AT&T Corp. says it expects to have 1 million voice over Internet customers by the end of next year, while cable TV giant Comcast Corp. has said it anticipates offering the service to all its customers by the end of 2006.
A flurry of recent announcements by telecom companies paint the hot technology as the industry's future.
So should consumers ditch their traditional land lines now and opt for the cheaper new service? Maybe not yet.
Voice over Internet may be shaking the foundations of telecommunications, but it's hardly mature, and its regulatory future remains uncertain.
"If you were to look at it in 10 to 15 years time, everyone will be using Voice over Internet protocol," said Mark Main, senior analyst at Ovum, a British consulting firm. But getting there "will be quite varied, quite torturous and not at all clean."
VoIP opens up new features
Voice over Internet Protocol (VoIP) uses technology that packages voice calls as data and sends them over broadband connections.
The technique is less expensive because it avoids some access charges inherent in the traditional phone network, and opens up new features, like Web-based management of voice mail. Such advantages have prompted British Telecommunications PLC to plan on converting its entire network to Internet Protocol technology by 2008.
But some obstacles may delay VoIP's status as a popular consumer phone service:
- People have to know it exists. A June 24 study by the Pew Internet and American Life project found only 27 percent of U.S. online users have heard of VoIP service; 4 million are considering getting it at home.
- To get VoIP service, you need a broadband connection.
Even AT&T, which seems to be hoping VoIP will energize its shrinking business, said last week when it introduced the service in 10 states that VoIP "is not a complete substitute for traditional telephone service because it does not serve the needs of millions of Americans who cannot obtain or afford the high-speed Internet connection required."
Reliability issues
TNS Telecoms estimates that only 18.1 percent of consumers in those 10 states have broadband. And AT&T's VoIP service isn't open to everyone in those states, only residents of certain cities.
- Service is only as good as your broadband connection. If your network hiccups while sending a document or receiving a big movie file, it means a delay that most people would ignore or not even notice. But delays on phone calls are harder to tolerate.
"VoIP probably wouldn't have done real well when the Ken Starr report came out," and data networks were swamped, said Farooq Hussain, a principal at Network Conceptions, a telecom consulting firm.
Such reliability issues have led Carnegie Mellon University to wait to introduce VoIP on campus until it upgrades its network over the next three years, said Joel Smith, the university's chief information officer.
Network problems are more complicated for consumers because they're often buying broadband from one company and VoIP from another.
Regional Bell companies, such as Verizon Communications Inc., are the primary sellers of DSL broadband service, while their competitors in the long-distance and cable TV businesses are the primary sellers of VoIP.
"If you are providing phone services on someone else's broadband access network you have no control over the quality of service," Main said.
That said, some VoIP carriers have struck agreements with broadband providers. A good agreement can mean your call travels only on one broadband network.
A bad agreement, or no agreement, means your call could get switched from network to network, which can hurt quality. "It's like hopping on the Acela train versus switching trains four times," said Andy Abramson of Del Mar, Calif., who owns an advertising firm and runs a consumer VoIP Web journal, or blog.
Most states want regulations, taxes
- The prices, which start at $19.99 a month, are "competitive, not breathtaking," Main said.
The standard price for VoIP packages from AT&T and Cablevision Systems Corp. is $34.99 a month for unlimited local and long-distance calling, voice mail and call forwarding, but that doesn't include a broadband connection, which generally costs at least $30 a month. Verizon's local and long-distance packages for traditional calling range from $49.95 to $64.95 a month.
- A lack of regulation, and taxes, are a factor in keeping prices down. That may not last forever.
The Federal Communications Commission is considering whether to treat VoIP as a taxable telecom service or an untaxed data service. Beyond that, "half the states in the country are looking at regulating and taxing VoIP," said Gregory Rosston, deputy director of the Stanford Institute for Economic Policy Research.
If the service does gain a following, taxes on it might increase. "As cell phones have grown, the taxes on wireless have gotten much, much larger," Rosston noted.
- Voice over Internet service depends on the regular power grid, so if that goes, you have no phone. The traditional phone network has its own power and generally works even in blackouts.
The industry has already tackled some of VoIP's problems, such as connecting calls to 911 dispatchers.
Still, some investors are hanging back.
In one recent report, Banc of America Securities analyst David Barden noted: "This profits-are-huge, the-market's-exploding, the-opportunity-is-ripe-for-picking mantra seems eerily reminiscent of past disappointments."