Voice-Over-Internet Service Challenges Traditional Calling

vonage-forum.com/images/media/sunspothomenew.gif">

Voice-Over-Internet Service Challenges Traditional Calling

November 28, 2003

By Dan Thanh Dang

It wasn't that long ago when any long-distance company peddling a low rate could persuade Jeff Pulver to switch. But these days, Pulver has no use for such money-saving deals.

By hooking up his phone to the broadband connection in his New York office, Pulver and his 20 employees make all their calls over the Internet, slicing a few thousand dollars off the telephone bill every month.

As if the wireless industry weren't competition enough, traditional phone companies are facing a relatively new rival in the form of voice-over-Internet service.

Internet calling is still in its infancy, with 100,000 customers nationwide, but with about 20 million U.S. homes equipped with cable modems or digital subscriber lines, experts say voice-over-Internet is expected to become a multibillion-dollar industry over the next few years.
Dozens of small start-ups across the country - led by fastest-growing Vonage DigitalVoice in New Jersey - are signing up thousands of new customers a month. Large, established companies such as Verizon Communications Inc. and Comcast Corp. are entering the market, too.

"For the first 135 years of communications, things have been more or less the same," said Pulver, a pioneer in Internet telephony who founded pulver.com, a telecommunications firm.

Unconventional path

"Voice-over-Internet offers ... a way to break away from that conventional path. It will completely change the way we use the phone."

Many states are taking note. A handful have started studying how to regulate what is commonly referred to as voice-over-Internet protocol, or VoIP.

Minnesota recently lost a battle in court seeking to license Vonage as a traditional carrier. California is pursuing similar action. Florida decided through a legislative act not to regulate VoIP. Texas and Maryland are monitoring the situation.

Gregory V. Carmean, executive director of the Maryland Public Service Commission, said, "We're not taking any action of our own at this time."

In Washington, the Federal Communications Commission is about to provide guidance. In a forum Monday that will trigger a formal rule-making process, the FCC will examine the technical, market and safety issues behind VoIP as it decides how much regulatory oversight is needed.

Congress did not address the Internet in the landmark Telecommunications Reform Act of 1996. That leaves state and federal watchdogs to grapple with whether VoIP should be highly regulated like traditional telephone service or given more freedom to operate like the Internet, and with whether it is a telephony service or a data service.

VoIP advocates say they are concerned that too much regulation could stifle its growth or, worse, dry up investment money and chase innovation overseas. And the FCC sees dangers in moving too quickly.

"I urge caution in addressing VoIP issues," said FCC Chairman Michael K. Powell in a recent letter to Sen. Ron Wyden, an Oregon Democrat who has fought to extend a moratorium on Internet taxes. Powell has taken flak this year for pushing to ease regulations for Internet providers and media consolidation.

"There is universal agreement that these Internet services hold great promise for the American people," he said. "Imposing regulatory burdens on these new and emerging Internet services, before the FCC fully engages the public and develops a comprehensive record, may have the unintended consequence of stifling its growth and denying the public benefits of that growth."

Not too fast

Providers also want a go-slow approach.

"We don't believe that VoIP should never be regulated; we just don't think it should be regulated like a traditional phone company," said John Rego, chief financial officer Vonage, which has 72,000 customers. "We'd like to see a five- to 10-year bubble that allows the nascent industry to mature."

Vonage - which charges about $40 a month for unlimited local and long-distance calling, plus the necessary hardware - raised $35 million in venture capital Monday in an investment round led by New Enterprise Associates in Virginia.

ToadNet Inc. in Severna Park began trials of VoIP services last month.

Major carriers such as SBC Communications Inc., Verizon, Comcast and Cablevision Systems Corp. have started offering or announced plans to offer residential VoIP. Many carry parts of calls over the Internet without callers recognizing it.

Experts say VoIP's growing popularity - sparked by improvements in the technology - is also the reason states want to regulate and tax Internet telephony as a new source of revenue.

A decade ago, Internet telephony was used to bypass phone companies to make free long-distance and international calls. The quality was sketchy; voices sounded tinny and delayed. Internet callers could call only other people who had Internet phone service.

Today, Internet phone calls can be made from computer to computer, wireless or land-line phone. The quality has improved drastically, experts say.

Instead of using circuit switches to connect calls, VoIP records the sound, compresses the recording and breaks it up into small packets of data that are sent over the Internet. The phone on the other end reassembles the packets in proper sequence instantaneously.

The technology behind Internet calling is the reason VoIP advocates say it should not be highly regulated like traditional phone service.

"We're not saying traditional phone companies shouldn't offer voice-over-Internet," Pulver said. "This is not an us vs. them situation. This should be good for them, too. We can all offer this technology to customers. As a direct result of innovation, local phone service competition could be blown wide open."

Choose any area code

The advantage in using the Internet phone service is that customers can choose any area code in 95 major markets. A user can live in Baltimore and choose an area code in California, for example. Making a call from Baltimore to Los Angeles on the Internet would be a local call under that arrangement. Some long-distance calls essentially become free.

The same phone could be taken to London, hooked up to the Internet and used to call family and friends as if the caller were still in Baltimore.

"VoIP is a hot market, there's no doubt about it," said John O'Keefe, senior Internet service analyst at Current Analysis in Virginia. "But the consumer VoIP market is not touting itself as an end-all to land-lines, at least not yet. It's an additional service that can enhance the use of traditional phone service."

Major problems still need to be worked out, experts say.
VoIP can be installed only in homes that have high-speed Internet access. With its lack of geographic identification, Internet calling gives people the freedom of mobility, but it also makes it difficult to track someone's location in an emergency. Internet calling is impossible during a power outage.

On the plus side, VoIP will help increase worker mobility, allow desktop calling and conferencing to grow, and enable users to call or chat with their colleagues while browsing the Web or checking e-mail, said Vijay K. Bhagavath, an analyst at Forrester Research Inc.

"The purpose of regulation is to put some frameworks and boundaries in place so that companies don't abuse people," Bhagavath said.

"But we need to understand the full significance and impact of Internet telephony on people and how they will benefit from it before we can arrive at some sort of regulation. It's going to take a few years to get to that point."