ILECs answer VoIP phone threats

FRAMINGHAM (10/10/2003) - Incumbent long-distance carriers insist they are not sitting idle as fledgling voice-over-Internet Protocol (VoIP) service providers skim voice minutes - and revenue - from their networks.

Skype Ltd. is only the latest broadband VoIP company to create a buzz by offering a free alternative to traditional telephone services. The company says about 1 million people have downloaded its peer-to-peer software that lets users call other Skype users without cost.

And Skype is not the only new game in town. Broadband VoIP service providers such as Vonage Holdings Corp. and 8x8 Inc. could be bigger threats to AT&T, MCI and Sprint. The heavyweights for years have watched voice-service revenue drop even without the VoIP competitors, which last week were encouraged by a Minnesota court ruling that could lessen regulatory burdens on them.

AT&T and MCI companies are paying close attention to Vonage.

They do not seem as concerned about Skype, which requires users to download software and does not support connectivity to the public switched telephone network (PSTN).

"Everyone is watching Vonage," says Tom Valovic, director of Internet Protocol telephony at IDC. "It has that disruptive potential that has been talked about with VoIP for many years."

Last month, Vonage announced that it had installed 50,000 access lines. The compsny offers unlimited long-distance and local calling for US$35 per month. The attraction is that customers still can use their standard telephone, although they are required to install a device that connects to a RJ-45 telephone jack. Users can call anyone anywhere in the world.

Even though its own traditional voice revenues could be in jeopardy, AT&T sees the value of a broadband VoIP service. The telecom giant has been testing a broadband voice service with employees. And while MCI wouldn't say if it is readying a similar offering, the carrier is taking notice. So far, Sprint is mute on the subject.

While some of the incumbents are sharpening their broadband voice strategies, their competitors are proliferating.

Skype is the brainchild of the people who developed Kazaa, which in addition to being a popular file-swapping system has turned into a major security and bandwidth headache for network administrators. It's not clear whether Skype presents similar issues, but one thing is certain: A lot of people are downloading the software, and it's sending traffic via Internet that would have otherwise traveled over the PSTN.

Another company in the same genre as Vonage is 8x8, which offers its Packet8 broadband VoIP service to consumers and small businesses. Packet8 service starts at $20 per month for unlimited calling.

Besides the fact that the services let users lower their monthly telephone expenses, these packages are truly flat-rate. When AT&T, SBC or Verizon offers a flat-rate package, users see a handful of service fees related to state and federal regulations on their monthly invoice. Until recently, Vonage and 8x8 didn't have to worry about these regulations.

California, Minnesota and Wisconsin are trying to regulate VoIP service providers as traditional voice carriers. But the VoIP side won one battle in Minnesota last week when a federal court put an end to the state's efforts to regulate Vonage as a carrier offering voice over a circuit switched network.

These VoIP services are more successful than previous VoIP incarnations because they let users call anyone on the PSTN, While all Vonage and 8x8 voice calls are initiated over an IP connection, the vast majority are terminated over the PSTN, IDC's Valovic says.

This might be just one reason why incumbents are taking a closer look at these alternative service offerings.

AT&T says it is testing a broadband VoIP service that it might introduce to consumers. The carrier says its offering is not in response to companies such as Skype or Vonage, but rather is designed to offer customers more flexibility.

"We have our own game plan," says Joe Aibinder, director of AT&T voice-over-Internet services.

AT&T just finished an employee trial for a consumer voice service that runs over an IP broadband connection. Now the carrier is setting up an external trial with residential customers.

"We're putting a fair amount of energy into it . . . . We're taking it very seriously," Aibinder says.

"It's not just about [plain old telephone service], but the potential to support new features," he says. AT&T's plan is not to simply introduce a service that could cost less than the company's traditional local and long-distance voice packages. Instead, AT&T plans to bundle features such as personal voice conferencing that aren't available with plain old telephone service.

"Vonage is a vendor that a lot of people have noticed, including us," Aibinder says. "But we have our own objectives. Everyone needs to find alternative service opportunities."

Although Sprint declined to comment on the topic, MCI also is looking at the broadband VoIP market.

"I don't want to take anything away from the Vonage folks; it's a really good service. But we want to offer our customers a reliable service that works," says Vinton Cerf, long-time Internet activist and chief scientist at MCI.

Broadband VoIP presents a host of options that traditional telephony does not, he says. For example, customers will be able to use tools similar to AOL Instant Messenger to set up and tear down calls, he says.

"There is a lot of interest on the consumer side, but the question is whether all parts are there for literally a mass-market service," Cerf says. "We want to do due diligence to understand all of the service requirements. We need to be sure [quality of service] comes out on top right from the start."

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