Phone Firms Answer Call of Internet

The telecommunications industry didn’t seem all that impressed in 1995 when a small New Jersey start-up called VocalTec Communications Inc. developed a way to send ordinary telephone calls over the Internet.

Now, phone companies nationwide are heralding Internet telephony as the technology that could kick-start competition and pull the $400-billion telecommunications business out of its years-long slump.

Long-distance giant AT&T; Corp. and Time Warner Inc., the nation’s second-largest cable operator, this week announced plans to expand their efforts to treat phone calls like e-mail messages and send them using what’s known as voice over Internet protocol.

“Originally people thought voice over IP was interesting but sort of looked at it like a toy,” said Daniel Berninger, an independent technology analyst in Washington who was the director of project management at VocalTec. “But now it’s getting a lot of traction.”

The appeal stems from the fact that Internet phone calls largely circumvent the public phone network, using the unregulated data pipes of the Internet instead. Voice-over-IP technology chops conversations into packets of data and dispatches them like e-mail. Before they reach their destination, the data are reassembled into speech.

Most average phone users can’t hear a difference between a call routed over the Internet and one sent over the regular phone network. In fact, some phone companies already route some traffic with voice over IP.

Such calls don’t incur the access fee that local phone companies charge for routing traditional voice calls to their final destination.

The fees -- about 1 1/2 cents a minute for long-distance calls -- cost carriers about $25 billion a year. The Federal Communications Commission has been reluctant to impose them on Internet calls for fear of stifling innovation.

Although only a tiny fraction of calls today are placed with voice over IP, the potential savings are too tempting to pass up. Firms such as SBC Communications Inc., California’s dominant local phone carrier, have watched sales and profit slide amid increased competition, and a glut of network capacity has driven down retail prices.

This week’s announcements were aimed more at Wall Street than Main Street, even though the promise of voice over IP is lower phone bills. Carriers are eager to show investors that they are focused on cutting costs.

Originally, the technology was dismissed as cumbersome because a microphone, speakers, a personal computer and special software were required to complete a call. Then Cisco Systems Inc. introduced special Internet phones that could simply be plugged in.

All that’s required these days for a household to use voice over IP is a high-speed Internet connection, such as a cable modem. Regular phones can plug into the connection with a special adapter provided by the carrier. Calls can be placed to any number, and the recipient doesn’t need any special equipment.

In addition to phone companies using the technology to lower costs, upstarts such as Vonage Holdings Corp. and cable companies are exploiting Internet telephony to grab customers from the Baby Bell companies such as SBC, Verizon Communications Inc. and BellSouth Corp.

Cox Communications Inc. offers Internet telephony to residential customers in 14 Orange County cities. Time Warner Cable’s deal with Sprint Corp. and WorldCom Inc.’s MCI unit will bring the service to its customers nationwide over the next year.

The Bells are fighting back. On Wednesday, Qwest Communications International Inc., the fourth-largest local phone company, began offering Internet telephony in Minneapolis-St. Paul. SBC has said it plans to roll out voice over IP to business customers over the next year.

Despite the financial appeal of Internet telephony, experts say fewer than 200,000 Americans use the Internet as their primary phone line. And although experts forecast strong growth in coming years, the biggest boost, they say, will come from business users, many of whom transmit Internet calls over corporate data networks rather than the public Internet for security reasons.

Still, local phone companies are not happy about the trend. They contend that their network is used just as much for an Internet phone call as for a traditional one.

“Without the copper lines coming into the house, the whole Internet doesn’t exist,” said Jeffrey J. Prosser, chairman of Innovative Communication Corp., a West Palm Beach, Fla., carrier that provides local phone service in the Caribbean.

He acknowledged, however, that with giants such as AT&T; and Time Warner adopting the technology, “that’s going to escalate usage. If that happens, there’s going to be a significant impact eventually.”