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Finally, 21st Century Phone Service
Internet Telephony Promises Far More Sophisticated Features And Much Lower Prices. It Also Promises To Upset The Telecom Power Structure

January 6, 2004

By Staff

In the 127 years since Alexander Graham Bell discovered a way to "talk by electricity," phone calling has changed relatively little. True, the world today is awash in advanced services such as call waiting and caller ID, and of course cell phones. But those are minuscule advances compared with the technological evolution -- in much less time -- seen in aviation, agriculture, medicine, automobiles, and most other industries that are basic to American life.

This could be the decade that phones finally make their move. Voice over Internet protocol, or VoIP, sometimes pronounced "voyp," could be the transformative technology that will redefine the phone and the way people use it. With VoIP, calls are transferred in digital packets over data networks instead of over circuit-switched copper wires. This means any corporation with a network or any individual with a $30-a-month broadband connection can make calls without paying the phone company.

Moreover, once voice is on the Net, it becomes just another piece of information that can be manipulated in many more ways than traditional phone calls can -- which should lead to rapid innovation and improvement in voice communications (see BW Online, 11/11/03, "Why the Bells Should Be Very Scared").


The implications for the phone industry are, to put it mildly, jarring. The decoupling of voice calls from their traditional networks will loosen the hold of incumbents such as Verizon (VZ ), SBC (SBC ), and BellSouth (BLS ) on the $200 billion telecommunications market. With VoIP, customers will be free to provide their own networks or jump to new providers -- including cable-TV companies or startups such as Net2Phone (NTP ) and Vonage.

Voip has been around as long as the Internet. But until recently, it was the province of geeks and college kids who had more time on their hands than money. Now, Voip is reaching a tipping point.

For instance, it's no longer necessary to make calls over your PC using an external microphone -- though that device is coming back into vogue with services such as Skype, which enables simple PC-to-PC calls. People who prefer a more traditional experience can skip Skype, created by the architect of the Kazaa peer-to-peer music service, and use a normal-looking phone costing as little as $100. Since its launch in April, Vonage, a leader in Voip for consumers, has attracted 85,000 customers, who pay from $15 to $35 per month.


Corporations are catching the bug, too. Chicago-based Nemertes Research recently surveyed 42 companies, 70% of which have revenues of more than $1 billion. It found that nearly two-thirds are using IP telephony, and an additional 20% are running trials of the technology. It's no wonder that in December, AT&T (T ), Qwest (Q ), Cox Communications (COX ), and Time Warner Telecom (TWTC ) each announced aggressive rollouts of Voip service (see BW Online, 12/11/03, "Telecom's Altered Landscape").

"Voice over IP gives customers a sense of wow," says Cathy Martine, the AT&T senior vice-president who's spearheading Ma Bell's Voip rollout to the 100 top U.S. markets for both business customers and consumers. "Wow" hasn't been used to describe telecom since the 1950s' advent of the furry pink Princess phone. But the inherent flexibility of the Internet protocol may at last make that word appropriate.

Unlike traditional phone networks, which are centrally controlled and require expensive alterations to offer new features, the Internet runs on open standards. With VoIP, "you can develop new features as fast as you can write [programming] code and see if they work in the marketplace," says David Isenberg, an independent telecom consultant who spent 12 years at AT&T's Bell Labs. In short, no more waiting on sclerotic telecoms to deliver innovation.


The features that Vonage and other Voip providers already offer are impressive, solving as they do many of the challenges of both mobile workers and consumers. Take unified messaging, a feature that lets customers retrieve voice mail the usual way by phone -- or by listening to an audio file that has been sent to their e-mail account or stored on the Web in a password-protected area of the provider's site. This helps if you're on the road and is also a convenient way to share need-to-know information with multiple colleagues or family members.

Sophisticated call forwarding will at long last end the annoyance of having to call several numbers to locate someone. With VoIP, calls can be sent to several phones at once, sequentially or simultaneously. So if you aren't home, the call will go to your cell phone. If you don't pick up there, it will forward to your office or your PC phone. You can answer it wherever is most convenient -- or least expensive. If you're overseas and your cell phone and PC phone both ring, you'll use the PC and avoid roaming charges or spotty service.

The features that could appear next seem limitless. As soft phones -- ones that transmit calls through a microphone over the PC -- become more popular, the lines will blur between voice and data. Want to make a call? Just open the contacts file in your e-mail program, click a name, and put the call through. "Phones have been limited by their interface," says Jeffrey Citron, chairman and CEO of Vonage. "Once you connect a phone to a keyboard, life gets a lot easier."


Businesses already are finding creative ways to use VoIP. Health-care providers are writing software that integrates patient scheduling with the IP phone. When a patient calls in, the system can identify the person and automatically bring up relevant information such as his or her preferred physician, date of last visit, and the week's available appointments. The system can also be designed to automatically dial the numbers of patients who have appointments the next day and leave automated messages reminding them to come in.

One health insurer, which prefers to remain anonymous, uses Voip in a virtual call center staffed by nurses that it has hired across the country. It gives each one a laptop that's connected to a single location via IP telephony. When a call comes in, it rings on the laptop of whoever is on duty. The nurse puts on a headset and answers the "phone" to dispense advice. This system means the company doesn't need a central call center, and it can hire nurses in areas where salaries are lower.

Many companies are looking at Voip right now for strategic reasons. Robin Gareiss, principal research officer at Nemertes Research, says that's because it's time to upgrade their PBX systems, or private branch exchange networks.

Most companies bought new PBX equipment in 1998 and 1999 in anticipation of Y2K, and that equipment has now depreciated and is due to be replaced. Before they act, chief information officers want to make sure that whatever they buy prepares them for the years ahead. "CIOs know [VoIP] is the wave of the future, and they don't want to buy equipment that could hold them back," says Gareiss.


Ultimately, however, VoIP's lure boils down to money. Calls within the enterprise, whether it's the San Francisco or Singapore office, are "free" except for the cost of providing Internet bandwidth. Even bigger savings come from simpler network management. It's no longer necessary to have engineers running separate phone and data networks since with Voip all such traffic is carried over one set of pipes. Nasdaq estimates that it has cut $40 million off its $100 million annual network cost by using Voip to consolidate its 15 networks into one.

Corporations also save money on so-called moves, adds, and changes (MACs) of phones within their offices. According to a Nemertes survey conducted last July, those polled spend an average of $119 every time they add or move a phone, or change a number. On average the surveyed companies perform 0.87 MACs per employee per year. Once IP telephony is implemented, these costs drop. Instead of the one to two hours required for a PBX MAC, IP telephony MACs take about 15 minutes and cost from $2.31 to $2.81, according to Nemertes.

Money that stays in corporations' pockets is money the phone companies never get. Thus, the effects of Voip will fall on everyone from PBX equipment providers such as Lucent (LU ) and Nortel (NT ) to long-distance giants AT&T, MCI (MCI ), and Sprint (FON ). But it's the Baby Bells, which until now have enjoyed captive consumers, that are likely to be hit hardest.


In testimony before the Federal Communications Commission on Dec. 1, UBS Warburg telecom analyst John Hodulik estimated that local voice and related service generate approximately 60% to 65% of the Bell companies' revenues and at least 75% of their profits. As Voip becomes pervasive, Hodulik warned, "it will be extremely difficult for the carriers to replace these profits through sales of new services such as DSL [digital subscriber line broadband service] and long distance, as these products typically produce lower margins." (See BW Online, 9/8/03, "Time to Rewrite the Rules of Telecom".)

To make up for the shortfall, the phone companies are pushing managed Voip services to large business clients and Vonage-style services to consumers. But even some insiders are skeptical that the incumbents can pull off this strategy, if only because it takes brave CEOs to aggressively cannibalize their own businesses.

Martin Geddes, a telecom industry veteran and the author of the Web log Telepocalypse, fears that the incumbents have no real commitment to Voip and instead aim to undermine startups by dominating the Voip market, then slowing its evolution: "Expect to see products that are deliberately short on service and performance, and that give Voip a bad name," he wrote in his Web log on Dec. 11. "This is a marketing struggle, not a technology battle, and anything goes."

Over the long term, however, it's usually impossible to keep a good technology down. Voip can now match the quality and reliability of traditional phone networks. And its advanced services are likely to entrance phone customers, who will relish both the low cost and fancy features Voip offers. The transition will be difficult for the already-beleaguered phone carriers. But for their customers, it could be a dream come true.

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