Consulting and market research firm Frost & Sullivan expects voice-over-Internet Protocol (VoIP) technology to be the most significant development in the telecommunications industry since wireless technology.
Similar to data on Internet-based networks, voice-over-IP technology takes a voice call, splits it into a number of information "packets," then reassembles it at its final destination. Technology like voice-over-IP is expected to make networks more efficient and less expensive to run.
Although the growing VoIP niche generated $279 million in equipment sales last year, it is expected to balloon to more than $10 billion over the next five years.
Such growth prospects highlight the changing nature of the telecommunications industry, as well as the emerging opportunities for network equipment firms such as Cisco Systems, Lucent Technologies and Nortel Networks. Those firms are expected to supply much of the hardware to create the new Internet-based networks.
"I actually believe the voice-over-IP movement will probably be more substantial and far-reaching than the growth of the wireless market," said Pete Dailey, managing partner for packet telephony at Frost & Sullivan. "I think ultimately every call will go over IP at some point."
A variety of recent deals emphasizes the growing interest in voice-over-IP technology.
Earlier this month, cable operator Comcast and Lucent Technologies began voice-over-IP trials, and AT&T plans to deploy VoIP technology once it has successfully offered circuit-switched local cable telephony services.
By using Internet protocol (IP), the same transmissions technology used to shuttle data over the public Internet, communications companies and Internet service providers (ISPs) are beginning to offer voice services that often are cheaper per minute than traditional long-distance services.
IP technology takes a piece of information, like a voice call, and breaks it up into segments or "packets" to send along a network. Sending information in this fashion is more efficient and costs less than traditional circuit-switched technologies. Circuit-based technology, used by most telecommunications firms, requires a dedicated connection between two calling parties.
Although these advantages lead some industry analysts to predict Internet-based voice services will soon be widely adopted, the technology still faces concerns, including voice quality of VoIP calls.
Technical concerns over call quality must be overcome, according to Dailey. In addition, a lack of technical standards, which would allow multiple systems to work together, could hold the market back.
Frost & Sullivan predicts Internet-based calls and associated equipment sales will grow substantially faster among telecommunications carriers than within big businesses.
The so-called enterprise market, comprised of large corporations, is expected to account for equipment sales of about $2.2 billion in 2005, up from $117 million in 1998. Sales to the communications carrier market is expected to total $4.1 billion, up from $147 million last year, according to the study.
Dailey said it is more compelling for carriers to deploy VoIP technology because it allows for substantial cost savings, particularly on international calls, which ordinarily are subject to a variety of fees.
"A call to Greece that may have cost a dollar a minute now maybe costs only 10 cents with Internet telephony. That gap is the arbitrage opportunity that carriers were initially taking advantage of," Dailey said. "Then I think carriers began to realize it's much cheaper to deploy an Internet or router-based network than the traditional circuit-switched networks Capital costs for the network are far less."
The adoption of Internet telephony and related equipment is also expected to grow quickly overseas, the study found.
In 1998, North America accounted for 69 percent of the voice-over-IP equipment revenue. But that percentage will fall to 38 percent by 2005, as Europe is expected to claim 32 percent of the market with Asia grabbing 19 percent.