Phone Calling Over Internet Is Attracting More Interest

Phone calls over the Internet may finally be catching on. When the technique was first used in the mid-1990's, Internet telephone conversations were hailed as a way to make long-distance calls without paying toll charges. The most zealous advocates predicted that the conventional public telephone network would quickly become obsolete. That has yet to happen, of course.

Despite the money-saving potential, sending voice telephone calls over the Internet remains largely a niche service for technophiles and for people seeking cheaper international communications — like users of prepaid phone cards, who may not even realize that their discount calls are bypassing the regular phone network. Yet the technology is showing signs of gradually expanding to a broader audience, a step that could eventually mean wide-reaching changes in the telecommunications industry, if early experiments by individuals and businesses are any indication.

Terence Chan, an employee at a Seattle technology company, for example, uses a service called Free World Dialup to talk to his family in Hong Kong. Free World allows Mr. Chan and his relatives to use equipment that looks and sounds like regular telephones but enables users to call one another and pay no fees beyond the rates for their fast Internet connections.

"I was interested in Internet calling as a technological novelty," Mr. Chan said, "but what really got me into it was the fact that it is free." Among business users, meanwhile, Japanese companies appear to be leading a migration to Internet calling. Organizations like Shinsei Bank and Tokyo Gas have begun using it for internal communications and some external calls. A recent survey by the Mitsubishi Research Institute showed that more than 40 percent of Japanese companies planned to begin using Internet calling in the next few years.

Internet calling currently accounts for more than 10 percent of international calling traffic, with about 18 billion minutes worldwide, up from 9.9 billion minutes at the end of 2001, according to the research firm Telegeography.

"We expect a steady transition to Internet calling so that by 2010, nearly all calls will go over the Internet," said Tom Evslin, chief executive of ITXC, a company in Princeton, N.J., that is a leading carrier of Internet calls.

To be sure, few people in the telecommunications industry expect an overnight transition. Instead, analysts and industry executives foresee a gradual transition over several years, similar to the way people switched from black-and-white to color television.

A big factor is the billions of dollars that large local and long-distance carriers have invested in conventional network equipment. These companies, which still transmit the overwhelming majority of phone calls, will be reluctant to mothball their systems anytime soon.

Still, numerous companies on the margins and even closer to the center of the telecommunications industry are seeking to take business away from the dominant carriers by offering cheaper Internet-based services.

One of them is Mr. Chan's provider, Free World, a company based in Melville, N.Y. Free World gives its users five-digit telephone numbers that enable them to communicate using special Internet phones made by Cisco Systems, for which Free World users pay less than $300. If the company can reach its target of 50,000 users by September, it plans to start charging for add-on services like voice mail and conference calling.

Advances in technology and the use of faster network connections have alleviated many of the problems that plagued early forms of Internet calling, like noticeable delays between the time someone spoke a word and the time the person receiving the call heard it. The sound quality is now comparable to that of calls placed via the public telephone network. These improvements have benefited companies that transmit international calls over the Internet, providing the service to other companies that sell prepaid calling cards to the public. The callers and the people they call, who use regular telephones, typically cannot tell that the Internet is carrying all but the first and last few miles of their calls; the signals are routed through Internet gateways.

The big difference between calls that travel over the Internet and those that use the regular telephone network is the underlying routing technology. Although the public phone network has become highly computerized in recent decades, it is still in many ways the equivalent of stringing two cans together to allow sounds to travel from one point to another: each conversation requires a single dedicated circuit. The modern phone network's complexity lies in the way any two "cans" are able to be temporarily strung together by software that routes calls through a carefully designed system of thousands of switching locations. The Internet, on the other hand, uses a crazy-quilt network to send and receive information, whether it is in the form of voice calls, e-mail messages or video conferences.

In each case, sounds, text messages or images are digitally broken into tiny bits of information and disseminated over the network, using any number of routes before all the packets of bits are reassembled at the other end of the line.

Many network engineers say that if telephone networks were built from scratch today, they would almost certainly be Internet-based. The Net is believed to be more efficient compared with the dedicated circuits of conventional phone networks.

Executives at some of the largest telecommunications communications companies are planning to make Internet calling part of their business as they seek efficient ways to route some calling. But they expect the technology to catch on at a much slower pace.

"We have a very reliable telephone system that has worked well for many decades," said Eric Rabe, a spokesman for Verizon Communications, the nation's largest local telephone company. "We see an eventual movement away from the traditional system, but right now it's mainly early-adopter types."

As more calls are made through a mix of Internet and conventional methods, pricing is likely to become an issue. Calls over the conventional network — especially long-distance calls — have generally been priced on a per-minute basis, while billing for Internet connections is more typically a flat monthly fee. Either system could be changed, although the Bell companies and other giant carriers have an interest in maintaining the pricing for the conventional network.

In addition, governments in several developing countries, including Panama, Kenya and South Africa, have sought to limit the use of Internet calling out of concern that national carriers in those countries were losing revenue to Internet-based systems. In those countries and elsewhere, regulators could require that Internet calls be billed by the minute or taxed.

Within this country, a potentially major force in Internet telephony could be the cable television industry. Large cable companies are already providing telephone service, with about 2.1 million local voice customers as of June 2002, according to the National Cable and Telecommunications Association. Though it is still a relatively new business, that number is expected to grow as cable companies bundle local phone services with their offerings of fast Internet service and digital cable television. Other companies, mainly start-ups that have managed to survive the industry's recent turbulence, have their own strategies. One such firm is Vonage, a company in Edison, N.J., that offers flat-rate calling services over high-speed Internet connections.

Vonage customers can use a regular touch-tone telephone for a service plan that charges $40 a month for unlimited local and long-distance calling in the United States. Vonage subscribers use an adapter that lets them connect their phones to their high-speed Internet modems. Users also have access to low-cost international calling plans.

Despite the attention on consumer-focused services like Vonage's, some analysts say the real growth behind Internet calling will come from business customers. But in this country, that will require the continued growth of high-speed, or broadband, Internet services.

Tom Nolle, the president of the CIMI Corporation, a technology consulting firm in Voorhees, N.J., says broadband penetration needs to climb to about 20 percent of the population — from the current level of 10 percent — for Internet calling to begin to make sense to a large number of businesses. Once that happens, companies can start to use Internet calling to communicate between their own offices and customers and suppliers. Such a trend, of course, would raise the competitive pressure on large local phone companies like Verizon and SBC Communications, which so far have felt minimal impact from Internet telephony.

Another source of pressure on the phone companies could be the growing popularity of the form of wireless Internet access known as Wi-Fi. Several start-up companies mean to provide Internet calling services via Wi-Fi networks, using hand-held or laptop computers equipped with microphones and earpieces.

"There's no reason why companies can't use P.D.A.'s to give employees in the field a way to access their corporate telephone systems," said Raju Gulabani, the chief executive of TeleSym, a company based in Bellevue, Wash., that makes software for wireless Internet calling on hand-held personal digital assistants, or P.D.A.'s. Intel's communications fund is an investor in TeleSym.

As with any emerging technology, it is unlikely that all the new approaches to Internet telephony will take hold. But one thing is clear: Internet phone calls have emerged as one of the most creatively vibrant parts of the battered telecommunications industry. "There's been very little innovation in 125 years of the public telephone network," said Jeff Pulver, founder of Free World Dialup. "Anything that can be done to wrest influence from the large companies that have such control over the way we talk to each other is a step in the right direction."