Business, Finance & Economics

Better than plain old telephone service?


SAN FRANCISCO — Make a phone call that crosses a national border and, without even knowing it, you're probably using a technology that is transforming the global telecommunications industry.

The technology, known as Voice-over-Internet-Protocol (VoIP), began in Israel in the mid-1990s and was popularized by startups like Skype. It chops conversation into thousands of digital data packets, sends these packets over the internet and reassembles the conversation at the other end — bypassing the traditional phone system and its per-minute charges.

“VoIP began as a much cheaper way to make international and long distance calls,” said analyst Ken Landoline of Synergy Research Group in Reno, Nevada.

Now it is now being quietly adopted by telecommunications carriers in Europe, Asia and North America. Analyst Jeff Pulver said VoIP as a technology has been more successful than Skype, the Scandinavian company that was acquired in 2005 by eBay, the online marketplace. EBay recently spun Skype back off again to compete more freely in the VoIP marketplace.

“Skype as a company hasn't done all that well, but VoIP has gotten a lot of traction in the telecom world,” said Pulver, who tracks the industry through his website, “The incumbent telecommunication carriers, especially in Europe and Asia, have embraced VoIP to make themselves more competitive.”

Pulver said the Israeli company VocalTec unveiled the first commercial VoIP system in 1995. Skype debuted in 2003 with VoIP software that enabled computer users to have conversations through their PCs, via the internet, essentially for free.

“Skype became very popular very quickly,” Pulver said. “In 2004 and 2005 it was threatening every major phone company.”

In 2005, eBay bought Skype for more than $2.6 billion, hoping to weave online conversation into its digital marketplace and thus spur more transactions. Pulver said the acquisition never delivered the benefits eBay expected and blunted Skype's momentum as an alternative to traditional phone carriers.

In September, eBay sold a controlling stake in Skype for nearly $2 billion to a group of outside investors that includes browser software pioneer Marc Andreessen. Whether the new ownership will revive Skype as a challenger to the telecom status quo remains to be seen.

Meanwhile, analysts say the major telecommunications firms have embraced VoIP as a way to lower their own costs of delivering long-distance voice traffic.

Analyst Stephane Teral with the market research firm Infonetics said telecommunications firms in Europe and Asia have been pushing VoIP all the way into their systems, using it not just for long-haul transport but also selling digital lines directly to consumers, in contrast to U.S. phone carriers that still typically offer old-fashioned analog lines, which essentially connect the caller and receiver over wires that are dedicated to their conversation, like a string stretched between two cups.

NTT in Japan has more than 7.3 million VoIP subscribers, and France Telecom has about 6.5 million, Teral said.

In the United States, cable companies are using VoIP to deliver the phone component of the bundled services they are selling to consumers, enabling them to compete with the telephone carriers. “Phone calls in my home office come through my cable provider's infrastructure along with my internet and television service,” Landoline said. “The telephone company does not enter my house.”

Silicon Valley technology forecaster Paul Saffo said the Skype spin off comes at a time when VoIP technology is approaching an inflection point.

“So far VoIP has just been cheaper,” Saffo said. “Now the voice quality is getting better. But what will really make VoIP take off is that it can add features that weren't possible with plain old telephone service.”

For instance, he said VoiIP makes it possible for players in online games to speak with one another, adding another dimension to their interactions.

“We're just starting to understand what VoIP can do that the old telephone system couldn't,'” Saffo said. “This is a technology that is moving into the mainstream.”

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