Monday, October 20, 2003

Many believe that Internet-based phone service will revolutionize the telecom industry

Many believe that Internet-based phone service will revolutionize the telecom industry

By Jennifer Davies
UNION-TRIBUNE STAFF WRITER

October 19, 2003

The phone system that has defined communications over the last century could become obsolete in less than two decades.

That's if telecommuni- cations pioneers like Vonage have their way.

The New Jersey company uses the Internet to provide phone service at a fraction of the cost of the traditional system of copper wires and circuit switches.

In less than two years, Vonage has signed up some 60,000 customers and estimates it will have 100,000 by the end of the year.

It's no wonder the company has made such inroads. For $35 a month, customers get unlimited local and long distance calling plus features such as voice mail, caller ID, call forwarding and call waiting. Similar packages from SBC Communications or MCI typically go for about $50.

"Fifteen years from now, it is not inconceivable that the traditional phone network will no longer exist," said John Rego, Vonage's chief financial officer.

The result could be a revolution in the telecommunications market, breaking the near stranglehold that traditional phone companies, such as SBC or Verizon Communications, have on the local calling market.

Until now, competition in the local phone business has been difficult because it relies on a complex network, which would be expensive to build from scratch.

Now companies, large and small, will be able to bypass that system by installing the new technology, called voice over Internet protocol, or VoIP for short, for a fraction of the cost that it would take to rent space on the old phone network or build a new network.

The increased competition, coupled with lower technology costs, could result in much cheaper phone bills for consumers.

No one questions that VoIP is ushering in a new era in telecommunications but this is not the first time VoIP has been heralded.

In the late '90s, a lot of hype surrounded VoIP but it was cumbersome to use and riddled with glitches. Jeffrey Kagan, an independent telecommunications analyst, said the early version of VoIP mostly appealed to techie types.

"It was two people staring at their computer screens with headphones on giggling because they were beating the system by not having to pay for phone calls," he said.

The service that is now being offered has little in common with the earlier incarnations of VoIP. The proliferation of broadband connections and software improvements have made VoIP a viable alternative to traditional, circuit-switched networks. VoIP, which translates phone conversations into packets of data, now works with regular phones and the scratchy voice quality has mostly been eradicated.

"The barbarians are at the gate. VoIP is knocking at the door," Kagan said. "It is just starting to be embraced by the mainstream world."

VoIP is still not for everyone. To get the service, customers need a high-speed Internet connection like DSL or a cable modem. Subscribers then plug a so-called gateway box into a computer router and a phone into the gateway box.

Eric Warner, a Rancho Bernardo resident who uses Packet 8, a VoIP service offered by 8X8, a Silicon Valley company, said it is not as confusing to install as it may sound. In fact, Matthews liked it so much that he signed up his mother who lives in West Virginia for the service, too.

"My mother was able to do it and she is about as anti-technical as they come," Warner said. "It is one of the most simple installations I've seen."

Because of its simplicity and low cost, Rego said traditional phone companies should be worried about their new streamlined competitors. Vonage has been able to quickly sign up customers with only about $15 million in funding and 150 employees.

It is not just small companies like Vonage and 8X8 that are looking to harness this new technology. Heavy hitters like AT&T Corp., Time Warner and Cox Communications see the opportunity and cost savings the technology provides and are offering or planning to roll out VoIP in the near future.

Despite the competition, SBC is supportive of the technology and plans to start incorporating it alongside its current phone network, said Dorothy Attwood, the company's senior vice president for regulatory affairs. The company already uses VoIP for much of its long-distance phone service.

Kagan said telecom giants are backing the technology because it makes economic sense.

"VoIP is not really a threat to the traditional phone companies but to the technology that they have used," he said.

Cox, for instance, already offers phone service, using traditional technology, in many of its cable television markets such as San Diego and Orange counties. But in other markets, the company is closely looking at using VoIP because it is easier and cheaper to install.

Time Warner, which also provides cable service in San Diego County, rejected the idea of providing phone service with traditional technology, waiting instead until VoIP technology improved enough to be offered on a commercial basis.

Time Warner already offers the service in Portland, Maine, and plans to roll it out in Rochester, N.Y., and two markets in North Carolina. It has not yet announced its plans for 2004 or when the service will be available in San Diego.

Keith Cocozza, a national spokesman for Time Warner, said its VoIP service has done well in Portland, besting the growth the company saw when it introduced its Road Runner high-speed Internet service. When it introduced Road Runner, it had 3 percent penetration after six months. With its VoIP service, it has 3 percent penetration in just three months.

"Response actually has been very good, surprisingly so," Cocozza said.

But with success comes scrutiny. So far VoIP companies have been able to offer phone service almost free of regulation. Now, however, state utility commissions are beginning to take a hard look at the technology – and the companies that use it.

"Voice over IP is finally here, but the regulatory implications of that are less clear," said Mark Kersey, an industry analyst for Current Analysis, a market research firm with offices in La Jolla.

Wisconsin and Michigan were among the first to take a hard-line stance on the issue, arguing it was within their utility commissions' jurisdiction to oversee the VoIP companies as they are essentially offering phone service. Florida, on the other hand, has passed legislation saying it will not regulate VoIP services

The regulatory question is getting ever more murky. Just last week, a federal judge issued a decision preventing Minnesota's utility commission from regulating the technology.

That decision hasn't stopped California, however. Last month, the state's Public Utilities Commission sent letters to several VoIP companies, telling them that had until Oct. 22 to apply for the right to offer phone service in the state. The PUC estimates there are some 10,000 VoIP customers in California.

Vonage and 8X8 are taking a wait-and-see approach and haven't decided how, or if, they will respond to the letter.

Asking VoIP companies to comply with traditional phone regulations is tricky. The biggest issue centers on 911 service. While traditional phone networks work with 911 service and can pinpoint the address of the call, VoIP services like Vonage's cannot.

The 911 limitations of VoIP also are part of the technology's strength and prove how difficult it may be to regulate. The VoIP gateways that come with Vonage and Packet8 are portable, so users can plug them in anywhere there is a broadband connection. It also means that someone in San Diego can have a number that uses a New York City area code. Warner said his mother chose a San Antonio prefix so that her daughter who lived there could call her for free.

"The Internet is vast and nobody knows where you are," Rego said. "We are not bound by geography."

Because of the new technology's promise and pitfalls, many in the industry say the rush to regulate is seen as a mistake. SBC says excessive regulation could kill the budding technology.

"There is no urgent need to impose all sorts of regulation as the technology emerges," said SBC's Attwood.

As more states take different regulatory stances toward the technology, both telecommunications giants and VoIP startups hope the federal government will step in to provide some regulatory clarity. Michael Powell, chairman of the Federal Communications Commission, indicated earlier this month that the time may be right to study the issue of VoIP and how it will change the telecommunications landscape.

"We're probably going to hold a hearing this fall and we are probably going to initiate a notice of inquiry to begin examining voice-over-IP issues and proper classification," Powell said.

Kagan agreed that the issue had to be studied. He said the technology is evolving too fast and it is too soon to slap regulation and taxes on the nascent technology.

"It's in motion. It's a work in progress," he said. "Trying to tax it and trying to regulate it is a lot like trying to fix a lawn mower while it is moving. You could get your hand cut off."

Jennifer Davies: (619) 293-1371; jennifer.davies@uniontrib.com

1 Comments:

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March 2, 2009 at 1:22 AM  

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