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Net telephony poised to take off?

Internet phone technology VoIP is ready for mass adoption, according to analysts. So what's holding it back? Old equipment dies hard.

Internet phone technology that dumps copper wires, circuit switches and phone jacks for all-digital systems has finally come of age, according to analysts.

With more companies adopting these "voice-over-IP" (VoIP) systems and concerns about sound quality fading away, the technology is ready for mass adoption, according to several recent reports from equity research firm Merrill Lynch and technology consulting firm Aberdeen Group.

At the same time, business customers such as Lehman Brothers are praising the digital phone technology, and IP phone makers like Cisco Systems are reporting booming sales.

"Though converged networks have been promised by technology providers for years, Aberdeen research indicates that 2001 was a watershed period for VoIP," said Dana Tardelli, a senior analyst at Aberdeen. The firm in a May 24 report said the market has "reached critical mass," and myths about poor quality are on the verge of being dispelled.

Merrill Lynch's study, issued Friday, said that historically, "poor performance and reliability have plagued the adoption of IP telephony," but the quality of service offered today outshines that of traditional phone networks.

The appeal of VoIP technology lies in cost savings that come from adding voice to the line that carries Internet access. But most companies already have a traditional voice and Internet structure in place, so it doesn't make sense for them to transfer to the new technology.

Analysts say that the only thing holding back VoIP is the persistence of older networks in the United States--something that won't hamper the technology overseas, where more antiquated systems are more likely to be upgraded.

Among the companies that have adopted VoIP systems are Lehman Brothers, Cisco, Merrill Lynch, Dow Jones and a range of universities. Craig Cotton, manager of product marketing for Cisco, estimates that more than 50 percent of Fortune 500 companies now have at least some IP-based phones.

Cisco, which makes equipment for VoIP, was the first company to go to a completely IP-based phone system and has been impressed with the quality, Cotton said. "For the past two to three years, customers have had all the tools," including sound-quality gear, he said.

"People think quality of service is too complex to engineer," he explained, but Cisco has a software program that "masks" the complexity of engineering and installing a VoIP network.

Copper wires won't die fast
The real reason VoIP has yet to take off, Cotton said, is that old equipment dies hard.

Referring to "private branch exchanges," the pieces of traditional calling equipment that connect most phones to networks, Cotton said: "PBXes are expensive. They depreciate over a five- to seven-year period; those are long depreciation cycles. Not too many companies are going to take out technology that hasn't even depreciated yet."

The persistence of old technology helps explain why adoption rates have been so slow, analysts said. "In '99, less than 2 percent of the whole voice marketplace was IP; in 2000, it was 5 percent, and in 2001, it was 9 percent," said Kathleen Simpson, an analyst for research firm Gartner.

According to the Merrill Lynch report, sales of IP-PBXes--the digital equivalent of the traditional PBX--are still slow and will make up only 50 percent of all PBXes shipped in the next five years.

There is also the problem of competition from traditional telephone companies. Most of them have integrated some VoIP technology into their networks but aren't eager to make themselves obsolete by getting rid of traditional networks entirely.

Several companies in the VoIP arena are looking to international markets, where old infrastructures and incumbent resistance aren't as widespread.

Adoption overseas
Net2Phone, which makes technology for VoIP networks, said it has its eye on the overseas market.

"We'd rather be a telephony provider for a Taiwanese company instead of Cox Communications," said Sarah Hofstetter, senior vice president of communications at Net2Phone. Hofstetter said the company is implementing services in India, and its strategy overseas is to "get in and get in fast."

"Entering India now is like entering the U.S. 20 years ago, when the Baby Bells had just broken up," she said. "It's like Sprint coming in afterwards and people being amazed just to have any option."

According to a recent report by consulting company Frost & Sullivan, VoIP is poised to take off in Europe, the Middle East and Africa, and traffic in those areas could reach 57 billion minutes by 2008.