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Internet Rings In '04 As New Phone

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Latest Technology Melds With Old, Poising To Make Mainstream Splash

January 6, 2004

By Dave Ebner

This is the eighth part of a Report on Business series on who - and what - to watch for this year.

The Internet is about to become -- and in some cases already is -- the new telephone.

The technology making it happen goes by various monikers: Internet telephony, Internet protocol (IP) and the unwieldy Voice over Internet protocol (VoIP). But by any name, it promises a revolution for the telephone business. And it is poised to make a mainstream splash in 2004.

"It's definitely here," said Roberta Fox of Fox Group Consulting. "It works. It's no longer a novelty. It's going to be an interesting ride."

On the technical side, IP runs voice and data over a single network, rather than the current standard of two or more, meaning phone companies can cut costs. But it also opens a major gateway for competitors, allowing startups to easily crack the once impregnable telephone business, a burgeoning threat to older players. Further, cable television companies are quickly becoming telephone companies, another massive threat to the existing order and a boon for customers looking for other options.

For customers, a range of options has suddenly become easily available as telephones and computers meld. With a telephone handset and a computer screen, communications are much more visual. Everything from easy-to-use video conferencing to voice mail is displayed on screen, allowing a person to check messages in any order rather than listening to a dozen sequentially.

"Because it's an IP phone, you can do a lot more with it," said Brian Sharwood, an analyst at the telecom consultancy SeaBoard Group.

Mr. Sharwood has a standard telephone connection as well as two IP-based phones, one of which is from upstart Vonage Holdings Corp. of Edison, N.J. It has close to 100,000 customers in the United States and is getting ready to expand to Canada.

One of IP's immediate attractions is the offer of "free" long-distance phone calls. IP connections generally charge a flat rate for local service, a large selection of options such as call display and voice mail, as well as unlimited long distance.

The "phone" is just like a traditional phone but is connected to a computer through a small piece of equipment that bridges old and new technology. A high-speed Internet connection is required, but once plugged in, the era of per-minute charges is over.

U.S. cable TV companies are quickly rolling out IP telephone service to their customers, and 2004 should see a much greater expansion as big names such as Time Warner Cable Inc. make their mark in the field. In Canada, Shaw Communications Inc. of Calgary is working on its business plan and Rogers Communications Inc. of Toronto said it will be in the business next year.

The continent's largest phone companies, seeing the coming assault on their core business, are fighting back. In November, Telus Corp. of Vancouver introduced its IP-One service for large and small businesses. Bell Canada of Montreal plans to launch a similar service in 2004 and is set to test an IP service for residential customers over the next several months.

John Seliga, Telus's IP chief, thinks IP for businesses will be "bigger than anyone thinks" this year. "IP telephony offers solutions not otherwise available," Mr. Seliga said.

Don Smith, chief executive officer of Ottawa-based IP gear maker Mitel Networks Corp., said businesses will seize on the technology in 2004.

"It's not going to be about going out on a limb any more," Mr. Smith said.

Michael Sabia, chief executive officer of Bell, said in mid-December that the industry is at a "tipping point." Bell aims to run all its traffic on an IP network by 2006 and hopes to offer new IP services to almost all its customers by then.

"Our industry is being remade," Mr. Sabia said.

U.S. phone companies are busy, too. Verizon Communications Inc., North America's largest phone company, plans IP for the home by June. AT&T Corp. has said it will introduce the service in the next couple months.

David Dorman, head of AT&T, said IP is the "most significant, fundamental technology shift in telecommunications in decades."

Usage is taking off. The technology emerged in the mid-1990s but was plagued by problems, such as audio quality. With those problems since addressed -- IP fidelity now can exceed that of a standard digital telephone -- users have quickly begun to rely on it.

According to consultancy TeleGeography, one-eighth of international long-distance telephone minutes this year are running over IP networks, up from a 10th last year and much smaller proportions in previous years.

TeleGeography said IP probably will "transform a century-old business in just a few years." In fact, "most end users are likely unaware that many of their phone calls are traversing the Internet, rather than traditional . . . networks."

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