Voice Over IP

Calling the Next Tech Challenge (washingtonpost.com)
As a former Motorolan, the whole Voice Over IP (VoIP) is pretty fascinating to me. I’ve been thinking for years — ever since AT&T started offering their digital one-rate plans — that long distance would die as a business in time. If VoIP becomes a reality, and it will, how will phone companies or cable companies be able to justify charging for time when they already offer unlimited amounts of digital data packets for a flat rate? That’s what your broadband internet connection is.

Voice takes up considerably less bandwidth but has some technical problems, such as people wanting to talk in real time, whereas an email or web page can have a delay to allow for the assembly of data packets. That’s why current voice technology involves switches and dedicated circuits. With all of the emerging technologies, such as WiFi, it’s not hard to imagine a technology coming along that uses VoIP to displace the phone and cable companies and eventually reduce the cost of communication to a low flat rate for unlimited time around the world.

If you want phone service, you’ve got the traditional wired network, cell phones and (soon) VoIP. In June 2003 there were 148 million cell-phone users, up from 34 million in 1995, says the Cellular Telecommunications & Internet Association. Of these customers, 14 percent — especially younger users — say their cell phone is their main phone, and 26 percent of the rest say they might switch, reports In-Stat/MDR, a market research firm. If you want a high-speed Internet connection (broadband), you can get it from your phone or cable company. New broadband wireless technologies, including one called WiMax, may expand the choices within a few years. If you want television, you’ve got cable and satellites.

The next technologies aren’t just pipe dreams. Consider VoIP.

A small company named Vonage already sells converters that, attached to phones and Internet access lines, transform calls into data packets. Vonage routes these (via computer servers) over the Internet and, at the other end, reconverts them into voice messages that can be received on any phone. It has 130,000 customers and hopes for 1 million by the end of next year. Its premium service costs about $38 a month and allows unlimited calling in the United States and Canada. AT&T is introducing VoIP and also projects 1 million customers by the end of 2005. About 4 percent of U.S. businesses already use VoIP in their telecom networks, says Daryl Schoolar of In-Stat/MDR. By 2007, that might be 19 percent, he estimates.

However these predictions turn out, the new technologies — VoIP, WiMax, satellites — represent enormous competitive opportunities and threats. Suppose that VoIP succeeds big time. It might make obsolete much of the local networks of the traditional phone companies, now worth roughly $125 billion, says Scott Cleland of Precursor Group Advisors. Calls would increasingly circumvent these networks. This might imperil traditional phone companies (Verizon, BellSouth, SBC, Qwest). Cleland and others speculate that software and hardware companies might include VoIP in their products. In effect, Microsoft or Dell could become phone companies.

No one knows which technologies and companies will prevail. But competition should be economically invigorating. VoIP might drive demand for broadband, persuading millions of households to get high-speed Internet access. (VoIP won’t work with slower, dial-up connections.) In mid-2003, about 21 million homes and small businesses had broadband, reports the Federal Communications Commission. That’s less than a fifth of U.S. households. In 2002 the United States ranked sixth in the world in broadband use as a share of population, behind South Korea, Canada, Belgium, Denmark and Sweden.

The Internet’s Catch-22 has been this: The small number of homes with broadband limits the market for new Internet products; without those products, people have less reason to pay extra for broadband. New technologies may break the deadlock by providing new products (VoIP or something else) or lowering broadband prices (through WiMax or something else) — or both. Competition of this sort involves huge risks and much investment capital. But the largest obstacles lie in government policy and consumers’ cautiousness.

Interesting times ahead.

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