Phone Calls On The Net: Coming Over Loud And Almost Clear

Internet telephony is slowly improving in quality

With just a personal computer, an Internet connection, and some software, the long-distance telephone world can be your oyster--free. That's the promise of Internet telephony: Pay for a local call to hook up to the Net, then chat with your buddies and business partners in far-flung locales. There's just one drawback: The Net wasn't designed for continuous voice transmission, so those who use it have had to put up with half-second delays more reminiscent of low-tech walkie-talkies. "Voice over the Internet," concedes David House, chairman and CEO of Bay Networks Inc., a networking leader, "just hasn't worked very well."

But the troubled lines may soon be clearing. In the past couple of months, telecom giants have jumped into the nascent market, bringing along wads of cash to pour into research and development. In August, Deutsche Telekom paid $48 million for a 21% stake in pioneer VocalTec Communications Ltd., an Israel-based developer of Net telephony products. AT&T is backing New Jersey startup ITXC Corp., which is developing software for routing calls on the Net. Bell Atlantic, US West, and Microsoft, meanwhile, are pumping money into fledgling VDOnet Inc. And if WorldCom Inc. succeeds in its $30 billion bid for MCI Communications Corp., it could become the most aggressive of all in pushing Net telephony, given the pair's domination of the Internet backbone.

WAITING FOR PROFITS. That has sent the stocks of these pioneers skyward. The biggest winner may be VocalTec, which posted a $7.2 million loss on sales of $8.5 million in 1996, yet it has watched its stock price nearly triple, to $29, since July. NetSpeak, which makes Net telephony software called WebPhone, last year lost $2.8 million on sales of just $867,000--but its stock has doubled, to $20. "The promise of the market is pretty immense," says Eric Zimits, communications analyst at Hambrecht & Quist. Few analysts expect further significant stock gains, however, in part because most of the Internet telephony pioneers won't even hit profitability until next year.

This froth has been a while in coming. Net telephony first hit the World Wide Web two years ago--only to be quickly derided for poor voice quality and annoying delays. One big problem has been that data networks break speech into little packets so it's possible for some packets to arrive out of order or too late to be included in a conversation. Another issue is the lag time inherent in the Net. Speech packets have to travel through a dozen or more "routers"--which direct them toward their destination--and each router takes a split second to do its job.

But improvements are on the way. New software algorithms have cut voice delays over the Internet to about 300 milliseconds from as much as 600 earlier this year, says Jacob Davidson, chairman of Israel-based Delta Three Inc., which has been working on the problem. What's more, some companies are figuring out how to avoid portions of the public Internet by sending speech over private data networks--or intranets--that hook up to the Net. In fact, Networks Telephony Corp. plans to avoid the Internet entirely and use the private data network of Infonet Services Corp., owned mostly by foreign telephone companies, to offer international long-distance service. "We feel there's a tremendous market for our services," says Bill Perren, Networks Telephony's president.

Another key breakthrough came last year with the arrival of a "gateway" server from VocalTec. A gateway connects data networks--such as the Internet and corporate intranets--to the public telephone networks. That allows Internet calls from computer to phone or, with gateways on both ends, from phone to phone.

DEEP DISCOUNT. But crystal-clear connections will come at a price. Networks Telephony requires Internet service providers to buy a router to direct calls to its private network at a cost of $10,000 per site. A worldwide network could easily cost millions of dollars. Still, Perren, the company's president, estimates that he can undercut international telephone rates by 40% or more.

Big savings are triggering a rash of small companies to offer deep-discount long-distance service. Renegade phone companies, such as RSL Communications Ltd., named after owner and cosmetics heir Ronald S. Lauder, offer connections to Japan, for example, at 30 cents per minute, compared with 40 cents charged by traditional long-distance companies. Earlier this year, RSL bought 51% of Internet phone company Delta Three for $10 million. Other early entries in the Internet phone service business include IDT Corp. with its Net2Phone service, Internet service provider Concentric Networks, and Networks Telephony.

The giants aren't far behind. AT&T and MCI already are running trials. Cable companies, too, plan to provide Internet Protocol (IP) phone service as they build out their broadband networks and start offering speedy, premium-priced hookups to the Net. "It's a huge deal for us," says Leo T. Hindery, president of cable giant Tele-Communications Inc., which plans Internet service starting next year and phone service in 1999. "It eliminates local-access charges, it's crystal clear, [and] it's an extension and seamless part of the data service."

Such expectations are swelling predictions for Net telephony usage. Experts say consumers will jump at the new service, but the onslaught of traffic will likely come from businesses anxious to slash some of the $40 billion a year spent on phone bills. Net phone service in the U.S. is expected to rise from virtually nothing last year to $2 billion by 2004, or about 4% of the total long-distance calls, according to market researcher Forrester Research Inc. in Cambridge, Mass. "Internet telephony is moving beyond the propeller-head market," says Christopher Mines, a Forrester analyst.

What may also lure corporations is the promise of new ways for merging voice with video and data communications over the Web or a company's data network. "In the long run, it's not the cost savings that's going to boost the market," says Elon Ganor, chairman and CEO of VocalTec. "It's the multimedia capabilities it gives us and the smart call-management capabilities."

Deere & Co. is a believer. The huge agricultural equipment manufacturer thinks that the technology will improve communication internally and with customers and suppliers. For example, if a supplier ships a faulty part, a Deere employee can show the supplier the incorrect part and explain what needs to be changed--all over the Internet. "We want to collapse the time frame to make decisions and respond better to customers," says Carlo Pensyl, Deere's Internet technical project manager. Currently, Deere is in the process of testing Microsoft's NetMeeting, and Pensyl plans to recommend later this year that the technology be given to 23,000 employees.

The applications seem endless. Travel agents could use voice and video over the Net to discuss travel plans; Web merchants could use it to show merchandise and take orders. AT&T already offers a hybrid version of the technology. With its InterActive Answer service, customers at the Web sites of AT&T clients, such as Alamo Rent-A-Car Inc. and Outrigger Hotels Hawaii, can get an immediate call back on a standard phone line. Eventually, the callbacks could come over the Net. "You're really starting to see the power of marrying these applications," says Daniel Schulman, vice-president of strategy and local marketing in AT&T's consumer division. "It's the intersection of today's voice network and tomorrow's data network."

That's why many believe the future of Net telephony lies bundled with video and data communications. "It started off around free calling, but now it's moving toward value-added communications," says AT&T's Schulman. With that kind of progress, Net telephony isn't just for geeks anymore.

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