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08/03/98- Updated 08:35 PM ET
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Net could revolutionize phone service
NEW YORK - Almost a year ago, AT&T research chief David Nagle
demonstrated an Internet telephone call during a two-day meeting with
stock analysts.
He placed the call from a computer, not a telephone. The sound quality
was terrible. The delays were annoying.
The story was far different last month when AT&T executives met once
again with Wall Street analysts. President John Zeglis showed off a new
kind of higher quality, phone-to-phone Internet call. And the
demonstration was accompanied by a stunning announcement that
AT&T would be the first major U.S. long-distance carrier to jump into
the emerging market now known as Internet Protocol (IP) telephony. It
is basically a cheaper, more efficient technology that could allow
millions of AT&T phone calls to travel via the Internet instead of the
regular phone network.
The shift at AT&T is powerful evidence of a remarkable change that
has occurred in telecommunications during the past year. Telephone
calls over the Internet, dismissed not long ago as a high-tech version of
ham radio, are suddenly taken very seriously by the communications
establishment.
That raises the prospect of lower prices and new services for
consumers and major changes in the structure of the industry now
dominated in the USA by AT&T, MCI, Sprint, GTE and the regional
Bell phone companies. AT&T's trial begins during the second quarter.
Qwest Communications and a few other carriers already allow people
to make calls over the Internet for 5 cents to 7.5 cents a minute.
By 2002, the Internet could account for 11% of U.S. and international
long-distance voice traffic, up from just 0.2% last year, predicts analyst
Mark Winther of International Data. "Internet telephony is a reality, and
telcos have surprisingly awakened to that rather early," analyst David
Goodtree of Forrester Research says. "It will be the catalyst that forces
the total restructuring . . . of the profits of all telcos worldwide."
Perhaps this forecast was the wakeup call: IP telephony could eliminate
the profits of U.S. long-distance carriers by stealing just 6% of U.S.
telephone traffic, the International Telecommunications Union warned in
a report last year.
Evidence of the hastening convergence of the phone network and the
Internet is overwhelming.
The same day that AT&T announced its Internet telephone plans, MCI
revealed a pact with Netspeak, a company that makes computers that
connect phone networks to the Internet. Bell Atlantic announced a day
later that it wants to build high-speed Internet transmission lines across
its local phone territory. US West announced the following day that it
was forming an Internet-development alliance with equipment maker
Cisco Systems.
America Online, the country's largest online service, is testing IP
telephone service with 5,000 users. Tele-Communications Inc., the
country's largest cable TV operator, said in December that it would
begin offering Internet phone service in late 1999. Last month, start-up
Level 3 said it would build the nation's first telephone network based
entirely on Internet standards.
"Over the next few years, you will see very rapid growth in IP
telephony," says Joe Nacchio, CEO of Qwest, which is constructing a
16,000-mile fiber network that uses both traditional phone switching
technology and the Internet. "I think it will be unstoppable." He already
offers consumers IP telephony in nine Western cities.
Humble beginnings
Internet telephony barely existed until February 1995, when an Israeli
company, VocalTec, introduced a software program that allowed
people to speak to each other using their PCs and a microphone.
"It was like ham radio," recalls analyst Francois de Repentigny of Frost
& Sullivan, an early user. People could only talk to other personal
computer users who ran the same software and happened to be logged
onto the Internet at the same time.
The medium took a huge step forward in 1996, when VocalTec
unveiled a "gateway" computer that connects the Internet to the phone
network. That allowed people to speak to each other over the Net
using regular phones instead of PCs.
The advance was a major break with tradition. The basic design of the
phone network hasn't changed since AT&T invented it more than 100
years ago. It's a vast roadway where every call has its own lane, or
circuit. A telephone call ties up an entire circuit, even when people
pause between words or put the phone down to answer the doorbell.
The Internet is much more efficient. Calls travel a short distance over
copper phone lines to the nearest phone company office, where a
gateway computer converts the sound of the voice into the ones and
zeros of computer language and breaks it into little pieces known as
packets. Compressed packets are thrust into the Internet or data
network, where they share lines with other transmissions, such as
e-mail.
The result is that Internet calls are cheaper than regular calls. "This is
going to be the stake that finally drives a hole through the heart of the . .
. extraneous costs associated with traditional voice communications,"
says Jim Courter, president of IDT, which charges 5 cents a minute for
long-distance calls over the Internet. "The cost of calls is going to be
dramatically reduced."
IP calls are especially cheap now, because they are exempt from fees
long-distance carriers must pay local carriers for access to the local
networks, where all long-distance calls begin and end. Local carriers
want that to change, but IP technology would still be more efficient than
a regular long-distance call.
Cable TV companies and Internet service providers entering the $80
billion long-distance business are sure to benefit. By 2002, the Internet
will drain $3 billion in annual revenue from U.S. long-distance carriers,
Forrester Research estimates. That's about 4% of their revenue base.
About $2 billion of that will go to new long-distance providers, and
about $1 billion will go directly to telephone users in the form of price
cuts.
Profitable niches
Others, too, will benefit as IP phone service takes hold:
Up to 10% of the world's fax market, which generates $45 billion in
telecom revenue a year, will move to the Internet in two or three years,
says CEO David Friend of FaxNet, a long-distance carrier just for
faxes.
"The $18 billion market for calls from the United States to foreign
destinations will be the first and biggest target of Internet telephony,"
Forrester says. Key reason: The Internet bypasses international
telephone networks, which are often outrageously expensive. USA
Global Link announced plans in early 1997 to build an IP-based
network just for international calls.
A company can easily slash its phone budget 35% by moving its voice
traffic to the same network that handles its data transmissions, says Eric
Benhamou, CEO of Internet equipment maker 3Com. A Forrester
survey of 52 Fortune 1000 companies finds that more than 40% of
telecom managers plan to move some voice or fax traffic to the Internet
by 1999.
One major force driving the rapid growth of the Internet phone business
is that the basic technology behind the Internet is available to the public
for free. But today's Internet has drawbacks, too. It is dogged by traffic
jams that can occur during peak usage. Even users with high-speed
access can get bogged down when the network is overloaded. Newer
versions of the Net will be able to assign higher priority to certain kinds
of transmissions, such as phone calls.
AT&T's Nagle serves on a presidential advisory committee that is
guiding the development of Internet 2, a high-speed network that will
be available in several years.
Meanwhile, he says the quality and security of IP telephony on the
existing Internet is rising. The implications of that are just reaching
consumers.
Bruce Ravenel, TCI's senior vice president for telecommunications,
says TCI's 12 million customers won't be able to tell the difference
between a regular phone call and an IP call. "The technology inside the
network will be IP, but the experience for the customer is that they will
make a 'toll' quality phone call, just like they do today with conventional
telephone networks."
John Roth, CEO of equipment maker Northern Telecom, goes even
further. He sees the day when voice calls will be virtually free and video
and data transmission will be the real moneymaker.
Who will dominate?
Newcomers might have an edge in the market to provide this new
breed of phone service. "Give me one example of any company in any
industry that has managed to deal with an economic change of this
magnitude and be dominant in the next era," says James Crowe, CEO
of Level 3. "There isn't one."
Even old-line phone carriers that develop a good strategy for IP
telephony might run into trouble, because they will need to take huge
charges to write off their old networks, says Francis McInerney,
partner with North River Ventures, an investment and consulting group.
But Nagle says big phone companies already have paid off many of
their network investments. And new data networks will lower costs for
traditional carriers, so profit margins won't be gutted by falling prices.
Finally, he notes, history shows that traffic on communications networks
rises as prices fall.
Nagle says the fact that AT&T has been able to create an Internet
phone offering between 1997 and 1998 is proof that it can compete.
"The industry is moving more quickly. And more important for us, we're
moving a lot more quickly," he says. "We have realized the potential
and importance of the Internet, and we are resolved to be leaders in
that industry."
By Steve Rosenbush, USA TODAY |
