Seven years after Congress passed a landmark law restructuring the phone business, hope for the beleaguered telecommunications industry may lie less in federal regulation than in two fast-growing technologies: wireless computer networks and Internet telephony.
From behemoths such as AT&T; Corp. to start-ups such as TeleSym Inc., the industry is spending hundreds of millions of dollars with the intent of transforming the staid public phone system.
The more flexible computer-based system envisioned by engineers and executives could slice voice calls into digital packets and transmit them over existing communications networks along with e-mail, Web pages and other data.
"These two technologies ... will revolutionize telephone service [by] enabling consumers to have the ultimate freedom of choice about who will be their service provider," said Jeff Pulver, co-founder of Vonage Holdings Corp., a firm that offers flat-rate calling services over high-speed Internet connections.
At their best, the two technologies work together to create a consumer experience much like using a standard mobile phone -- except that the calls are a fraction of the cost and "voice over Internet Protocol" phones cannot hold signals while the user is moving. At their worst, they don't work at all.
Setting up the gear to do this now is markedly more involved than plugging a phone into a wall jack. Users need a high-speed Internet connection and a wireless network -- both of which are growing in popularity.
Because wireless networks and Internet telephony are based on established standards and relatively cheap computer equipment, widespread adoption of the two technologies would permit entrepreneurs to challenge the Bells and give customers a real choice in local phone service and high-speed Internet access.
Experts say it is unlikely the traditional phone network will be supplanted by a rival technology within the next decade. But they say wireless data networks and Internet telephony could carry as much as 30% of domestic voice traffic and more than 50% of international traffic within three to seven years.
"They really lower the barriers," said Kevin Werbach, a Philadelphia-based technology consultant who served as the Federal Communications Commission's counsel for new technology during the Clinton administration. "These technologies don't require that a company have billions of dollars in order to compete."
Some skeptics, however, argue that no business model exists for either wireless networks or Internet telephony. Neither technology has an established system for billing customers or ensuring quality service. In addition, the Internet telephone has been plagued by voice quality and security problems.
The stakes are high. Regional phone companies such as SBC Communications Inc. and long-distance providers such as Sprint Corp. are locked in a bitter battle over access to the Baby Bells' lines and customers. To spur competition in the industry, the Telecommunications Act of 1996 opened those lines to the Bells' competitors.
The Bells say the lease rates they are allowed to charge are too low and driving down their profits. Competitors fret that without access to the networks -- built with ratepayer money over several decades -- they would have to build their own competing systems, which would be prohibitively expensive.
The FCC is mulling over a proposal to overhaul the rules. On Tuesday, the Senate Commerce Committee is expected to grill FCC members on what has gone awry in the telecommunications industry over the last seven years.
Efforts to get around the Bells are perhaps best symbolized by TeleSym Inc., a Bellevue, Wash.-based start-up backed by computer chip giant Intel Corp. The company offers software that allows consumers with Pocket PCs and other hand-held computing devices to make wireless calls over the Internet, the technology known as voice over IP.
"Consumers have clearly communicated that mobility is important to them, going so far as to pay for two different [mobile] devices -- a cell phone and a PDA hooked to the Internet," said Joe Dodson, TeleSym's vice president of marketing. "With voice over IP, you can put that person on one piece of hardware and let him make calls over the Internet" at a much lower cost.
Although only about 10% of U.S. Internet users have used a computer to make a phone call, both local and long-distance companies have overhauled large parts of their networks to facilitate the transmission of voice traffic in a data form just like e-mail and Web pages.
Motivating the companies is the lower cost and greater efficiency of Internet telephony.
Ordinary phone calls require a dedicated electronic circuit between two people as well as a huge, refrigerator-sized $2-million switch to route the call. By contrast, voice over IP uses off-the-shelf computer and networking gear to send messages more efficiently.
Another benefit of the technology is that it can enable carriers to avoid millions of dollars in phone-connection fees because the calls are treated as unregulated data traffic instead of fee-based voice traffic.
The nation's local and long-distance phone networks currently hand traffic back and forth. Each time a call switches networks, the companies involved pay each other a fee. Those transmitting Internet traffic don't pay a fee.
Internet telephony has proved especially attractive in the international arena where relatively high dialing rates have long fueled a market for less costly alternatives. Internet calling accounts for more than 10% of international voice traffic, with about 18 billion minutes of call time used worldwide in 2002, up from 9.9 billion minutes at the end of 2001, according to research firm Telegeography. The vast majority of that time was used by the big telephone companies routing calls over cheaper fiber-optic networks.
IP telephony also is beginning to catch on domestically as engineers simplify equipment.
Cisco Systems Inc., which sells a $300 Internet phone that can be plugged into a computer network, has shipped more than 1 million IP telephones to customers. Overall, worldwide IP telephony equipment revenue is forecast to more than double over the next two years to $7.6 billion and reach $15 billion by 2007, according to IDC, a Framingham, Mass. research firm.
The rise of IP telephony benefits from the rise of wireless networks, which allow users to leave the tether of their computers.
A wireless standard known as 802.11b, or WiFi, uses the same unlicensed airwaves as household portable phones and has exploded in popularity as the technology has been incorporated into laptop notebooks, Palm Pilots and other portable devices.
WiFi access is available for free or a monthly fee in every state and at thousands of public places nationwide, including most Starbucks Corp. coffee houses. In the wings are even bigger deployments. Last month, for instance, IBM Corp., AT&T; and Intel announced they plan to set up a nationwide WiFi network in the 50 largest U.S. cities.
Sprint has a small investment in Santa Monica-based Boingo Wireless Inc., a start-up that offers consumers access to WiFi networks in 300 cities for a monthly fee of $24.95. Meanwhile, phone companies such as AT&T; as well as many cable operators are placing significant bets on Internet telephony.
"As a company, I think we are banking on" voice over IP, said Clayton Lockhart, vice president of network architecture for AT&T.; "It's something that we are really counting on."
Many frustrated consumers are signaling that they, too, may be ready for the new era.
According to a preliminary FCC analysis, about 1 million American households dumped their second phone lines in 2001. Most of those consumers, experts say, substituted wireless phones or broadband Internet access for their communications needs. The trend, they say, is likely to mushroom.
That has alarmed the local Bell phone companies that remain financially the strongest pillar of the telecom industry. Still, the Baby Bells are embracing voice over IP and to a lesser extent wireless technologies in the hopes they can exploit the lower costs while hanging on to their customers.
"With voice over IP, I only need to have one hosting center for the entire U.S. and I will have millions of different companies competing to offer me applications" for my customers, said Teresa Taylor, executive vice president for products and pricing at regional Bell phone company Qwest Communications International Inc. "It's an inevitable evolution to voice over IP, whether its us -- the local phone company -- or" some competitor.