Spokane is 250 miles east of Seattle, far enough to avoid the traffic jams but close enough to be caught in the orbit of the nearby technology center. So it shouldn't surprise anyone that this small city has started a revolution of its own. School officials ripped out the district's old phone network and, last fall, started using radically new Internet technology for all its communications. The Net system is saving the school district about $100,000 a year in telephone- and Internet-access fees. More important, it's doing wonders for the education process. One example: Students scattered throughout the district can listen in real time to a teacher giving a lesson over the Net--and ask questions through their computers if they have them. "The payoff has been unbelievable," says information technology manager Dennis Schweikhardt. "But the real value is that it has changed the way teachers teach."
Welcome to the dawn of the talking Internet. What has been mostly a medium for text, colorful graphics, and the occasional music clip, the Internet is beginning to be used for a dizzying array of voice communications. Web sites like Yahoo! Inc. and Excite@Home are letting Web surfers chat verbally with each other about everything from a stock's prospects in the turbulent tech market to the New York Knicks' prospects in the NBA playoffs. America Online Inc. just introduced a Web browser that lets people click on a button so that they can talk to friends over the Net. And you don't even need a computer: Companies like Net2Phone Inc. will route a call from your home phone over the Internet to another telephone, cutting your phone bill by as much as 90%.
Voice-on-the-Net is serious business, too. Companies around the globe are beginning to use new systems based on Net technology in place of their old phone networks--not only because they're cheaper but also because they can do so much more. In its New Jersey offices, brokerage giant Merrill Lynch & Co. is installing 6,500 Internet phones that will let employees have free conference calls over the Net and trade instant text messages at the same time. That's just the first step in the company's plan to convert its entire global network to let all 67,200 employees do the same. Compaq Computer Corp. is expected to launch a massive initiative within the next month that will let visitors to its Web site click on an icon to speak live to a company representative. And American Express Co. is using voice technology to combat fraud. When it suspects that someone is trying to use a stolen credit card online, an AmEx employee can zip a text message to the person and then start up a voice conversation over the Net. If the person can't answer certain questions, such as the cardholder's mother's maiden name, the transaction won't be processed. "We can actually use this technology to ask additional questions and go through a verification process," says Jeff Fleischman, vice-president of interactive services at American Express.
All this adds up to the biggest change to hit telecommunications since the invention of the telephone 124 years. Today's phone technology is basically a souped-up version of the 19th Century system. It converts sound into electrical waves and shoots it across copper wires and optical cables.
Internet technology is completely different. It turns sound, like the human voice, into digital form and breaks it into chunks of data for transmission. That allows many calls to share the same phone line. Voice-on-the-Net is cheaper, and it opens up the communications field to a flowering of innovation. While the old phone system was tightly controlled by a handful of companies, the new technology is being developed by a host of fast-moving companies in Silicon Valley and the rest of techdom. The outlook: Voice-on-the-Net, which accounted for less than 1% of global telecom traffic in 1999, is expected to surge to 17% by 2003 and more than 30% by 2005, according to U.S. Bancorp Piper Jaffray. "I think voice over [the Net] is an inevitable outcome of technology," says C. Michael Armstrong, the chairman and CEO of AT&T, which is investing billions in Internet telephony.
The move of voice traffic to the Internet will force wrenching change on established telecom players like AT&T. While they used to keep the same equipment for up to 30 years, they now have to replace some gear every 24 months or so in order to keep up with competitors that are buying the latest technology from the computer industry. To make matters worse, prices for their core telephone services are plunging as lower-cost alternatives emerge. To stay on top of the changes, AT&T agreed on Mar. 31 to lead a coalition that is investing $1.4 billion in Net2Phone, a leading provider of phone services over the Net. AT&T also is preparing to offer voice-on-the-Net service over its cable networks.
Even more vulnerable are overseas phone companies that have been living off international phone rates that are sky-high. For example, people in Afghanistan who use Net2Phone to call the U.S. pay $1.13 per minute compared with more than $5.50 per minute without the service. Not surprisingly, many phone companies have fought off voice-on-the-Net services. They were illegal in Japan until last year, and Telefonos de Mexico has been trying to shut down Net-based services offered by AT&T and British Telecommunications PLC.
RELIABILITY. The transition to Net technology won't be easy for corporations and other customers either. Spokane had to redo part of its $19 million project last summer because of technical glitches like strange pauses in conversations and scratchy music when callers were put on hold. Another big hurdle is reliability. Calls over the traditional system are completed on the first attempt 99.999% of the time, and even if the power goes out, the network continues to work. The Internet, or people's connections to the Net, fail all the time--and if the power goes out, so does a phone link to the Net.
Carriers are rushing to fix these problems. AT&T originally installed batteries in people's homes to make sure that its local telephone service would continue to work even when the power went out. However since AT&T would lose some control with that approach, it later decided to put power supplies for each neighborhood in its own facilities. Qwest Communications International Inc. and other carriers are investing in their own Internet equipment so they don't have to depend on the sometimes unreliable public Net.
Still, the sheer economic benefits of voice-on-the- Net keep the market growing. Geoequipos SRL, a mining equipment company based in Peru, slashed its international phone bill 90%, to $150 a month, by using a Net telephone service from an upstart called deltathree.com Inc. Parsons Brinckerhoff Inc., an engineering company in New York, has cut the cost of its conference calls in half, to $3,000 a month, by conducting them on the Net. And Merrill Lynch's new Net phones in New Jersey are expected to reduce its telecom bill by one-third, people familiar with the project say.
UP FROM WALKIE-TALKIES. Cost savings will pale in comparison to the innovation that lies ahead. Voice-on-the-Net will lead to profound changes in how we communicate. A company called Voyant Technologies Inc. in Westminster, Colo., plans to make its click-to-chat technology available for handheld Palms and other devices in about three months. That means you could make a Net phone call with your electronic organizer--and wouldn't need to carry around a cell phone. Tellme Networks in Mountain View, Calif., and other companies are developing voice-recognition technology that will allow people to navigate the Net from a phone by asking verbally for things like stock quotes or movie locations. And Evoke Inc. in Louisville, Colo., is working on software that will let people make cheap video calls over the Net. "I believe that our services will be as popular and pervasive as e-mail and the telephone," says Evoke CEO Paul A. Berberian. "We believe these tools will be used every single day in the corporate environment."
If that happens, the new voice services could have a powerful effect on electronic commerce. Right now, 80% of people who begin a transaction on the Web cancel it before it's completed. While market research on the topic is thin, that could be because those folks get confused, or they're worried about security. If they could speak live to a company representative, that completion rate would likely shoot up. "The fact that you can click on the button of a Web page and instantly talk to someone over the Internet will make people feel more comfortable about buying things online," says AmEx's Fleischman. Market researchers agree. "Companies that voice-enable their Web sites will achieve an immediate improvement in the number of sales that are completed--in the realm of 50%," says Charu Gupta, an analyst with Renaissance Strategy in San Francisco.
It's hard to believe that voice-on-the-Net didn't exist until five years ago. It began with a pioneering Israeli company called VocalTec Communications Ltd., which developed early commercial versions of the hardware and software for making calls on the Net. Users downloaded the software from the Web for a fee. Once installed on a PC with a speaker and a microphone, free calls could be placed to other similarly equipped computers around the world. But there were drawbacks: Both users had to be logged on to the Internet at the same time and the callers had to take turns pushing a button to talk, just as if they were using walkie-talkies. To make matters worse, the sound quality was terrible.
The big break occurred a few years later when VocalTec developed a device called a gateway that allowed people to make Internet calls with regular phones. The gateway serves as a bridge between the Internet and local phone networks around the world. It essentially allows callers to bypass the long-distance networks. That means you can call around the world for the price of a local call. Because the service was so much easier to use and the quality had improved substantially, upstart phone companies like Net2Phone began buying VocalTec's gateways and marketing the service aggressively. In some markets, such as South Korea, voice-on-the-Net accounts for 20% of international calls.
Internet telephony is becoming an extremely contentious issue among major phone companies. AT&T and British Telecom, through their Concert joint venture, have created a clearinghouse that finds the cheapest international route for other phone companies. Sometimes that's a traditional telephone cable, and, increasingly, it's an Internet-based network. "We have been using voice over [the Net] to carry traffic to countries such as Mexico, China, and Vietnam," says Cathy-Ann Martine, president of Concert international carrier services. In contrast, consider China. The country imprisoned Chen Zhui, 36, and Chen Yan, 30, last year after they launched a tiny discount phone service using Internet technology. The brothers were released on appeal, and now China has issued a limited number of licenses for voice-on-the- Net. Taiwan, Vietnam, and Singapore continue to limit use of the technology.
Although voice-on-the-Net technology was developed for discount phone service, it's now evolving in myriad ways. Here's an example. Back in February, Justin Ohrmundt, a project manager at the architecture firm Grund & Riesterer in Chicago, faced the task of inspecting all 30 buildings in Walpole Point, a condo development on the Windy City's North Side. A real estate firm called Prairie Management & Development Inc. had hired Ohrmundt's firm because it needed to know if it had budgeted enough money to fix up the property. No problem: Ohrmundt used his digital video camera to shoot a snapshot and record a brief voice clip about any problems. He then sent the digital photos and audio descriptions over the Net to a group of people at Prairie Management and his own firm. The job was done in one week instead of the usual three--and the clients could use the Net to see more accurately than ever before what problems they faced. "We're a small firm, but we can update our technology faster than larger firms," says Ohrmundt. "That helps us compete."
The Web also is doing wonders for communications within companies. Managers at the engineering firm Parsons Brinckerhoff used to gather once a year for an annual training session at company headquarters in New York. The trip has been replaced with 12 monthly conference calls on the Web. "The total cost is about $200, and that includes the cookies," says Stephanie Parson, the company's chief information officer. "But more important, we are communicating more often." And more effectively. During the conference calls, participants can send Parson instant text messages, which she can answer privately or share with the group. The conference software also lets the participants view PowerPoint slides as they talk to one another.
CLICK FOR HELP. Voice-on-the-Net is likely to be the biggest development in customer service since the invention of the 800 number. While Compaq Computer won't comment, people familiar with the company's plans say it will roll out the technology on its site within the next month. That will allow customers who press "click-to-talk" icons on Compaq Web pages to speak live with customer service agents. American Express is about to begin a 90-day trial of similar voice technology, from Lipstream Networks Inc., on its Web site. If the trial works, AmEx plans to integrate voice throughout its Internet operations.
There are a few big challenges for voice-on-the-Net before other companies follow suit. One major issue is that the medium is split by a series of currently incompatible technology standards. That means that someone using Yahoo for voice chat can't talk to another Web surfer who is using AOL's technology. The issue may get ironed out over the next year. AT&T'S investment in Net2Phone, which also counts AOL and Yahoo among its investors, is designed to make Net2Phone the industry standard for both voice and text instant messaging. Once a standard is clear, businesses can use voice-on-the-Net to communicate with many more people than previously possible.
That's hardly the only challenge for the talking Internet. Instant messaging's "presence" function, which announces whether that person is online, isn't that useful yet because many people are online all day, especially in office environments, even when they aren't sitting at their desk. Newer versions of instant messaging software are expected to correct this problem by the end of the year. What's more, security is poor, so that in some cases outsiders may be able to listen to private conversations. "It is vulnerable to security hacks," says Jeff Pulver, CEO of pulver.com, which publishes voice-on-the-Net research. Future generations of the software should become more secure.
Perhaps the biggest problem for voice-on-the-Net is that sound quality can be dreadful. In some cases, people can't even understand each other because of delays and interference. Carriers have been boosting quality in recent months by integrating their Internet telephony equipment with a high-quality data transmission standard called asynchronous transfer mode. In addition, some Net voice players, including Lipstream, are installing their own servers so their can improve the quality of their service.
During the next few years, these new voice technologies will find as many applications as there are users. Back in Spokane, the new network has allowed the school district to create a special class for hearing-impaired students, who use videoconferencing gear to work with teachers many miles away. "Yes, the network is faster, but that is not the point," Schweikhardt says. "It is allowing us to do things we could never do before." Alexander Graham Bell, who began his career tutoring deaf students, would have been pleased.