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Internet Phone Connections Grow More Popular

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Internet Phone Connections Grow More Popular

January 18, 2004

By Bobby White

This was it. Cheryl Moseng looked at her telephone bill and felt enough was enough. She decided the time had come to sever the cord with her service provider.

"I got fed up with the telephone companies and my high bills," she said. "What annoyed me the most was every phone bill started with a base price, then you had all these add-on fees. After I took a look at it, I saw the fees and taxes were almost equal to the base price."

She chucked the bill and service provider MCI and found a cheaper alternative. Moseng tapped a small California company that provides Voice over Internet Protocol, or VoIP. For $19.95 a month, the Fort Worth resident can place calls over her computer lines to anywhere in the country, including the Metroplex and her son at Purdue University in Indiana.

Once considered marginal, Voip technology has turned the corner and could radically change the telecommunications industry much like wireless services have, analysts say. Its emergence is part of a broader multi-industry shift from analog technology to the digital world.

Regional phone networks are supported by circuit switches that connect calls. Voip works differently; it collects voice transmissions, then compresses and splits the transmissions into packets of data that can be shuttled through the Internet. Once the data reaches its destination, the packet is reassembled in proper order. The technology has been around since the mid-1990s, but recent innovations have moved it into the forefront.

The beauty of Voip is its many applications, including sending voice mail via e-mail and making calls using an address book on a computer. In addition, video can be sent along the same high-speed connection.

Defecting consumers, such as Moseng, and the promise of additional applications have jostled the major phone companies into action.

Qwest Communications of Denver announced a few weeks ago that it is working on a Voip plan. AT&T announced in November that its Voip rollout could save it billions. And Verizon announced a $2 billion deal with Nortel Networks, calling for the Canadian-based company to upgrade Verizon's entire network with the technology over five years.

Greg Evans, vice president of service and access technologies for Verizon, called the ambitious plan a fundamental change in Verizon's network. Both businesses and consumers will use the upgrade, but it's the business world that's expected to take significant advantage of the technology.

"Businesses have been craving something like [VoIP]," Evans says. "They are looking for new and innovative services like being able to combine voice and data or voice and video. It's an improvement on traditional services."

SBC Communications of San Antonio, the leading service provider in North Texas, announced its Voip product in July. It chose to focus on business customers. SBC declined to say how many customers it has signed up but said it has a presence in 30 markets and will enter 100 by year's end.

"What's happening is, business customers are getting away from just a phone set on the desk," said Marianne Gedeon, who oversees voice and data convergence for SBC. "They want the power of a tool that goes beyond just phone calls."

Last year, there were 110,000 Voip subscribers in the United States, according to Parks Associates, a research firm in Dallas. Parks predicts that the number will climb to 4.5 million by 2007.

A hodgepodge of smaller firms have emerged to capitalize on the technology. The newest entrant into the Metroplex market is Nuvio of Kansas City, Mo.

Nationwide, the front-runners are Vonage of New Jersey and 8x8 of California.

"Anybody that is a broadband subscriber is a potential customer for us," said Huw Rees, senior vice president of sales and marketing for 8x8, which sells the Packet 8 Internet telephone service. For 15 years, the company focused primarily on video conferencing, but it switched its attention a year ago to VoIP.

To win over technology-wary consumers, 8x8 decided to make its Packet 8 a plug-and-play product to make it as simple as possible, Rees said.

Consumers sign up for the service online and are mailed an adapter that plugs into their broadband connection and telephone. Consumers then select the area code they want, regardless of physical location. The service has nearly 10,000 customers, and the company offers a 30-day money back guarantee.

Its $19.95 a month price was enough to win over Moseng, and Rees is banking on more dissatisfied consumers coming his way. He's not worried about upcoming Voip competition from the huge phone companies.

"What we are seeing is a lot of announcements, but no one has yet to launch a service," Rees said. "Actually, what [companies like AT&T and Verizon] are doing is legitimizing us because we are out front. People see us as a viable service."

There are drawbacks to VoIP. It's difficult to trace an emergency call, and if the power fails, customers no longer have phone service. Also, the connection is less stable than a regular phone line.

The quality of a Voip phone call has been a primary setback to its adoption. With any Internet connection, there are short periods of inactivity followed by bursts of data transmission. Voip is susceptible to the same issues.

"You may have strange delays,"said Duncan MacFarlane, professor of electrical engineering and chairman of telecommunication engineering at the University of Texas at Dallas.

"The service may be cheaper, but the price you pay is the quality of service."

But MacFarlane said a downgrade in quality is not as much of an issue as it was a few years ago.

"Traditionally, wire-line service has always been of a higher quality, but then the cellphone came along," he said. "If you think about the cellphone, people have been willing to trade off solid reception for mobility. The drop in quality has conditioned a lot more people to be open-minded about not needing every conversation to be high in quality."

Analysts consider cable modems a more reliable Internet connection for the technology than digital subscriber lines, or DSL. The distinction gives an advantage to cable providers such as Comcast and Charter Communications.

That has the big phone companies, such as SBC, concerned because cable companies can then compete for a consumer's phone service. Moseng took advantage of such a bundled package with Charter, which provides her broadband access.

Some are also concerned about where the technology is headed.

"Telecom is in a transitional period," said Jeff Kagan, an independent telecommunication analyst in Atlanta. "The industry is blending and converging."

Communication devices are converging. Equipment that transmits voice, video and data will no longer be distinctive.

"We are in the middle of a 20-year transition. When you pull the camera lens back a little, you can see that. It's the beginning of a homogenization of an industry," Kagan said.

A recent skirmish between phone and cable in Texas illustrates the point. When Time Warner petitioned the Texas Public Utilities Commission in August to allow it to offer service, both Verizon and SBC announced their opposition. The commission gave Time Warner its approval in December. Time Warner has partnered with Sprint and MCI to offer service.

For now, the competing entities are depending on consumer interest to drive convergence. But one of the technology's most alluring qualities -- cost -- is perhaps a contrived one. The fees and taxes that bloat a traditional phone bill are absent from Voip only because it's an unregulated medium. It may not always be that way.

The Federal Communications Commission, under the helm of Michael Powell, is loath to enter the fray just yet. The official word from the FCC is that it's still gathering information. The courts have also been pulled into action but thus far have deferred to the FCC.

Powell, speaking at the meeting of the Technology Advisory Council in Washington, D.C., recently, warned regulators that a fledgling industry needs time before regulation is added.

"I think what I care about is, I want to build from a blank slate up as opposed to from the myriad of telecommunications regulations down," Powell said. "We might agree we want to be in the same place, but it is a nasty, entangled litigious exercise to start from a phone company world of regulation and work your way down this way, rather than to try to say, no, this is something new."

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