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Net phone market heats up

As another company entered the Net telephony market, a study predicts that online phone technology will drive down long distance rates.

As another company announced its entry in the growing Internet telephony market, a study is predicting that online phone technology will drive down long distance rates.

The study, by Atlantic-ACM, also predicted that traditional phone companies will be pressured into adopting the new technology.

Internet telephony rates "are driving a new kind of price war," said Atlantic-ACM CEO Judy Reed Smith. "And the result of that will be a new kind of network."

One piece of that system, ICG Communications, announced today that it will make a 5.9-per-minute rate available in 166 U.S. cities by the end of the year. The rate applies only to calls made and received on ICG's IP (Internet protocol) network. Calls made on ICG's network and received on another network will cost 7.2 cents.

ICG credited its planned rate to the acquisition of Internet service provider Netcom, which will provide the IP infrastructure that will carry the inexpensive calls.

The service is one of many recent developments pushing Internet telephony. These include proprietary IP network service provider Qwest's planned acquisition of LCI International, announced yesterday, and IDT's 5-cent-per-minute consumer rate, announced last month.

The reason for IP telephony's growing impact is that advances in technology are eroding the difference in quality between IP and traditional telephones. As long as traditional phone service maintains a distinct quality advantage, it will remain as a premium service that users will be willing to pay extra to have.

But once that gap closes, traditional telephony will face an uncertain future. Some believe that this is already happening.

IP telephony is cheaper for two reasons. The first is that the system of switching on the IP network is more efficient that the public switched telephone network, or PSTN. With PSTN, one conversation monopolizes an entire line. But with IP, information is broken down into packets and reassembled after its journey, enabling numerous conversations to make use of that one line.

The second reason Internet calls are cheaper is that PSTN calls incur access charges at the points of origin and destination, which is how local phone companies are compensated for the use of their networks. Current government regulations do not require those fees with Internet calls, though IP telephony companies using their own proprietary networks are still subject to them.

But the Federal Communications Commission is widely expected to end the free ride for access fees for Internet calls once the nascent industry gets on its feet. Those fees would raise the rock-bottom long distance rates announced by companies like ICG and IDT, but not to the level of current market charges.

Meanwhile, IP long distance bargains will force phone companies to either adapt or die.

"Those who adapt more quickly will be the best positioned for success," Smith predicted. "I don't see immediate death for any of the providers, but I do see an imminent loss of market share if they don't embrace this technology."

The report identified three causes for the current proliferation of IP telephony services: heavy competition in the long distance market, advancing technology that makes IP telephony viable, and progress in building out the IP networks to carry its traffic.

The report also identified three effects of that proliferation: further price reduction, more investment in networks, and increasing phone use by consumers as services become more affordable.