Internet phone use gets boost

NEW YORK -- Cable and phone companies are hustling to offer new services that route calls over the Internet, a technology that eventually will make the 125-year-old telephone system seem about as advanced as sending smoke signals.

That day bounded closer this week as three major communications companies -- Time Warner Inc.'s cable TV unit, Qwest Communications International Inc. and AT&T Corp. -- announced plans to sell Internet phone services to consumers.

The plans promise to lower the cost of phone service and include new features, like the ability to check voice mail or program call-forwarding re-quests on the Web.

Internet phone technology has already made serious inroads in big companies and as a means of carrying international calls.

But while Internet phone services for consumers have been available for more than a year from some cable companies and startups like Vonage Holdings Corp., it has remained a niche technology.

Fewer than 200,000 Americans use Internet phone service as their primary line, according to TeleGeography Inc.

That figure could soar in 2004. Besides the announcements made this week, the nation's biggest phone company, Verizon Communications Inc., plans to deliver a consumer Internet phone offering within six months.

"The giants getting into the business gives Voice Over IP credibility," said Guzman & Co. analyst Pat Comack, using the technology's official name. "People will give it a shot now. All of a sudden, this is not a toy anymore."

But while the Internet phone bandwagon swells, the full-fledged revolution seems several years away. For now, only the roughly 20 percent of U.S. households that have broadband Internet access can use the technology.

Perhaps most importantly, special steps have to be taken to make the Internet phone systems connect to 911 dispatch centers or work in blackouts like the old-fashioned phone network can.

"I'm not going to pretend that we're ready to solve those problems," AT&T spokesman Gary Morgenstern acknowledged Thursday. "We're working on that."

Other providers say they have addressed those issues. Internet phone pioneer Net2Phone Corp., which is focusing on helping cable companies deliver the service, boasts that it also has overcome the technical hurdle of letting law enforcement officials set wiretaps, which phone companies are required to allow.

Traditionally, a phone conversation is converted into electronic signals that follow an elaborate network of switches in a dedicated circuit. Long-distance calls cost more because regional carriers have to be paid for originating and terminating the calls.

The new technology has a terribly nerdy name, Voice over Internet Protocol -- or Voice over IP or just "VoIP" -- but its premise is pretty simple.

When a call is made, the sounds are converted into packets of data that take diverging paths around the Internet or private networks, just like e-mails or Web pages. The packets get reassembled as sound on the other end of the call.

The sound quality sometimes strays from perfection -- though it has come far in recent years and is expected to get even better.

The process is cheaper because it cuts some or all long-distance access charges out of the equation -- though that is a contentious issue under consideration by the Federal Communications Commission.

It also helps big businesses save money because they can use their expensive data networks to make phone calls instead of only shuttle files around.

And because voice is sent like any other kind of data, new videoconferencing services and Web-based phone messaging applications are possible. The address book in an e-mail program can dial a number with the click of a mouse.

Combine all those elements, and VOIP represents a tidal wave.

Providing service costs Vonage about 1 cent a minute; AT&T probably could do it for about seven-tenths of a cent because it has its own vast data network, says UBS Warburg analyst John Hodulik.

With such low costs, charging for long-distance by the minute will probably give way to "all you can eat" plans. For example, Time Warner Cable lets its Internet customers in Raleigh, N.C., and Portland, Ore., make as many calls as they want for $39.95 a month.

Also, cable TV companies increasingly will use VOIP to sell phone and broadband service in an attractively priced "bundle" that makes customers less likely to leave. In response, phone companies might have to accelerate plans to upgrade to fiber-optic lines that can carry a huge amount of stuff, including ultra-fast Internet and high-definition TV.

In the meantime, the billions of dollars worth of copper phone wires spread across the country figure to gradually become obsolete. AT&T stopped investing in the old-style "circuit-switched" infrastructure several years ago, opting instead to build only data networks.

"It's not a question of if," said Forrester Research analyst Charles Golvin. "It's a question of when."