Publication Date: September 6, 1996

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Internet Telephony Has Broad Implications for Business

By Ken Shulman

For some, it is merely an intriguing idea, a way—in the words of one columnist—"to turn a $3,500 computer system into a $29 telephone without a ringer." For others, it is an innovation that will redefine the nature of online communications, expand the possibilities for businesses to exchange data, voice and video files. For most, it seems to offer companies the chance to slash their long-distance bills dramatically.

The era of Internet telephony is just beginning. But major players like Intel, IBM and MCI are investing in the new technology. And local telephone companies cringe at the sight of a burgeoning industry they fear may soon put them out of business.

Simply put, Internet telephony permits users to exploit the Internet system for both voice and data communication. With Internet telephony, users can simultaneously download software, hold a conversation, and set up conference calls on the Internet. The owner of a newly purchased computer could contact an online service technician, discuss the problems in his system, and upload the defective files without having to hang up the phone. Architects working in offices in Tokyo, New York and Sydney could examine and adapt the same blueprints in real time, and talk about their design options. All this while bypassing the local switching network and its hefty fees.

"It's true that up to now, the media has focused mainly on the potential savings that Internet telephony can offer," says Dr. Elon Ganor, CEO of VocalTec, Inc. in Northvale, N.J. A pioneer in Internet telephony, VocalTec shocked the telecommunications market last year with its release of "Internet Phone," a software package that allows users to place voice calls to similarly equipped computers over the Internet. "People are realizing that they can call their cousin in Australia for next to nothing. But for me, the most interesting part of Internet telephony is in its multimedia capability, in the possibility of combining voice, data and video transmission in the same call. We are talking about a superior form of communication."

Getting Past the Limitations

Nevertheless, the first wave of Internet telephony had some serious limits. The quality of the transmissions was only fair. And with Internet Phone and similar software products, both parties have to be online. But with the appearance of VocalTec's Internet Telephone Gateway and Sattel Communications Co.'s central office switch, Internet telephony has shifted into hyperdrive.

These devices, and others, allow users with standard telephones to place phone-to-phone voice calls through the Internet. At the gateway switch, the calls are transformed into packet data transmissions, then routed to another gateway switch in the destination city that transforms them back into analog transmissions and directs them to a standard telephone. The obvious advantage is that the person receiving the call does not have to be online. And the caller avoids local access charges and long-distance fees. In short, the existing technology will allow businesses to keep a line open from New York to London for little more than the cost of an Internet connection, after the equipment is in place.

"Forty percent of every dollar spent on long-distance charges goes to local access fees and tariffs," says Tony Squeglia, director of corporate communications at Sattel Communications Co. in Calabasas, Calif. "With our central office switch, a company can bypass the local network. The telecom revolution has just begun. In a way, the situation is like that of the 1980s, with the deregulation of the phone market."

The Sattel hardware runs between $400,000 and $4 million, and is marketed principally to telecommunications companies and Internet service providers. In comparison, the VocalTec Internet Gateway, marketed through value-added retailers, is designed for smaller businesses and sells for $3,995.

Pinning Down the Savings

For businesses, the potential savings offered by Internet telephony appear significant. Large businesses with substantial international phone traffic could set up gateway switches between key cities, diverting the majority of their telephone calls to the Internet and away from long-distance carriers and local public switched telephone networks (PSTN). Banks could maintain open lines between foreign branches and affiliates.

Yet the possibility of inexpensive voice and multimedia communication may not necessarily lead to bottom-line savings. "We have seen the price of long-distance communications drop considerably over the past 10 years," says Mike Miller, district manager for media relations at AT&T's Worldnet headquarters in Bridgewater, N.J. "And we have also seen that as the price goes down, the number and length of calls goes up proportionally."

Even VocalTec's Ganor, who has everything to gain by touting the economic advantages of his product, is reluctant to promise savings.

"We have a saying in Israel that you can't say how much it will cost to make a suit for an orphan," says Ganor, a physician born and trained in Tel Aviv. "How tall is the boy? Is he big or small? The same thing is true saving money with Internet telephony. Are we talking about General Electric, or a hardware store in Trenton? You have to know what kind of company you are dealing with first. A lot of people are looking at this like it is a free lunch. It isn't. Eventually we will see some sort of per-usage billing with Internet telephony. There will be a business model. We just don't know what it is yet."

Ken Shulman writes from Cambridge, Mass.

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Related article - For Telcos, It's Another Layer of Competition

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