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Who'll be the Internet's Ma Bell?
If you don't already use Voice over Internet Protocol, you almost certainly receive calls from those who do. Here are the winners as traditional phone lines go the way of the buggy whip.
By Michael Brush
For years the prospect of cheap, Internet-based phone service was just another sorry example of the kind of tech hype we all fell for during the 1990s bubble.
But now, it's coming of age -- infiltrating our homes and offices at a rapid clip and posing a challenge to the Baby Bells.
It's no longer a matter of hooking up headphones to a PC and chatting on a bad line with someone who has the same equipment. Internet-based phone service these days is clean and easy. In the home, you just plug an adapter in to a high-speed Internet connection and use your normal phone.
Internet-based phone service -- widely known as VoIP, for Voice over Internet Protocol --- is already more common than you might think. Chances are, a few of your phone conversations this week traveled through Internet-based lines used by your phone company, and you didnt even know it. About 5% of all long-distance phone calls in the world now go through these kinds of lines, industry experts say.
Almost certainly, youll be using Internet-based phone service much more in your home and office in the next few years -- to enjoy advantages such as:
- using picture phones
- using an adapter that lets you plug into a high-speed Internet connection anywhere in the world (including hotels) and make long-distance calls for no extra charge
- getting unified messaging, which lets you do things like pick up voice mail or faxes in your e-mail box
- saving 25% to 30% on your phone bill
Traditional, analog phone calls -- the kind weve all made over the past several decades -- travel along dedicated circuits. These are copper and fiber-optic paths set up to carry a single conversation. Internet-based phone systems, in contrast, convert voices to digits, put those digits in "packets" and route the packets over the Internet. Packets from many calls can run on the same line, and theyre compressed. So less bandwidth is used -- one of the reasons VoIP phone systems are cheaper.
Businesses are already signing up for VoIP at a healthy clip. Theyre looking to save money, add new features and establish better lines of communication with employees in branch and home offices. Residential users are flocking to Internet-based phone service as well. Usage in both these camps is growing by roughly 100% per year recently -- albeit off a small base. Some experts believe that within a decade or two, old circuit-switched phone lines will be virtually a thing of the past, taken over by Internet-based phone service.
However long it takes, the transformation over the next several years will provide a boost for telecom equipment providers such as Sonus Networks (SONS, news, msgs), Avaya (AV, news, msgs), Nortel Networks (NT, news, msgs), 3Com (COMS, news, msgs) and Siemens (SI, news, msgs). Tiny Internet-based phone service providers such as deltathree (DDDC, news, msgs) and 8x8 (EGHT, news, msgs) will likely see some gains out of it, too.
Losers may include the traditional phone companies, which have much invested in the older phone infrastructure that is going to become outmoded. They include the likes of Verizon Communications (VZ, news, msgs), BellSouth (BLS, news, msgs) and SBC Communications (SBC, news, msgs).
Heres a closer look at this transformation sparking a mini-spending boom in the otherwise lethargic telecom world.
IP phone demand
Weed through all the hype and marketingspeak, and youll find several concrete advantages to IP phone service that will clearly spark demand in the coming years:
Outsourcing. If you call a help desk these days, you may get a pleasant sounding assistant speaking with a pretty thick Indian accent -- because he is in India, working for a lot less than help desk assistants in the United States. To bring down the cost of all those calls going to all those help desks abroad, companies are using VoIP connections.
Savings for the consumer. The average person pays almost $60 a month for long-distance and local phone service. VoIP helps many phone users save at least a third of that, if not more. The best deal? That seems to come from the Santa Clara, Calif.-based 8x8. For $20 a month, you get unlimited calls in the United States and Canada. You can plug their adapter into a high-speed Internet connection anywhere in the world and make long-distance calls to these two regions for no extra fee.
Last May, Time Warners (TWX, news, msgs) cable division began offering unlimited local and long-distance VoIP phone service (excluding Alaska and Hawaii) for $40 a month, in Maine. The biggest thing is price, but people also like the ease of changing it over, says Gerry Campbell, in charge of the phone service offering at Time Warner. The company will offer the service in North Carolina and upstate New York by the end of the year, and perhaps all 27 states where it provides cable by 2005. By then, it may be offering video phones.
Vonage, a private company in Edison, N.J., offers customers unlimited calls throughout the United States and Canada for $35 a month. Vonage is signing up 2,500 customers a week and hopes to have 100,000 customers by the end of the year, says CFO John Rego. Again, a main attraction is price. The days of getting horrific phone bills, thats over, says Rego.
New York-based deltathree helps consumers and businesses save by giving them local phone numbers in foreign countries. Through these numbers, calls can be place to the United States or elsewhere for the price of a local call. The company also offers cheap links for use in foreign call centers.
Aside from the lower cost of the underlying technology, VoIP service is cheaper because customers dont pay all those annoying fees and tariffs you see on your phone bill. Why not? The service is not regulated like a normal phone company. There is one additional cost, though. You have to have some sort of high-speed Internet connection to use the adapters that feed signals to the phone.
Savings for businesses. When big companies set up VoIP, they cut costs because they are running only a single network for data instead of one for data and one for voice. You can clearly simplify things and lower costs if you can merge everything onto a single network, says Lawrence Byrd, the convergence strategist at Avaya. And communications with branch offices become cheaper on VoIP systems because they are basically internal phone calls, says Troy Jensen of ThinkEquity. In new buildings, a single network means less wire needs to be installed.
Ease of use for businesses. With a VoIP system, its easier for headquarters to connect with employees out in branch offices or at home. About 53% of workers are outside headquarters, and typically their communications systems are a lot worse and they are not well connected, says Avayas Byrd. VoIP systems make fixing that easier. One plus: experts anywhere can be brought in on customer service or help desk calls. And call centers can be spread out, instead of making employees all show up at one spot. For example, about 90% of JetBlue Airways (JBLU, news, msgs) agents work at home, says Byrd, thanks to VoIP systems in place at the airline.
VoIP makes communications easier in other ways. Sales staff can blast prerecorded messages to many prospects without having to repeat it each time. Employees can collect voice, e-mail and fax messages in one place -- like an e-mail box -- in unified messaging. And VoIP systems can do neat tricks like display which of many phone numbers where a person is available. Or they automatically send all but certain calls (like the one from your boss) into voice mail. VoIP systems also make it easier to move employees and their phones around offices, without any complex reprogramming of phone systems.
Streamlining of certain operations for phone companies. Even though traditional phone companies such as BellSouth and AT&T (T, news, msgs) may stand to lose big in the VoIP movement, they're already using VoIP to their advantage, too. Companies like Verizon and BellSouth, which once only offered local service, use VoIP to streamline connections in their new long-distance services. And long-distance companies like AT&T, Sprint FON Group (FON, news, msgs) and Global Crossing (GBLXQ, news, msgs) use VoIP to set up their own local networks to offer local phone service. They have the right to lease local lines from the incumbent carriers, but that right will go away in three years, says Michael OHara, who handles marketing for Sonus. They will need to offer local service without using these local networks, so they are turning to VoIP.
Some potential winners
All the big telecom equipment vendors from Cisco Systems (CSCO, news, msgs) and Nortel Networks, which makes components used in VoIP gear sold by the giants, may benefit as VoIP sales increase, says Jon Arnold, an analyst who follows VoIP at Frost & Sullivan. But Sonus stands out because it is the only major pure play on VoIP among the telecom equipment vendors. And Avaya has an edge because it helped so many major corporations put in their phone systems in the past. Now, those companies will be turning to Avaya for help upgrading those systems for VoIP.
Aspect Communications (ASPT, news, msgs), which helps businesses set up call centers, could see some payoff from the VoIP trend, as well. Companies like Avaya are making headway at the corporate level, and that is great for Aspect, says Gary Barnett, the chief executive of the company. As they put their VoIP infrastructure in place, we can overlay our VoIP call centers on top of that. He expects this kind of growth to pick up over the next two years.
In VoIP service, some of the main providers are private -- like Vonage and Cbeyond Communications, which offers VoIP to business. But public companies deltathree and 8x8 may see gains as VoIP takes off. Weve seen a tremendous amount of renewed interest, says Paul White, deltathree's CFO. The company serves both residential phone users and business, by letting them buy cheap inbound calls from various regions in the world. A company will build a Web site to reach foreign markets, but customers feel like they want to pick up a phone and call someone, and they can do that, says White.
As for 8x8, its in the early stages of morphing from a VoIP equipment provider, to one that offers VoIP phone service. But its that background in VoIP equipment -- like adapters and handsets -- that gives it the advantage of being able to undercut competitors with its $20 per month fee. We own all the technology, and we have no costs associated with licensing that technology, says Huw Rees, who manages sales and marketing at the company. So we operate from a lower cost base. The company will likely have to issue new shares soon to fund marketing efforts. And right now, it's just in the early stages of transforming to a service provider. It only has a few thousand subscribers.
Some potential losers
Greg Gorbatenko, an analyst with Loop Capital, reckons losers will be the former Baby Bells, like Verizon, BellSouth, SBC and Qwest Communications (Q, news, msgs) -- in part because theyll be giving up local and long-distance business to VoIP providers. Meanwhile, long-distance competitors like AT&T will be using VoIP to establish local networks and compete for local customers.
Regulators, however, just might come to the rescue. California recently told several VoIP carriers they have to register for phone licenses. Regulation of VoIP providers as phone companies would increase costs by 10% to 20%, taking away some of their price advantage, says CIBC World Markets analyst Timothy Horan.
Regulators worry that VoIP may bring trouble, if it starts to become the only service in households. Some equipment in the circuits, for example, doesnt run on an independent power source and could go down in a blackout. And VoIP phones cant be traced to locate 911 callers.
Legal experts, however, doubt states will be regulating VoIP providers any time soon. After all, a federal court has already overturned attempts by Minnesota to regulate VoIP.
The law is clear that these services should not be regulated as phone services, says Bill Wilhelm, the Swidler Berlin Shereff Friedman lawyer who successfully challenged Minnesota on behalf of Vonage. There is a distinction between underlying phone networks and the Internet applications that ride over them. Just because Internet applications can do the same thing that phone networks can, that doesnt mean they are the same as the phone networks.
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