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AT&T Joins Fray For Cheaper Calls Through the Web

Vonage In Print News
December 11, 2003

By Matt Richtel

The battle over the future of telephone service will break wide open today with an announcement from AT&T that it plans to offer unlimited long-distance and local calling using Internet technology at a lower cost than conventional phone service.

The move, disclosed by industry executives close to the company, comes after announcements this week from Time Warner Cable that it would provide phone service in many areas where it offers high-speed Internet connections and television access and from the BT Group of Britain that it would offer Internet-based telephone service to its customers.

Together the moves highlight sudden embrace by telecommunications companies in the United States and around the world of an initially derided technology that they now say is destined to shake the competitive foundations of an industry that generates hundreds of billions of dollars. For consumers, the shift is likely to mean lower prices and enhanced telephone features with about the same quality of voice delivery.

The emergence of Internet-based telephone calling is expected to ignite a regulatory and political firestorm among the major communications companies. The technology raises new privacy and security questions that regulators will have to grapple with. At the same time, it has the ability to shift or eliminate tens of billions of dollars in fees and taxes now paid by telecommunications companies.

In the case of AT&T, the company hopes to avoid at least some of the $11 billion in fees it now is required to pay to send traditional voice traffic over the lines of its local phone company competitors, which control access to millions of homes and businesses.

David W. Dorman, the chief executive of AT&T, is scheduled to announce the company's plans today in a speech in New York to Wall Street analysts.

Industry executives close to the company said that Mr. Dorman intended to refer to Internet-based phone calling as "the most significant fundamental new technology shift in telecommunications in decades."

The company has not yet disclosed a price for its new unlimited nationwide phone service, which will be available only to people who already have high-speed Internet access installed in their home or business.

Still, the announcement by AT&T, the nation's largest long-distance company, shows the technology should quickly move beyond the handful of small companies that now deliver telephone calls as Internet traffic.

"This certainly is a significant event," Kate Griffin, an analyst with the Yankee Group, a market research firm, said of AT&T's impending move, noting it may well be the most aggressive effort yet by a major telephone company.

"We've been waiting for years for companies to announce their roll-out plans," she said. "Now everybody is jumping in."

The rush has been set off by sharp improvements in the technology that allows telephone calls to be carried over cable lines, and, in an unconventional and less expensive way, over existing telephone lines. What the technology does is change a voice signal into data - resembling the form used to deliver e-mail messages, digital music and Web pages - that can be sent across a variety of networks, including cable and telephone lines, satellite and even electric utility wires.

The Internet-based services allow customers to use their regular telephones, but plug them into boxes that translate voice traffic into Internet data packets. Callers would keep their existing phone numbers.

There are some substantial advantages to this technology. It not only is less expensive to install and operate, it can offer consumers the ability to manage telephone calls in new ways. For instance, through a computer, consumers could program their phone not to ring at certain hours, to forward calls to a mobile phone, and to allow certain numbers to ring through but not others.

The pricing for Internet-based calling is just emerging, but it is clear that the service will undercut traditional phone prices and should lead to lower prices in the future.

Customers of conventional unlimited calling plans now pay about $50 to $70 a month, excluding taxes and surcharges. Time Warner Cable charges $49.95 for its service in Maine; Vonage, the largest Internet-based telephone provider, charges $35 for unlimited calling.

On the broadest level, the ability to turn voice messages into digital data cuts the tether between the existing telephone lines and calls. Once the voice signal becomes digitized, it can be sent over a host of different lines, opening competition to numerous telecommunications providers.

But the service has disadvantages, at least for now. Internet-based calling is not as reliable and it is subject to interruption in a power failure.

Vonage has around 75,000 customers in the United States. It sends its traffic over the public Internet, which has led to incidences of dropped calls, among other problems. AT&T expects to overcome most of those problems by relying on its own private data networks.

Still, the service has other drawbacks. For the time being, it would be available only to people who have high-speed Internet access in one of the top 100 metropolitan areas, either through cable or D.S.L. lines, a market that AT&T puts at 23 million households. That access is spreading rapidly and should be available to millions of other Americans soon.

Over all, there are only about 100,000 Americans who use Internet-based telephone access today, according to the Yankee Group.

But the entry of the biggest companies in the industry is giving rise to a major business and regulatory fight. At the core of the debate is the question of whether Internet-based traffic should be regulated and taxed.

For the major players, it is also a fight over the allocation of billions of dollars of access fees that telecommunications companies pay one another for access to one another's lines. Those fees are permitted as part of federal regulation of telephone calls.

Under AT&T's plan, it would continue to piggyback on a portion of the networks operated by the local phone companies. But it would be sending calls over that network in the form of Internet traffic, not traditional voice traffic. Signals sent as Internet traffic are not regulated by the government, and thus do not carry the same access charges.

The telephone companies are arguing that AT&T should have to continue to pay. "If we carry your traffic, you ought to pay for it," said Eric Rabe, a spokesman for Verizon.

This issue could well be decided by the Federal Communications Commission, which began hearings on the topic last week.

This story also appeared in:
  • Contra Costa Times, 12/11/03
  • Lakeland Ledger, 12/11/03
  • Silicon, 12/11/03
  • eWeek, 12/11/03
  • Silicon, 12/11/03

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