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Is the World Ready to Make Phone Calls Via the Internet? After Six Years of Hype, the Answer is a Resounding Maybe

September 24, 2003
By Jeff May

BOSTON -- Internet phone technology may finally be poised to hit the big time.

The telltale sign: The industry's leading lights are trying to tamp down the hype, not dial it up.

Instead of the swagger that characterized meetings such as the influential Voice on the Net conference a few years ago, some executives this time almost seemed to poor-mouth the state of things. They pointed out Internet phone companies control just one-tenth of 1 percent of the local lines in the United States.

There is a reason for the restraint. The 2,000 people gathered here have been through the most vicious years in telecom history. At the same time, raising expectations too far could give ammunition to regulators.

But everybody here agrees the industry is at a tipping point.

"How big is the opportunity?" asked Jack Waters, an executive with Level 3 Communications, which caters to business customers. "I believe the opportunity is massive."
Internet phone service has been billed as the Next Big Thing for the better part of a decade. Experts say the service is a way to bring down costs and permit wrinkles such as "follow-me" dialing that can direct calls to a home number, wireless phone or voicemail system, depending on a person's availability. But the future has been slow to arrive.

The telecom meltdown of the past three years was particularly hard on the thinly funded, upstart companies who first embraced the technology.

These days, most of the nation's largest cable operators plan to offer the service widely within two years, and companies such as AT&T and Sprint expect to expand its use for business and residential customers.

Why Now?

The technology has matured in the past few years, although there are still issues with providing reliable 911 service and backup power in an electrical outage.

No one is exactly sure what the "killer app" for Internet-based communications will be, said Christopher Fine, an analyst with Goldman Sachs. But as the telecommunications industry recovers, phone carriers are more willing to gamble on investments, especially ones that will allow them to offer services their competitors don't.

"It is going to happen," he said. "It is going to succeed."
Phone by Internet works differently than the century-old, circuit-switch system. Think of circuit-switch calls as a train track that connects one point to another. When a call is made, the voice signals board the train and it rumbles down the line, a portion of track no one else can use as long as the call is open.

Internet-based systems slice voice signals into small digital packets, which follow different routes to get to their destination, where they are reassembled. Since the packets seek out the least congested paths, they make the network more efficient and better able to handle great vats of data.

The advantage for customers isn't efficiency, but cost. Vonage, an Edison-based Internet phone company, offers unlimited phone service for as much as $20 less a month than Verizon or AT&T, although you have to have a cable modem that comes with its own monthly fee.

Another company, Newark-based Net2Phone, is ramping up its marketing for Internet telephone service.

Comcast and Cablevision, New Jersey's largest cable operators, are gearing up to offer Internet phone service throughout their territories. Comcast has a market test in Coatesville, Pa., and plans to go into two other markets it won't name next year.

The service should be widely available by 2005, said Steve Craddock, the company's senior vice president for new media development. Comcast also has a video phone service on the drawing boards, which it plans to begin testing next year.
Cablevision already offers phone service on Long Island, and plans to broaden the offering, although it has not released details. Its customers are not just using the service as inexpensive second lines for kids or home offices, either. Thirty-seven percent of those who sign up use it to replace their existing service.

Those kinds of numbers make the regional Bell companies nervous, since they control the majority of the nation's local phone lines. Those lines have been shrinking in recent quarters because of the adoption of wireless phones, and the Bells are worried Internet phone service will accelerate the process once it is widely available.

The local phone companies say Internet calls should be subject to the same federal fees for wiring rural and poor urban areas that they pay. In petitions before the Federal Communications Commission, AT&T and Jeff Pulver, the conference organizer, have argued that Internet phone technology is an information service, not a telecommunications one.

He even told the conference they should not even describe what they do as "Internet telephony" anymore.
"It's starting to become a problem on the regulatory level," he said.

The FCC has been in no hurry to take up the issue, but Minnesota officials recently declared Vonage a telecommunication service, a classification the company is challenging.

FCC official Robert Pepper said the issue is complex.

Should the Xbox game console be considered a telecommunications service, he asked, since it allows online gamers to taunt each other through their headsets?

For now, federal regulators seem content to let the Internet phone industry grow into a viable competitor. Just to make sure, Pulver, in his opening address, made sure to point out how few lines the industry controls.

The message was aimed at regulators, but he was preaching to the wrong choir -- at Voice on the Net, almost everyone expects the number to shoot up soon.

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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 for details.

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