Here's the WSJ article for those who could not get to it.
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The Wall Street Journal Interactive Edition -- November 24, 1997
Internet Phones Catch On
As a Global Experiment
By GAUTAM NAIK
Staff Reporter of THE WALL STREET JOURNAL
How do you attack an entrenched phone monopoly when it costs billions to build a new network to carry the calls? Bertelsmann AG has an answer: Use a network that's already there -- the Internet.
With cost savings made possible by using the Internet, Bertelsmann, the German media giant, plans to launch phone service early next year that will offer discounts of 30% to 60% below Deutsche Telekom AG's long-distance and international rates. If successful on a small scale, Bertelsmann plans to expand Internet telephony across Germany -- and then through the rest of Europe.
Deutsche Telekom, not to be outdone, has launched its own Internet test offering phone service to 1,000 customers. A small U.S. company, USA Global Link, already has 8,000 customers using Internet phone service, mostly in Germany, and it plans to invest $500 million in a purely Internet-based phone network.
Numerous other carriers, big and small, also are counting on so-called Internet telephony to help them breach the defenses of deep-pocketed and entrenched phone monopolies. While Internet telephone service, which lacks the clarity of calls made with traditional technology, is still in its infancy, it already is starting to undermine the hegemony of conventional phone networks.
'For the 21st Century'
"The existing phone network was for the 20th century," Darryl Green, president and chief executive of AT&T-Jens, an AT&T Corp. venture in Japan offering Internet telephony. Internet technology, he says, is "the network for the 21st century."
AT&T has no plans to offer Internet telephony in the U.S., but its venture with 25 Japanese companies is using the Internet technology to invade heavily protected telephone markets in Japan. The service has been available since August in major Japanese cities, and can be used to call certain domestic areas, as well as 57 international cities, mostly in North America and Europe.
AT&T-Jens's rates illustrate the threat posed by Internet phone services: A three-minute call from Japan to Britain is 135 yen ($1.10) with the AT&T venture, compared with 770 yen with a traditional Japanese carrier. A similar call to the U.S. is 99 yen, instead of 450 yen.
The Internet promises other savings, too. According to the International Telecommunications Union, the Geneva-based association of the world's traditional phone companies, it costs 15 cents to switch a kilobyte of data using traditional means, but only four cents via so-called Internet packet-switching. And because the Internet is a network of many, many interlinked networks, even tiny providers can plug into its vast geographical reach without making massive investments of their own.
Such cost savings have prompted Internet moves by other major telecommunications companies, such as WorldCom Inc. of the U.S. It plans to take renewed aim this winter at the fax market, which has annual world-wide revenue of $38 billion -- by offering an Internet-based offering that's 35% to 55% cheaper than traditional faxing.
Difficult Choice for Some
Despite such moves, the advent of Internet telephony has posed a dilemma for large phone companies: If they counter the threat by offering their own heavily discounted services over the Internet, they could cannibalize their traditional high-margin revenues; but if they don't adapt to the new technology, they risk seeing their revenues
cannibalized by the new rival companies.
"We're in this to make a profit, not to hurt our own telephone business," says Hannu Tuomisaari, a manager at Telecom Finland Ltd., which is testing the waters of Internet telephony with business users.
But telecom providers that underestimate the Internet risk a "perilous situation," warns the ITU. A recent report by the group says that "if Internet telephony stole only 6% of U.S. phone traffic, this could potentially eliminate the profits of U.S. long distance carriers," barring huge price or volume increases.
Given the threat, some companies are trying to find new ways to integrate telephony with the Internet. Telecom Finland, in addition to its Internet-based phone service to business customers, is testing a voice-over-Internet service intended to work with Web pages. Finns can dial up a Web site run by a commercial television channel, click on a
button, and talk via an Internet phone link to a representative of the TV channel.
Interest in Internet telephony got a further boost in August when the state-controlled Deutsche Telekom agreed to buy a 21% stake in VocalTec Communications Ltd., an Israeli company that makes software for Internet-based phone calls, for $48 million. "The Internet has come a long way and should be taken seriously," says James Lennox,
an Internet project manager at Deutsche Telekom.
A Long Way to Go
In addition to testing Internet voice service for customers in the U.S., Germany and Japan, Deutsche Telekom plans to experiment with an Internet-based fax service. Still, the German giant hasn't yet decided whether it will offer Internet-based phone service commercially.
Indeed, Internet telephony has a long way to go before displacing everyday phone service.
One reason is that Internet voice technology is still in its hobbyist phase, with phone conversations often distorted by such factors as transmission delays. Hefty investments are still required to build "gateway computers" in major markets so that traditional phone networks can easily hand off calls to cyberspace, and vice versa.
Such gateways are necessary for Internet service because of the differences between how calls are transmitted through cyberspace compared with traditional networks. With conventional systems, calls are connected through a switch that makes a link between the caller's and recipient's phone lines. As long as the conversation continues, no one else can use the same lines.
But with Internet telephony, something very different happens. Every spoken word is broken up into scores of "packets," tagged with the destination address, and allowed to take whatever easy route they can find to the recipient's phone.
Once the packets arrive -- often in a split second -- they are instantly reassembled in the original order and emerge as the same spoken word. This technique allows an Internet-based offering to use fiber-optic lines far more efficiently -- and hence cheaply -- than today's standard phone method.
Growth Estimates Vary
Estimates vary about just how fast the Internet telephony market will grow. U.S. market-research firm International Data Corp. estimates that by the end of 1999, Internet phone services world-wide will grow from virtually nothing to a $560 million business. Frost & Sullivan, another U.S. market-research company, figures the global market could total $1.8 billion in annual revenue by 2001.
Most industry analysts agree that the initial -- and juiciest -- target for Internet telephony will be international calls, which are currently priced far above cost. Probe Research, a consulting firm based in Cedar Knolls, N.J., predicts that by 2001, Internet-based
systems will carry more than 7% of the world's international phone traffic.
As further proof of the Internet's growing force, consider one of the biggest potential telecom deals: WorldCom's $37 billion offer to buy MCI Communications Corp. The Mississippi carrier's audacious bid isn't about acquiring old-style telecom assets, but about gaining Internet reach, of which MCI has plenty.
Technology futurist George Gilder describes the trend bluntly: Traditional networks, he says, "are the wrong pieces, on the wrong board." Instead, "the game is Internet protocol packet data over fiber optics." Translation: Anything an old-style phone network can do -- zap phone calls, dispatch faxes -- the Internet will one day do better |
