Dialing for Dollars – Internet phone calls haven’t made much of a dent in the Baby Bells’ business. Yet.

Robert Rivera was looking for a way to lower his phone bill, so he did what until recently had been unthinkable: He disconnected from his local phone company.

By MARCELO PRINCE
DOW JONES NEWSWIRES

The Mineola, N.Y., resident instead opted to let his cable company carry all the telephone calls to and from his apartment. Now, for $34.95 a month — about $65 less than he used to pay — Mr. Rivera gets unlimited nationwide phone service and features such as caller ID from Cablevision Systems Corp.

What makes this possible for Mr. Rivera is Cablevision’s introduction earlier this year of a phone service based on a technology called voice over Internet protocol. VOIP, as it’s known, has been in limited use for some half a dozen years, transmitting low-cost — and mostly low-quality — long-distance calls over the Internet. Companies that sell pennies-per-minute calling cards use VOIP. It’s also popular overseas. More than a million people have signed up for VOIP phone service from a Yahoo Inc. subsidiary in Japan, and in India it’s used to transform cyber cafes into discount calling centers.

But now, cable companies, Internet-access providers and start-up telephone companies are slowly rolling out VOIP with greatly improved sound and services. For less than traditional phone service generally costs, customers can get unlimited calls and the ability to do things like check their voice mail on a Web site (click on the message as you would an e-mail, then listen to it over your PC speakers) or adopt any area code in the U.S. (allowing anyone in that area code who calls you frequently to avoid long-distance fees).

Indeed, after years of testing and spending billions to upgrade their networks, cable companies can now deliver Bell-like service with more features and at lower cost than the Baby Bells themselves, making the cable outfits serious challengers for the Bells’ core local-phone customers. Cox Communications Inc., Comcast Corp. and other cable companies already have more than two million phone customers they serve using traditional circuit-switched technology, and both are eyeing VOIP eagerly.

Philadelphia-based Comcast, the largest U.S. cable company in terms of subscribers, is conducting VOIP trials in its home market with the ultimate aim of replacing its circuit-switched service with Internet telephony. That way Comcast could stop paying long-distance phone companies for using their lines. "Once we get the call on our data network, the transport cost is virtually nothing," says Sam Chernack, vice president of VOIP at Comcast.

A few issues still have to be resolved before the technology can compete on a truly equal footing with the Bells. For example, unlike traditional telephone service, phones that work on VOIP have no source of power. If a blackout hits, the phones won’t work. For that reason, most observers see VOIP for now as an attractive second phone line, instead of a replacment for the Bell local service. Cable companies are researching the power issue, however, and aren’t lowering their sights from the greater goal.

VOIP "is the biggest risk" to the local phone companies, says Norm Bogen, a research director at In-Stat/MDR, a Scottsdale, Ariz., research firm. "The pipe from the cable company into my house is many times larger than the pipe from the phone company. The guy with the bigger pipe is going to win."

The way it works is, VOIP turns the human voice into digitalized units, which it then bundles into "packets." Made digital and small, these packets stream over the network at blazing speed to their destination, where they’re reassembled into an analog signal — the voice you hear. And because the packets travel separately in spurts, they don’t tie up a line continuously the way traditional calls using circuit-switching technology do. That means more line capacity and lower costs for the network provider. Some cable companies estimate delivering phone service by VOIP can cost them as much as 50% less than circuit-switched service.

Where the technology suffers is when it’s used to transmit over the public Internet. As the packets hop between different networks and encounter varying degrees of line quality, they can get delayed, or even lost, degrading the sound.

Good Pipes

But cable companies have huge networks of uniform high quality. They’ve developed software that lets them manage the Internet protocol traffic, ensuring voice packets get priority, and limiting the number of hops they make when they do have to venture out onto the public Internet. Cable operators also are capitalizing on advances in compression technology, widespread adoption of high-speed Internet access, the recent establishment of industry standards for VOIP equipment and new gear from manufacturers like Cisco Systems Inc. and Nortel Networks Corp. The result is sound quality equal to that of the Bells — at lower cost.

Industry sources estimate there are about 100,000 residential VOIP users in the U.S. For now, most use it as a second phone line and subscribe to a start-up service like Vonage Holdings Corp., or a PC-based service like Net2Phone Inc. and deltathree Inc. But market researchers predict rapid adoption next year as cable companies publicize and expand their offerings. Forrester Research, Cambridge, Mass., estimates that by 2006 cable will provide VOIP to more than four million U.S. homes, taking billions of dollars in revenue away from the Bells.

Communications entrepreneur and VOIP advocate Jeff Pulver predicts the Bells will co-opt the technology to defend their residential business. "They are losing revenue," he says, and "the only way they can fight back is to be parasites themselves, take advantage of the cable infrastructure and roll out voice-on-cable" as a second-line service. Mr. Pulver is the founder of Free World Dialup LLC, a privately held company in Melville, N.Y., that lets people make free calls using a high-speed Internet connection.

Executives at Bell companies acknowledge Internet phone service is becoming a serious competitor. "Will voice over IP ultimately replace circuit switching? Probably so," says Ross Ireland, chief technology officer at SBC Communications Inc., San Antonio. "It’s a matter of time. It could be fairly soon for businesses. In the consumer market, it could take a decade or 20 years."

SBC and its sisters are already embracing VOIP to lower their costs and sell new services to large businesses. "It certainly provides flexibility that traditional circuit-switching doesn’t," says Link Hoewing, assistant vice president for Internet policy at Verizon Communications Inc., New York. For instance, some business customers use special IP phones that allow them to take their phone number anywhere they can plug into a high-speed Internet network.

Some long-distance carriers, including AT&T Corp. and Sprint Corp., are using VOIP on their own lines to transport calls between distant cities. Large businesses, too, such as brokerage giant Merrill Lynch & Co., use it on their own private networks to link remote locations and save on long-distance fees.

VOIP’s critics, though, including Mr. Ireland of SBC, maintain that the technology isn’t ready for primary residential use. Among its shortcomings: the need for better encryption to protect transmissions, which often pass through neighboring homes. And some of today’s services can’t support 911 calls, because they don’t tell police the physical location of a caller.

Then there’s the power issue. Some cable companies, such as Cox, are conducting tests to determine how expensive and complex powering an Internet phone connection would be. Some estimates say that while using VOIP is roughly half as expensive as circuit-switched lines, the savings are only about 10% if the cable firm decides to provide electrical power to the service. Comcast and others are moving ahead with cheaper alternatives that rely on a power backup at customers’ residences, such as embedding an eight-hour battery in cable modems.

Until such issues are resolved, observers predict VOIP will appeal mostly as a second line. But with its other attractions, no one is selling it short.

Apart from a cable connection and special modem, no new equipment is needed. You plug a standard phone into the modem or adapter, which routs calls through a high-speed Internet connection. All of your house’s phone jacks can be connected to the cable. With a small microphone attached, a PC can even serve as a phone, though industry analysts see little demand for that.

The calls aren’t metered: There are no time-of-day or length-of-call restrictions. Nor are there long-distance charges: A call next door is no different from a cross-country conversation. And because VOIP is currently an unregulated Internet service, like instant messaging, there are no taxes or government surcharges.

VOIP offers features that traditional phone networks can’t, such as talking e-mail and caller ID that shows up on your TV or computer screen. Several start-ups are using these and other next-generation services to woo customers. Privately held Vonage, which uses a VOIP adapter to piggyback on a cable or DSL connection, lets you sign up for phone numbers in different area codes. A Vonage customer can also take his or her phone number to another location simply by plugging the adapter into a high-speed network. "I could be in Barcelona and have a New York City area code" so a New York friend would get charged for a local call but the phone would ring in Spain, explains Phil Giordano, vice president of wholesale sales at Vonage. The Edison, N.J., company, which charges $39.99 for unlimited nationwide calling and seven phone features, has about 20,000 mostly residential customers.

Vonage is hoping to increase its sales through closer cooperation with cable operators. "We would host [the service], operate it and sell it for them using their brand name," says Mr. Giordano. The company has a similar arrangement with high-speed Internet service provider EarthLink Inc., which began selling Vonage’s services to its 779,000 customers in March. Atlanta-based EarthLink charges $39.99 for unlimited nationwide calling and 11 features, including voice mail and area-code selection.

Testing, Testing

Cable companies around the country are testing the waters with VOIP promotions. Cablevision, Mr. Rivera’s cable company, based in Bethpage, N.Y., began quietly offering its service in communities on Long Island, N.Y., this year, though it won’t say how many households have signed up.

Time Warner Cable, a unit of AOL Time Warner Inc., began advertising VOIP service in Portland, Maine, in April and now has more than 800 customers. For $39.95 per month, customers get unlimited local calling and domestic long distance, plus several features such as caller ID and call waiting. That’s considerably cheaper than what Verizon, the regional phone company, is offering. Verizon’s Web site (www.verizon.com) offers customers in Portland unlimited local calling, directory assistance and three additional features for $32.73 — but that doesn’t include long distance. Add 300 minutes of long distance a month for $21, and the total comes to $53.73.

Liberty Media Corp., Englewood, Colo., began testing Internet phone service with about 200 cable customers in Luquillo, Puerto Rico, last year, using technology from Net2Phone. Early results show 35% of Liberty’s customers are using the VOIP line as their primary phone, says Stephen Greenberg, chief executive of Net2Phone, Newark, N.J. VOIP is on a "hockey stick" shaped growth curve, Mr. Greenberg adds, meaning it took a few years to come to market but is now poised for rapid adoption.

Cable operators, meanwhile, are keeping their eyes on a very big prize. As Comcast’s Mr. Chernack puts it: "The plan is to cut the Bell line into the house, and have all the phone jacks go through the cable modem."

— Mr. Prince is a staff reporter for Dow Jones Newswires in Jersey City, N.J.

Write to Marcelo Prince at [email protected]

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Start-up aims to improve Wi-Fi calls

By Michael Kanellos
Staff Writer, CNET News.com

TeleSym is trying to clear the static out of Wi-Fi calls.

The Bellevue, Wash.-based start-up is marketing software that lets people make what are basically free telephone calls over a Wi-Fi network through a laptop, PDA (personal digital assistant) or cell phone.

More importantly, the underlying technology minimizes the effect of dropped packets or other sundry problems that occur in Internet transmission, the company says. The end effect, according to TeleSym, is that the speaker doesn’t sound like he or she is calling from inside a well, or is on a ham radio on the outskirts of Chang Mai.

"Most people have gone on the assumption that you need quality of service (improvements) in the Internet because of packet loss," said Raju Gulabani, the company’s CEO. "But it is possible to compensate…(The TeleSym technology) is designed to take into account that there is not quality of service on the Internet. The quality is so good you could be on a call for 24 hours without your brain hurting."

Although analysts and PC executives have for years been touting the ability to make telephone calls over computer networks, with only limited results, momentum is now building for VOIP (voice over Internet Protocol). The quality of the transmissions is rapidly improving while the cost savings of bypassing the telephone carriers has become more apparent. Cisco Systems has become one of the principal proponents .

Wi-Fi essentially extends the reach of VOIP functionality. Handhelds enabled with Wi-Fi run for far less time on a single battery charge than traditional cell phones. Nonetheless, mobile Wi-Fi calls basically cost nothing because they run across existing, expensed computer networks.

While U.S. carriers are mostly only in the tinkering stage with Wi-Fi calls, overseas carriers are moving fairly rapidly to adopt the approach more broadly. China Mobile, the largest mobile carrier in that country, is already bundling Wi-Fi/GPRS (General Packet Radio Service) solutions with mobile phones and laptops, according to sources, while China Netcom is promoting broadband and Wi-Fi for business and commercial buildings.

Using notebooks or PDAs as phones isn’t a huge mental stretch either, said Jon Arnold, VOIP program leader for consulting firm Frost and Sullivan, referring to TeleSym’s product.

"You’re not trying to turn the device into something it isn’t," Arnold said "People complain that VOIP is grassroots and fragmented, but so were the first days of the Internet."

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Rather than sell full-fledged VOIP systems like those produced by Cisco, TeleSym develops software, which it sells directly to corporate buyers and increasingly will sell indirectly through hardware manufacturers and/or service providers.

The TeleSym system consists of SymPhone Client software, which basically turns electronic devices into cell phones, and two server applications used to connect and route calls. The SymPhone Call Server routes calls between client phones inside a corporate firewall, while the SymPhone PBX Connector connects client phones to the outside world.

A package dubbed SymPhone N comes with the client software and the Call Server, while the SymPhone NP package comes with both server applications, along with the client.

The PBX Connector can sustain 92 simultaneous calls, Gulabani said. Because studies show that on average only one in 20 phones in a large organization are active at any given time, the company says that one server can handle a staff of about 1,800.

Together, the servers cost $3,500, while the client software costs $300 to $400 per device. But "there are no recurring charges for cell phone calls," Gulabani said. "When you travel you can just use the broadband connection in the hotel."

Still, the company’s main selling point is quality of service. Gulabani and the company’s other founders have developed algorithms that compensate for blips in transmissions and latency.

"We’re able to handle much more jitter and delay than most other competitors can," said Gulabani "You can’t compensate for four packets in a row being lost, but we can compensate for two to three packets."

The company is currently focusing on the SymPhone N package, which will be marketed to retailers, warehouses and other companies with large numbers of roving employees. The setup essentially turns a handheld or bar code scanner into a walkie-talkie.

"In many cases they use pagers and cell phones and get monthly charges," Gulabani said, adding that universities are looking at the setup for student communication.

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