Is VoIP ready for prime time?

Net phone calling is poised for a major boost as cable giants get into the game, but some big players are holding back even as millions of broadband customers convert to the service.

Internet phone calling is poised for a major boost as cable giants get into the game, but some of the biggest players are holding back.
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While still just a trickle, early defectors to voice over IP (VoIP) represent the vanguard in a trend that some analysts believe could soon roil the communications industry.

Independent VoIP providers such as Vonage and 8x8 are beginning to steal consumers from tradition phone operators with flat-rate VoIP plans that cost between $20 and $40 a month for local and long distance calls.

Even as momentum for VoIP mounts, however, some of the biggest cable companies have begun to suggest that the technology isn't yet ready for the masses.

"The potential widespread commercial deployment of IP (Internet protocol) phone service has important implications on the future of the cable industry," Bank of America Securities analyst Matthew J. Bartlett said. But "cable's use of voice over IP technology is not quite yet ready for prime time."

After years of overpromising and underdelivering, VoIP providers are generating renewed interest among consumers thanks to sharp growth in broadband connections to the home, improvements in quality of service, and hook-ups that allow VoIP calls over ordinary telephone handsets rather than clunky PC microphone systems.

VoIP services for now typically promise a smaller phone bill, virtually wiping out charges for long distance and international calls. In addition, connecting phone calls over the Internet could eventually open the door to advanced communications services that tie voice together with e-mail, instant messaging and video conferencing--something that Microsoft and others are already working to achieve.

While cable companies are expected to be among the biggest winners as customers switch from traditional phone to VoIP service, recent cable industry studies suggest that the rewards may come only slowly, if at all.

According to white papers and a series of recent interviews, Cox and Comcast continue to have significant reservations about VoIP technology. A major setback is cost, they've found. Creating a service with all the trimmings American dialers are used to costs just 10 percent less than building a traditional phone line, not the 50 percent savings predicted in early projections.

In addition, cable companies are worried that current VoIP equipment has not been proven on the kind of large scale that would be typical in any nationwide service. Trials to date have tested only a relatively small number of users, averaging about 100 callers at any one time. Furthermore, network gear typically runs on proprietary software that has not been designed with interoperability in mind, according to a recent Cox white paper.

The cable industry's hesitancy over VoIP could be a major problem for the technology, which is just now seeing a spike in consumer interest.

Cable companies are considered key to VoIP's success, mainly because they are the dominant U.S. providers of the high-speed connections that VoIP needs. But executives from Comcast and Cox now say they do not expect VoIP to pick up dramatically until 2004, if at all.

"While much of the VoIP equipment is available currently, the technology remains incomplete to support a wide residential deployment," a Cox spokeswoman said.

Added a Comcast representative: "It will happen, but we're not going to roll out out an incomplete service."

The case for 'true VoIP'
Only two things are required for a VoIP call from a home. One is a broadband connection. The second is an Analog Telephone Adaptor (ATA), which plugs into a home phone. An ATA costs about $100, but is often given away by VoIP providers. Businesses have a more-expensive undertaking, having to buy gateways, which act as an ATA for hundreds of phones at a time.

So far, most cable companies have sold what's known as circuit-switched cable telephony to about 2.3 million people.

Just like on telephone networks, these calls use a series of switches to navigate a cable company's fiber-optic network. It's a bandwidth-hogging set-up because the switches create a connection between the two phones for the length of the call. In some VoIP cable services, you can't make a call and surf the Web simultaneously.

The switches also can't distinguish between voice and other kinds of data, raising concerns that cable providers won't be able to guarantee a level of performance on par with a traditional phone line. Voice calls have a low tolerance for delay, typically requiring systems to give them priority.

As a result, cable companies want to upgrade from circuit-switched voice to more modern versions of VoIP, which solves many of these problems. In pure VoIP, the digital packets containing the voice calls can be prioritized. Users can surf and make phone calls at the same time because voice service doesn't completely lock up bandwidth.

Also, unlike its predecessor, next-generation VoIP is standards-based. The standard, called PacketCable, has the backing of key cable equipment provider CableLabs, which has just begun certifying equipment from manufacturers.

"The cable industry has been waiting to roll out VOIP service until it standardized all the protocols needed for a high-quality service," said Matthew Bartlett, a Bank of America Securities analyst.

Problems for Vonage
With cable companies likely on the VoIP sidelines until at least 2004, VoIP's immediate future remains in the stewardship of small start-ups like 8X8, deltathree, Net2Phone and Vonage DigitalVoice. For as little as $20 a month, customers get unlimited dialing, plus caller ID, voice mail and other usually premium services.

But Vonage and other small-time providers may be hard-pressed on their own to push VoIP to a national market and challenge to the dominance of traditional phones companies Verizon Communications, Qwest, Bellsouth and SBC.

"The biggest impact Vonage might have is the response from the major carriers," Jupiter Research analyst Joe Laszlo said.

During a recent interview, Vonage Chief Financial Officer John Rego admitted the company is too small to register on the competitive radar of major telephone providers, but he says that will soon change.

"Although we're proud of our 34,000 customers, they don't make a dent in the 60 million Verizon has got," he said, but added the company projects 1 million subscribers by late 2004.

Even though most VoIP providers appeared in mid-2002, there's already been enough of a price war for some analysts to see no other end than consolidation.

The most recent price cut involved 8X8, which sells a VoIP service under the name Packet8. 8X8's monthly unlimited service now costs $20, about half the price of competitors including Vonage.

The Bells are also locked in a price war, which promises to lower the cost of their unlimited traditional dialing plans and further erode a VoIP provider's price advantage. Rego acknowledged Vonage will likely have to lower its prices for home plans downward in the future to keep pace.

VoIP slips away from big business
To help them survive, many VoIP providers are turning to small and medium-size businesses. There too, they are finding problems. They've discovered that larger companies are shying away from VoIP because it costs too much to replace their telephone systems, or they've already built one of their own.

"VoIP in the enterprise space has not moved the market," said Robert Thompson, a top executive at the Enterprise Networks Division of Siemens Information and Communication Networks.

Concerns about Y2K are partly to blame, he said in prepared remarks released Tuesday. Many businesses already upgraded their phone networks to prepare for the disaster that never happened. As a result, there are only a few eager to upgrade again to VoIP systems, he said.

Also, Thompson agrees with cable companies about the value of the technology delivered by VoIP.

"The value...has been: at the best I get the same thing," Thompson said. "At the worst I might have less features, less functionality, less reliability."

But smaller businesses, which are nimbler in leaping to new technologies, are an eager and surprising market for VoIP.

"Small to medium-size business is definitely picking up the IP telephony banner," said Richard De Soto, vice president of Altigen Communications, which sells VoIP equipment almost exclusively to smaller businesses.

"Large companies have a large capital investment, so they can't afford to get rid of their old phone systems," De Soto said. "But smaller companies have older, analog based systems. That's the customer that's migrating to VoIP."

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