Face New Challenge:
Once a Minor Player, Service
Captures Growing Share
Of Home, Business Market
By PETER GRANT and ALMAR LATOUR
Staff Reporters of THE WALL STREET JOURNAL
October 9, 2003
There's a new gold rush in telecom, and it's reshaping an industry still
staggering from the collapse of its huge bubble of the late 1990s.
All over the industry, large and small players are working on ways to
send calls over the Internet or another data network, with potentially
big savings for consumers and companies alike. The technology, known as
VOIP (voice over Internet protocol), was introduced to the public in the
mid-1990s, but it wasn't ready to deliver many of the new efficiencies
and services that its backers promised.
Now many of the kinks have been worked out, and demand is booming for
the service. Sales of Internet phone systems to businesses are expected
to more than double this year, even as most capital spending on telecom
equipment remains stagnant. And the service is winning lots of fans in
the residential market, as cable companies offer Internet calling over
their own networks and a host of tiny start-ups offer low-cost, or even
This newfound success has sent shares in VOIP companies skyrocketing
-- and sounded a warning to established telecom operators. Internet phone
service is almost completely unregulated for now and requires little capital,
and the improvements in technology make even the smallest start-ups a
credible threat. So, some of the top names in telecom are testing their
own Internet phone offerings to make sure they don't get locked out of
the new market.
BellSouth Corp. is planning to deploy a form of the technology to sell
phone services, initially to businesses in the Southeast. Eventually BellSouth
may begin offering the service to households in its region and businesses
beyond its turf. Time Warner Cable, a unit of AOL Time Warner Inc., early
this year launched a VOIP service in Portland, Maine, that sells unlimited
local and domestic long-distance calling for $39.95 a month. AT&T
Corp. this month quietly began testing a consumer VOIP service in an undisclosed
Currently, VOIP accounts for less than 3% of global voice phone calls,
according to an AT&T estimate. But a number of trends are working
in its favor, say industry executives: the boom in demand; the evolution
of the technology, which permits companies to offer services beyond the
reach of conventional phones; and the spread of broadband connections,
which make VOIP much easier to use. Given all that, some industry executives
predict that VOIP will eventually replace the circuit-switch technology
that telephone networks have used for more than a century.
IP, the Internet programming language at the heart of the technology,
"is like Pac-Man," says Hossein Eslambolchi, president of AT&T
Labs, the research arm of AT&T. "Eventually, it will eat everything
in its way."
Many others in the telecom industry agree but caution that the transformation
could take more than a decade. The existing telephone behemoths will take
years to fully convert to the technology. Customers still face service
glitches as Internet phone services grow. And the service is beginning
to run into some regulatory hurdles.
Another downside: The VOIP service being offered by some upstarts and
most cable companies also has no independent power source, unlike conventional
phone lines. That means there would be no service during an electric-power
For their part, big phone companies such as Verizon Communications Inc.
and SBC Communications Inc. tend to play down the threat from upstarts,
even as they roll out their own versions of Internet calling. They agree
that VOIP eventually will dominate the industry's infrastructure but say
they have plenty of time to convert their networks and establish their
own VOIP operations.
Investors also are bullish on the technology, and have sent shares in
VOIP companies soaring. Denver-based SpectraLink Corp. has seen its shares
triple this year to over $21. Verso Technologies Inc., Atlanta, has risen
this year from below $1 a share to over $4, and Sonus Networks Inc., Westford,
Mass., has gone from under $2 to over $8 this year.
Traditional phone calls are made along circuits, dedicated paths between
callers. The circuits consist of networks of copper and fiber-optic wires
owned by telecom companies. They also own the circuit switches that interact
with billing systems, provide features like call waiting and caller ID
and set up the fixed paths over which calls travel.
Voice to Digits
Before VOIP, phone service could be sold only by businesses that owned
or bought access to the telephone companies' networks and switches. VOIP
bypasses part or all of that system entirely by converting voice to digits,
putting those digits in "packets" and then routing the packets
over the public Internet or a private network leased from a telecom company.
If the call is going to a regular phone, it has to be switched into the
traditional phone network. But it can avoid the regular network entirely
if it's going to another VOIP subscriber.
"It destroys the incumbent telephone-company business model,"
says David Isenberg , founder of Isen.com, an independent telecom-analysis
firm based in Cos Cob, Conn. A former Bell Labs researcher, he wrote a
widely read paper, "The Rise of the Stupid Network," in 1997
that predicted many of the current Internet-phone trends.