTY and other systems may not be compatible. Vonage 911 service operates differently than traditional 911. See www.vonage.com/911 for details.

** Certain call types excluded.

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