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Internet Phone Service Is Here: Bad News For Your Phone Company: Good, Cheap Internet Phone Service Is Finally Here

October 1, 2003

By Robert X. Cringely

The only thing I have in common with Howard Stern (other than the fact that we are both mammals) is that we both use Internet telephone service from a company called Vonage.

The Vonage service allows Howard and me to make, for $39.99 per month, unlimited phone calls anywhere in the U.S. and Canada and darned cheap phone calls to anywhere else in the world. It uses real phones and real phone numbers and is just like the service you're used to, except that calls are routed over the Internet rather than over a telephone company's network. Vonage is aimed at people with broadband Internet connections (primarily DSL or a cable modem) and uses a technology called voice over Internet protocol (VoIP). And it could kill your phone company.

Here is what I get for my $39.99. I get a little box from Cisco Systems that plugs into the Ethernet switch on my home network, and into that I plug a telephone. I use Vonage as line three on my four-line Panasonic wireless phone system, so line three (the free one) is available on all six extension phones. If that sounds like a typical small-business setup, then you must have visited my house.

The Vonage line replaces my old office phone line, saving me more on my SBC bill than I pay Vonage and making the service effectively free. (Lines one and two are for regular phone lines--a hedge.)

I have a local phone number in my 707 area code, but I could have chosen a local phone number in a number of other area codes, including the oh-so-desirable 212 (just in case I wanted to pretend to have a New York office). And for editors calling that 212 number from their Midtown cubicles, it would be a local call.

If I decide I want to change my area code I can get a new number in a new city for a small one-time fee. If I want a local phone number for the same phone in another area code in addition to my own, that's an extra $4.99 per month per number. I can live without those things, but I do have, for $4.99 a month, a toll-free number. I also pay $9.99 per month to activate the second Ethernet port on the Cisco box for a fax line. That line goes not only to my fax machine but also to the Panasonic phone system, so lines three and four are VoIP.

For about $55 per month, then, I have a phone line with unlimited local and long-distance calls, a fax line with 250 free minutes per month, which is a lot of faxing, and a toll-free number on which my stingy relatives can call me. And all this, of course, includes voice mail, caller ID, call waiting, call forwarding, etc. I can even get my voice-mail messages as audio files attached to e-mails sent to me anywhere in the world.

But wait, there's more! I can unplug my Cisco box in California and take it to the little house we have in Charleston, S.C., where every year I try to perfect my heat rash. I plug it into the Charleston DSL line and my business line and fax line ring there instead of in California. I could do the same thing on a trip to Japan, too, and soon even that won't be necessary, because I'll be able to replace the Cisco box with software on my notebook computer--so my office line will ring at my hotel in Tokyo.

I can use a computer headset to take the call or, even better, by next year I'll be able to plug a special phone into the USB port on my notebook. I completely bypass the hotel phone system. Not only am I saving on hotel charges, but my virtual phone doesn't know it's in Japan at all, so all my calls back to the U.S. are free.

Vonage founder Jeffrey Citron also started the computerized stock-trading system Island ECN--and sold it for half a billion dollars.

If your business is bigger than mine is, an affiliate of Vonage called Vontek can route the Internet phone right into your phone switch. It can even set up a virtual PBX so people working at home can all have extensions on the office phone systems no matter where they are in the world as long as they have broadband Internet service. I might never get out of bed.

Voip phone service has been around for years, but until recently the voice quality just wasn't very good. Now, because computing power is cheaper and Internet connections are faster, it is hard to tell a Voip phone from a regular phone--until you get the bill.

One technical feature that is driving Voip phone service is use of the session initiation protocol, or SIP. SIP comes from the world of instant messaging, where it is used to connect your teenage daughter to all of her online friends when she is supposed to be doing homework. What SIP does for Voip is create peer-to-peer telephone connections anywhere in the world. In other words, the phones talk to each other without the need for any kind of phone switch in the middle. It is a phone system without a phone company, and the implications of that change are profound (as we'll see).

Vonage is not the only Voip game in town, just the most visible right now. Founded by Jeffrey Citron, who started the computerized stock trading system Island ECN, then sold it to Instinet for $503 million, Vonage is spending more money and getting more exposure than its competitors. But those competitors are worth considering, too. At, for example, you can get a local number for your Voip phone for only $9.95 per month. Another service, called Free World Dialup, costs nothing--but offers a lot less.

The strongest competitor for Vonage on a feature-for-feature basis is Packet8 from 8X8, a California company that makes most of its money in the videoconferencing business. Packet8 does pretty much what Vonage does, but Packet8 just dropped its price for unlimited domestic calling to $19.95 per month. Can you say "price war"?

Of course, this is an emerging nightmare for local and long-distance phone companies. Some of them are responding with their own unlimited calling plans, but they aren't quite so full-featured as Vonage's or Packet8's. You can't take your phone with you, for example.

There is no risk of everyone swooping out and buying Voip phones and eliminating the plain old telephone service (POTS) overnight. However, in the next five years there is going to be some serious worry at the traditional phone companies about how they will make money. All the investment in the late '90s in Internet backbone construction (much of it by companies now in bankruptcy) is starting to look as if it might be good for something other than pornography and trading pirated music. "Big companies, which are traditionally where phones cost the most, will be the first to broadly adopt VoIP," predicts John Todd, a Voip consultant. "Even the slightest perception that Voip is less reliable than normal services will cause companies to hedge their bets. However, when you can pay 30% of what you're paying now, very often there is considerable interest in a new technology when the ROI turns positive in the first four months . For some companies that are voice-intensive, this can mean the difference between a humdrum year and a strong EBITDA positive, which perks up everyone's ears these days."

The local phone companies, or incumbent local exchange carriers, will do whatever they can to slow the growth of VoIP, but the fact that the phone traffic is on the Internet will make Voip impossible to stop. Vonage, for example, isn't a phone company at all in the eyes of the Federal Communications Commission. Vonage, based in Edison, N.J., works with competitive local exchange carriers (not the local phone company) to acquire local phone numbers and interconnects in several states. You could too. There is plenty of room for more Voip phone companies, and the cost of entry is low. For example, much of the guts of a Voip phone system can be built on a Linux application called Asterisk, which is free. (Asterisk is interesting for reasons beyond its low price. It is an Open Source application that supports a voice compression scheme called G.729, which can cram four Voip phone calls into the bandwidth normally required for one.)

Voip will have a big social and political effect, too, especially in other countries. Blocking SIP ports will become a way of life for many less-developed nations, as national phone monopolies struggle to keep their international long-distance cash cows alive. Law enforcement and intelligence agencies are beginning to comprehend what Voip will do to their wiretap efforts, and they aren't happy. Having spent $500 million to be able to tap almost any telephone line anywhere right from a computer screen, the FBI will find it hasn't a clue where SIP phone calls are coming from or going to. Tony Soprano would have to have one. Howard Stern already does.

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