Telcos moving in on Net market

As Internet use for voice and fax phone calls increases, telephone companies could lose $8 billion over the next four years, according to a study by Action Information Services.

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As Internet use for voice and fax phone calls increases, telephone companies could lose $8 billion over the next four years, according to a study released Wednesday by Action Information Services, a Virginia-based consulting firm.

"The growth of the Internet as a vehicle for voice and fax calls will have a huge impact on the telecommunications industry," said Sim Hall, vice president of research at Action Information Services and principal author of the study. "It brings in a new paradigm for businesses. Where traditionally data traffic piggy-backed on the voice networks, we are now seeing the flip side of the coin."

Because data networks, and especially the Internet, are free from the regulatory constraints imposed on telephone companies, the potential for significant savings is huge. "Since Internet access is generally purchased at a fixed monthly rate, individuals or companies with the proper software and equipment can place Internet voice or fax calls between computers anywhere without incurring per-minute fees," Hall said.

The initial stumbling blocks of PC to PC Internet Telephony (IT) are slowly being removed. The software needed to make Internet voice calls now comes bundled with the latest Web browsers and can be freely downloaded.

"Recent industry consensus on interoperability standards facilitates Internet calling among users of software from various suppliers," the study said.

"An even more interesting rise in Internet Telephony comes from the ability to make calls from traditional phone lines connected to the Internet through gateways," said Hall. "And the charges for the call are 40 percent lower than traditional phone calls."

Mark Winther, group vice president of worldwide telecommunication at IDC, concurs that the growth of Internet telephony is very significant. "It's not going to mean much for U.S. phone companies in the local and state-to-state calls," he said. "The main advantage will be in long distance calls, especially calls from one foreign country to another."

"Right now it is a price arbitrage game," said Winther. "Internet Telephony is positioned as a low-cost alternative and this will allow the industry to gain momentum and market advantage."

However, Winther added, most phone companies are lowering prices and some phone tariffs are now similar to Internet calls: "The price advantage is the window of opportunity, but there is a bigger market beyond that," he said. "There is a value-added service with digital connections using an IP structure that doesn't exist over phone lines."

"Internet Telephony will become a viable, robust alternative to traditional phone company networks," said Christopher Mines, an analyst at Forrester Research. "Our projections show that IT services will capture 4 percent of U.S. telephone spending in 2004. That's $3 billion in lost revenue by the traditional phone companies. $2 billion gets spent on IT and $1 billion stays in the consumer's pocket."

But Mines warned that, although they'll lose to Internet calls, phone companies themselves may start to offer IT. "It will still have a negative impact, but the amount of revenue lost will be gained by providing IT services. Some companies have been very aggressive getting into the Internet telephone market."

AT&T, for example, has begun IP voice communication trials in Japanese cities like Osaka and Tokyo, and from Japan to 36 other countries. The company also plans to fund IT market trials for New Jersey-based ITXC, said AT&T spokesman Mark Miller.

ITXC, founded by the former head of AT&T WorldNet, supports IT service providers with the intent of creating a global IT network much like the existing phone network. "In early 1998, AT&T will fund market trials for voice-quality services through IP telephony over dedicated IP circuits on international routes," said Tom Evslin, chairman and CEO of ITXC.

"This is obviously a very nascent industry," added Miller. "But we feel that there is some real promise for AT&T where IP protocol-based networks complement traditional voice services."

Companies like Telecom Finland and Telecom New Zealand have been operating some version of Internet Telephony for nearly a year. And large European players like Deutsche Telecom and France Telecom are investing in the IT market as well.

But, as usual, start-ups and entrepreneurs have sprinted ahead of established players in identifying and preparing for voice-over IP market opportunities, according to a study by IDC. Among the pioneers of these "next gen" telcos are: Delta Three (New York), AlphaNet Telecom (Toronto), and OzEmail (Australia).

Large international discount calling services companies, such as IDT (New Jersey) and USA Global Link (Iowa), also have found that voice-over IP allows them to offer 70 percent to 80 percent discounts over tariffs.

"Although traditional phone companies are experimenting with Internet Telephony, some more aggressively than others," says Hall, "they are still reluctant to come out with any new service. They are making a fortune on the existing cartel service."

"Traditional phone companies are ambivalent about the success of Internet Telephony because it will significantly change their business structure from the circuit-switched infrastructure in which they have invested billions," agreed Winther. "Internet Telephony is for the next generation telcos."