Calling the Next Tech Challenge

Although you may never have heard of VoIP, it’s the wave of the future. With VoIP — voice-over-Internet protocol — you can use the Internet for phone calls. When the wave arrives is anyone’s guess, but VoIP heralds upheaval. Never before have there been so many ways to get phone service, use the Internet or receive video images. The challenge for government and business is to convert this apparent mayhem into an investment boom that, unlike the ill-fated telecom bubble of the late 1990s, delivers lasting benefits for consumers and investors.

washingtonpost.com

By Robert J. Samuelson

http://www.washingtonpost.com/wp-dyn/articles/A25468-2004Mar25.html

Once upon a time, telecommunications was devoid of choice and competition. You got phone service from one place, television from another — and of course there was no Internet. That world is long gone.

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.

Most of us don’t want to try something genuinely new. We want the other guy to try it and, once it works, we’ll try it. Ironically, the Telecommunications Act of 1996 reinforces this conservatism. The goal was to foster local phone competition by breaching local phone companies’ monopoly over the "last mile" of wire to homes. To be allowed to offer long-distance service, local phone companies had to share their networks — at rates mandated by government regulators — with competitors that could then offer local phone service. Up to a point, the law has worked. Phone rates have dropped, because there’s competition among many companies offering packages of local and long-distance service.

But the competition is artificial, because it depends on rules that are constantly rewritten and litigated. (The latest court decision occurred only weeks ago.) Local phone companies complain they’re subsidizing competitors at unreasonably low rates. Indeed, the telecom bubble stemmed partly from FCC rules that, favoring new companies, encouraged excessive investment. The regulations are increasingly unjustified, because the law’s central premise no longer applies. The "last mile" monopoly is collapsing. If standard phone service costs too much, many will abandon it for cell phones. Aside from e-mail, the Internet offers VoIP. WiMax looms. In 1996 these developments weren’t anticipated. Cell phones and the Internet were just taking off. In 1996 only 23 percent of Americans had used the Internet, the Pew Research Center says.

One way or another, the new technologies are coming. But it would be better if Congress encouraged them by phasing out the 1996 telecom act’s outmoded regulatory requirements. Companies can compete with each other in two ways: by deploying their lawyers and lobbyists — gaining competitive advantage through legislative and legal decisions — or by providing new technologies that offer superior service, lower costs or both. It seems an easy choice.

© 2004 The Washington Post Company