Internet Telephony: The Newest Phone War//Frank,thanks, here it is article:March 8, 1998
By NOELLE KNOX
consumers looking for the cheapest long-distance telephone rates
need only log onto the Internet, the newest arena of intense
competition, where companies are offering special prices from 5 to
10 cents a minute.
This week, AT&T Corp. is expected
to start offering its Internet
customers long-distance calls at just 9
cents a minute, matching new rates
introduced recently by MCI
Communications.
Both giants are scrambling to
respond to the initiative of a little
player that had a big idea: Tel-Save
Holdings, a long-distance provider in
New Hope, Pa., that caters primarily to small and medium-sized
businesses.
Since Dec. 18, it has contracted with America Online to offer the
9-cent-a-minute rate to the online service's 11 million subscribers. With
promotions on its main screen and in full-page newspaper ads, America
Online has signed up almost 400,000 customers so far, and expects to have
a million by the end of June.
Many industry experts call such programs the start of a revolution that
will lower all long-distance rates, a result of making a connection in
consumers' minds between the Internet and phone service. Eventually, the
experts say, the Internet will become a major transmission vehicle for the
calls themselves and the line will blur between telephone and Internet.
"It's going to change the industry," said Jeffrey Kagan, a
telecommunications consultant and author of "Winning Communications
Strategies" (Aegis Publishing Group). The new rates are just the
beginning, he said, adding, "The question is: How low can they go?"
A long-distance company can
offer a lower rate to Internet
customers because the
company saves money. The
customers enter their own
billing data when they sign up,
and in most cases must pay
with a credit card, receiving
their bills through their
computers. For the companies,
that means no paper bills and
no postage costs, while the
reliance on credit cards also
reduces the companies'
exposure to bad debt.
Not all the long-distance
carriers are joining the
Internet price war. The Sprint
Corp., which offered the first
10-cent-a-minute plan, does
not offer Internet customers a
better rate.
"We think it's restrictive to say
one kind of customer can get
one kind of rate and another
customer can get another kind
of rate," said Robin Pence, a
spokeswoman for Sprint.
She also criticized the
Internet-based marketing plans
because they usually provide
customer service only online.
Still, many telecommunications
executives and analysts say that
this is only the beginning of a
shift toward new kinds of
communication via the
Internet. The current Internet
plans offer new rates for
long-distance calls carried by
traditional phone lines, but
AT&T plans to start a cheaper
service in May that will carry
long-distance calls over an
Internet-style network.
That service, called AT&T World Net Voice, will start in three cities, still
to be announced, and expand to 16 by the end of the year. AT&T will
charge 7.5 to 9 cents a minute for calls using Internet protocol.
Internet protocol, or Internet telephony, as it is also known, uses a regular
phone. But a separate transmission switch digitizes and compresses the
caller's voice into packets of data that are moved through the Internet and
reassembled at the phone on the other end.
"From AT&T's point of view, Internet protocol is critical to our future
success and growth," said Daniel H. Schulman, a vice president at AT&T's
World Net Service. "In fact, we think the Internet protocol is to the
communications industry what the personal computer was to the
computing industry; it's that fundamental a change."
The technology, though, which is just two years old, is still slow and
cumbersome. Many people who use Internet protocol for long-distance
calls report frustrating time lags between the speaker and the listener.
AT&T says it has reduced the delays, but callers must still dial a local
access number, wait for a prompt, enter an authorization code and then
dial the number they want.
But with improvements in quality in the next five years, the Internet
telephony business is expected to grow from less than $1 billion a year
today to $24 billion - about 17 percent of the projected United States
long-distance market, according to the International Data Corp.
About 25 million American homes are connected to the Internet. And their
occupants tend to be more affluent and make more long-distance calls. In a
survey last year, International Data found that in homes with a personal
computer connected to the Internet, the average respondent was 41 years
old, had a household income of $70,400 a year and spent an average of
$58 a month on long-distance calls.
Among households without a computer, the
average respondent was 47 years old, had a
household income of $38,700 and spent an
average of $30.50 a month on long-distance
calls.
While it may make good business sense for
long-distance carriers to focus on the most
profitable market segment, some consumer
advocates are not impressed.
"What we've constantly seen here is benefits for volume users at the high
end of the market, while rates have actually risen for consumers at the low
end of the market, unless government has intervened to put a lid on rates,
or forced them down," said Gene Kimmelman, co-director for Consumers
Union.
But Kagan, the telecommunications consultant, predicted that as Internet
telephony improved, it would push down all long-distance rates. "Within a
year's time, we're going to see traditional long distance down to the 5-cent
mark," he said.
As the long-distance industry changes, the line separating telephone and
Internet services may start to break down. Customers might buy
telephones with a screen, for example, and dial into the Internet to place a
call. Long-distance companies may start focusing on other, more
profitable businesses, like cellular phone service, pagers, call forwarding
and electronic mail.
"Long-distance companies will still make plenty of money, but they will
make it from these higher-margin services," Kagan said.
nytimes.com
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