Every day, when Shane Izaks picks up the phone in his Hong Kong office to call London or Los Angeles, he is stoking a revolution.
His calls, which travel over the Internet as bits of data, are cheap, clear and virtually untappable. The calls bypass traditional phone networks' tollgates and avoid government taxes, saving his company $7,700 a month. The government at first ignored it, then tried to stop it.
And now the big phone carriers are scrambling to catch up, as evidenced by last's week proposed merger of AT&T; Corp. with cable television system Tele-Communications Inc., a marriage that promises to send telephone calls across the Internet using cable TV wires.
"At first, we stood back and watched all the hype," said Izaks, the general manager for information systems at the Hong Kong & Shanghai Hotels group. "But the world is moving over to the Internet, and we are too. We wanted to find a way to push the envelope."
The ones doing the pushing were small companies such as Israel-based VocalTec Communications that found a way to beat high international telephone charges by sending voice over lines meant for data. Early conversations sounded as if they were being conducted with walkie-talkies and required expensive computer equipment. But just a year and a half later, better technology, combined with a network of private leased lines to hop over Internet bottlenecks, means conversations now are as clear and as simple as picking up the phone.
"It's an important step forward," said Margaret Hopkins, a principal consultant at Analysys in Britain. "No one argues that the industry will not move this way. It's just a matter of how fast." By her estimates, in five years, 25% of international calls will be made over the Internet, resulting in revenue of $7 billion for service providers. The flip side of that is even greater losses for telecoms--a clanging wake-up call for the big telephone companies that are heavily invested in the old circuit systems.
Redesigning the entire copper-wire and telephone-pole telecommunications system could cost billions. But companies such as MCI and Deutsche Telekom have started experimenting with Internet protocol (IP) systems, preferring to cannibalize their own voice traffic than have it eaten by upstart competitors. Sprint's announcement this month of a $2-billion conversion from the old telephone system to a data network is another bow to the digital age.
A normal voice call opens up an entire circuit reserved just for that call, and the circuit stays open until someone hangs up. But with IP telephony, special software can convert a voice to packets of data that can be sent over a phone line like e-mail or a fax and reassembled at the other end. The "packet switched" network that computers use can handle many data packets at the same time, making transmission cheaper.
Josh Howell, senior vice president of corporate marketing for Level 3 Communications, compares a call on an old circuit-switched network to a single car taking up an entire stretch of freeway for itself. The packet-switched networks can fill all the lanes of the freeway with hundreds of cars, trucks and motorcycles, all headed for different exits.
The small overseas start-ups, which had no stake in the old system, have been quick to implement the new technology. And as the giants awake, the tiny pioneers have been banding together to form competitive technologies and compatible networks--and now they have what the giants want: a low-cost global Web with integrated billing systems and services.
Australia-based OzEmail, for example, has assembled a constellation of franchisees that will handle one another's calls at cost, allowing users to avoid telephone companies' surcharges and host country taxes. That means they can offer calls at about half the average international rate and are a natural partner for a company such as Sprint, which has an extensive domestic network but little international access.
Tom Evslin, who last year founded ITXC Corp., or Internet Telephony Exchange Carrier, should know exactly what the possibilities are. He left his post as the vice president in charge of AT&T;'s WorldNet service to start servicing international Internet telephony networks.
The most likely stumbling block is regulation by worried governments. "Internet telephony is another factor forcing prices down," said Hopkins of Analysys. "It's exporting competition into countries where there wasn't any."
Indeed, Pakistan and India are trying to block IP telephony to protect national monopolies. In the U.S., a small surcharge subsidizes telephone service to remote areas, and governments are unhappy about losing the income. In April, the Federal Communications Commission decided to keep its hands off the Internet--for now.
But IP service providers say that even if they are treated like traditional telephone companies, they can still win through their more efficient technology and greater reach. OzEmail's Hong Kong franchise, MagicTel, pays the normal share of regulatory tariffs and still offers the lowest price in town. "We figured we'll do it the hard way first," said MagicTel founder Ryan Hendricks. "If we can succeed in a regulated environment, we're doing OK."
The IP providers are counting on making money through volume and added services, such as billing and settlement negotiation, and other information features.
Izaks, for example, uses MagicTel to talk to hotels in nearly 40 cities every day, halving his previous phone bill. But saving money is not the only reason he's using the Net. Soon, Izaks and a designer in Paris might be able to simultaneously view and change a floor plan while talking on the phone--all using the same line. In the near future, he might be able to archive his digitized phone calls or check his voicemail, e-mail and faxes all on one Web site.
Big telephone companies would do well to follow suit, says Elon Ganor, chief executive of VocalTec, which started the Internet telephony tidal wave with its software that allowed computer-to-computer phone calls and now has the greatest market share for IP service.
Deutsche Telekom recently bought a stake in VocalTec. AT&T; has a growing IP telephony business in Japan and is testing the U.S. appetite in San Francisco, Atlanta and Boston with its Connect 'N Save service that offers long-distance calls for 8.5 cents a minute.
Ganor is not afraid of the competition, though. "We were first. We have the maturity of product and the knowledge," he said. "Competitors are still playing catch-up."