Will Internet phone usage revolutionize the industry?

Daniel Briere, an Internet consultant and author, sends dozens of hefty faxes every day from his office in Verona, N.J., some of them to far-flung locales abroad. Yet his telephone bill for faxes -- once nearly $1,000 a month -- is only pennies. In other offices, people routinely make international calls for the price of calling across town.

These may sound like fancy phone scams, but they are actually just some of the newest applications of the Internet -- and potentially some of its biggest revenue generators.

Today, Internet telephony, as it is called, is considered the fastest-growing type of service on the Internet, and $30 million, by one estimate, is expected to be spent next year. Many experts say the question is no longer whether, but when, many consumers and businesses will start using the Internet in big numbers, particularly for faxing, in which a substantial potential for cost savings is seen. "This is the start of the next-generation telephone industry," said Jeff Pulver, an Internet analyst and chairman of a nonprofit group called the Voice on Net Coalition, an organization originally formed to resist phone industry attempts to regulate the use of the Internet for voice calls. While the pace of development has exceeded many people's expectations, not everyone shares Pulver's view that Internet telephony will amount to a revolution anytime soon. "We are not big believers that Internet telephony is going to take over the circuit- switch phone network," said John Sidgmore, chief executive of UUNet, a large Internet service provider owned by WorldCom. If WorldCom completes its proposed merger with MCI Communications, the combined company will own a huge chunk of both the traditional, or circuit-switch, telephone network and the Internet backbone. Among the problems Sidgmore and others point to is the typically poor voice quality of Internet phone calls. Because of the way in which data is sent over the Internet -- in digital "packets" of information, instead of the steady stream used in analog phone service -- conversations can sound scratchy or can even break off unexpectedly. Also, it is often still not possible for a user to call someone who uses a different Internet telephony service. Still, technical improvements have been made. As recently as two years ago, placing a call over the Internet required both parties to talk through the sound system of their PCs. But today placing such a call is almost as easy as making a conventional phone call. The caller typically picks up a normal phone, waits for a dial tone, then enters a personal identification code that has been assigned by an Internet telephony services company. The service then directs the analog call to a gateway device that converts it into digital code, which is then broken down into the packets of data. When the digital information reaches an Internet server in the destination country, it is converted back to the sound of the voice and, typically, sent over local phone lines to the intended phone number. Despite the glitches of Internet telephony compared with the traditional telephone network, an emerging crop of companies is betting aggressively that many consumers will decide the trade-off is worth it. Two of the leaders are Concentric Network and IDT, which are working to solve some of the problems. So are Delta Three, an Israeli company partly owned by RSL Communications, and USA Global Link, which plans to set up gateways all over the world for Internet traffic. While the market for Internet telephony is minuscule today, amounting to only about $10 million in revenues last year, spending on Internet telephony is expected to reach $2 billion by 2004, according to Forrester Research of Cambridge, Mass. Forrester estimates that in that year, consumers will save about $1 billion by not having used the traditional phone network; with the $2 billion in Internet telephony revenue, that translates to a loss of roughly $3 billion to the conventional telephone companies, or 4 percent of their projected annual revenues. For that reason, telecommunications giants are starting to take notice. Easily the most aggressive of them is Deutsche Telekom of Germany, which last summer paid $48 million for a 21 percent stake in Vocaltec Communications, an Israel-based maker of the gateways that are critical to Internet traffic. AT&T is also becoming involved. It has helped finance ITXC, a start-up that was founded by Tom Evslin, the former head of AT&T's Worldnet Internet service. ITXC, which stands for Internet Telephony Exchange Carrier, is developing technology to provide settlement and billing services for calls routed across gateways from one carrier to another. But for the most part, the telephone industry is approaching the market cautiously, concerned in part that the new technology could eat into its revenues, analysts say. "The incumbent telephone companies are not moving very aggressively in Internet telephony yet, because they don't want to underprice themselves," said Christopher Mines, a Forrester analyst. "The question is, where is that point where they have got to be in the market because customers are going to start using it anyway?" While that day has not arrived, the indications are that it will. Initially, corporations are intrigued with the possibility of enormous savings in sending international faxes, which this year will cost them upward of $7 billion. Faxes are a natural for the Internet because the problems that affect voice conversations in Internet calls do not affect the quality of a faxed document. As quality improves, companies are expected to attach Internet gateways to their corporate phone systems. In fact, in a recent Forrester survey of 52 large corporations, 42 percent of telecommunications managers said they expected to use the Internet to send faxes or to make calls by the end of the century. That also means telecommunications customers will face additional choices. Sidgmore of UUNet sees two markets developing: One for the lower-priced and, for now at least, lower-quality Internet telephony service, and the other for the greater quality and reliability of conventional phone services. "The point is, we're going to let the end user choose how much they want to spend to call London, and what quality they want to pay for," he said.

Copyright 1997
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