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BUSINESS
Internet telephony
Growing up
Voice over the Internet was once just a minor
inconvenience for incumbent telecoms
companies. It is now threatening to reshape their
businesses
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ONCE upon a time (about 18 months ago), Internet
telephony was the sole preserve of miserly geeks who
delighted in "beating the system". Tooled up with a
PC, a modem, a sound card, a microphone and some
special software, a determined nerd could talk with a
similarly equipped soul-mate on the other side of the
world for the price of a local telephone call. The call
quality was dreadful and the whole business had the
user-friendliness of camel-riding, but the miracle was
that it worked at all.
But now Internet protocol (IP) telephony is growing
up, and incumbent telecoms companies have some
unpleasant choices to make. The potential of voice
over the Internet has been transformed by the launch
this year of services by newcomers such as Delta
Three, USA Global Link and Qwest that require only
an ordinary telephone. They make it easy to
use-just open a credit card account, dial an access
number, give your personal identification number and
then make the call to your destination-and call
quality is at least up to cellular-phone standards.
It is also cheap. In America it is now possible to
make long-distance calls for between seven cents and
ten cents a minute and international calls for about half
the average 89 cents a minute charged by traditional
carriers. The Internet's indifference to distance
threatens to put a time-bomb under the carefully
worked out framework of charges that underpins the
telephone companies' most lucrative business.
Getting voice to work satisfactorily over the Internet
has been no mean technical achievement. Ordinary
voice networks are based on connections. The
connections at each end create a channel reserved for
the duration of a call. The Internet, by contrast, is a
connectionless network designed for routing packets
of data. Every packet contains the address of its
destination and is individually routed through the
network. Computers have little difficulty putting data
files back together again in the right order, but speech
is altogether trickier. The sound signal is digitally
coded and sent in packets, but the packets must
arrive within 20 milliseconds to prevent horrid noises
and within 250 milliseconds or the call will go down.
Improvements in voice quality using the public
Internet are due to more sophisticated software, but
the big change has been the increasing use of private
networks. These allow the operator greater control
over quality by cutting down the number of router
hops the packets have to pass through and managing
traffic flows to avoid congestion. The other
development is the spread of gateway servers that
link the standard telephone network to the IP-based
network.
One of the companies that has been quickest to
exploit these technological developments is Delta
Three, a subsidiary of RSL Communications, a
fast-growing new telecoms firm. A customer using the
Delta Three network to call Singapore from Ohio will
have his call routed by the local telephone company
to a gateway in America. The gateway then translates
the voice into digits and sends the data packets
across the Internet backbone, terminating at another
gateway in Singapore. That, in turns converts the data
back into voice and sends the call down local
telephone lines to the recipient in Singapore. This
week, Delta Three launched its service in Europe.
Is IP telephony poised to rule the world? The Yankee
Group, a telecoms consultancy, predicts that in
America, IP telephony minutes will grow from 0.4%
of consumer long-distance today to about 15% in
seven years. Analysys, another consultancy, reckons
that by 2003, 25% of international call minutes
worldwide will be made over the Internet, resulting in
revenues for service providers of around $7 billion.
However, because IP minutes are replacing more
expensive minutes, revenue loss to incumbent
telecoms firms is likely to be much more
severe-about $10 billion a year by 2001 if Analysys
has got its sums right. Although voice gets most of the
attention, a high proportion of IP traffic is likely to be
fax, which WorldCom's John Sidgemore describes
hungrily as "the low-hanging fruit" for Internet
telephony.
This is not to say that IP telephony firms will have
everything their own way. One cloud on the horizon is
regulatory. In America, the Federal Communications
Commission (FCC) has been toying with the idea of
making Internet telephony providers contribute to its
universal service fund, a sort of tax to subsidise
services for the poor levied on normal carriers. Last
week, the FCC stayed its hand, despite howls from
incumbent carriers who would like to see the Internet
upstarts forced to raise their prices. In Europe, the
EU's competition directorate is holding off similar
pressure for the moment. But in less developed
countries, the promise of cheaper calls may be
outweighed by the desire to protect the revenues of
state-owned incumbents.
Another constraint is capacity. Companies who are
building their own managed intranets, such as Delta
Three and Qwest, with its ultra-high capacity fibre
network, will avoid congestion. But Internet service
providers who want to bundle telephony to their
customers using the public Internet will have to invest
heavily in bandwidth if quality is to be acceptable. As
more voice minutes are switched to the Internet and
traditional telecoms firms react, marketing and service
costs are likely to rise, narrowing the price-gap over
time.
The incumbents are also developing strategies to
"manage" the growth of IP telephony. Most appear
resigned to the gradual loss of high-margin
switched-call revenues and are gambling that it is
better to cannibalise your own revenues than to watch
others do it for you.
Companies like AT&T and Deutsche Telekom are
introducing their own IP voice services, exploiting
their bandwidth, switches, customer base and
well-known brands to gain a share of the new
market. They hope to weave IP services together with
their traditional products, using the Internet to offer
low prices for unfussy voice customers, while earning
new revenues from advanced services that integrate
data, voice and video.
Analysys argues that in the medium term the main
impact of IP telephony will be to force the pace of
competition and thus lower prices, especially in
countries that have dragged their feet over
liberalisation. However, in the longer term, IP
telephony will be just a part, albeit an important one,
of the digital revolution.
In time, packet networks will almost entirely replace
more expensive and less capable circuit-switched
networks. As an executive in one big telephone firm
confessed to Cisco Systems, the data networking
giant which provides the routers and switches that
power the Internet: "When I look at our current
network, I see the valley of death. When I look at IP,
I see the mountain of hope."
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