Internet phones 'getting closer' Quality uneven, but big competitors acknowledge threat


Less than a year ago, the nation's long-distance companies saw the future, and it nearly scared them to death.

A new technology was emerging that threatened their landlocked core business. Internet telephones were on the horizon, and, on their face, they posed a powerful new threat: The Internet could connect long-distance telephone calls and could do it significantly cheaper than dialing directly to a given location.

For a time, the giant phone companies appeared quite mortal.

But in the short space of a year, those same companies are surprisingly calm. The general feeling, telecommunications analysts say, is that Internet telephone technologies are exciting but not ready for prime time.

"They are inevitable, but if you look at it from an incumbent's standpoint, I wouldn't move particularly fast," said David Goodtree, a telecommunications analyst with Boston-based Forrester Research. "You have to walk before you can run. The quality of Internet phones isn't there yet, so there is time before the big guys have to move."

With the threat of competition lessened, long-distance phone companies are no longer motivated to invest heavily in Internet phone technology. Instead, their attention is focused on cracking the lucrative $70 billion local phone market.

Which might be a great opportunity for several Silicon Valley companies active in the

growing Internet telephony business.

"This is right on the doorstep," said Brian Allain, director of Internet solutions for Lucent Technologies, an AT&T spinoff based in San Ramon, Calif. "The voice quality isn't as good, but it's getting closer and closer each day. It just takes time. The technology itself will continue to improve."

What's the big deal about sending a phone call over the Internet?


For decades, phone companies, both local and long distance, have enjoyed a virtual monopoly in their market. A person who wants to make a phone call is -- and has always been -- beholden to the rates, service and availability of whatever Pacific Bell, AT&T or its two main competitors have to offer.

Internet phones offer what amounts to the chance of a lifetime: to essentially bypass the network of AT&T -- or Sprint or MCI, for example -- and use the Internet to call anywhere in the world.

Here's how it works: Callers can use their regular phone line, fax or a personal computer equipped with a sound card, microphone and Internet modem connection, to make and receive calls.

Dollars cheaper

Instead of dialing a long-distance call, which first connects to a local network, then to a long-distance network and back to a local network on the other end of the call, users making Internet calls are only billed for the use of a local phone call because the remaining connection is routed through the Internet backbone instead of the long-distance network.

This way, the call -- even though it is traveling the same distance as a direct-dialed call -- is dollars cheaper, because it avoids all of the phone charges and taxes that come with making a long-distance call.

Such a competitive threat made phone companies nationwide take quick notice.

AT&T and Pacific Bell immediately called on state regulators to investigate whether the use of Internet phones violated any laws.

Others attacked the quality of the nascent technology publicly, then covered their flanks by quietly investing.

"It all depends on whether long-distance companies embrace the technologies," said Brian Beattie, group vice president and general manager of Nortel's Meridian Systems product line in Santa Clara, Calif. "They'll do fine if they want to respond to their subscribers and diversify themselves. If you're trying to give your customers what they want, it's an opportunity. But if you're a deer caught in the headlights, you should feel threatened."

Make no mistake about it: A threat does exist.

Manufacturers, though, say phone companies have the future in their own hands.

"We're seeing a lot of innovation. For anyone in the telephone business to ignore the phenomenon is a good example of sticking your head in the sand," said Tom Evslin, a former AT&T executive who recently resigned to head ITXC, an AT&T-backed Internet phone start-up based in New Jersey. "It sounds much like the cell phone industry 25 years ago."

But all is not necessarily well. Internet phones are in their infancy, and the price for such growing pains is poor to fair quality -- despite a recent billion-dollar Internet telephony partnership between San Jose, Calif., networking leader 3Com Corp. and electronics giant Siemens.

Broken signal

The first problem is with latency, the seconds-long delay when the speaker and receiver aren't in sync, and often the call breaks up. Latency problems exist mostly during international calls and cellular phone calls.

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