Internet telephone controversy brews US, overseas carriers disagree on the impact of Internet telephony on conventional telephone service By Elinor Mills

May  1996

Despite its promise of cheap long-distance phone calls, Internet telephony has quality, bandwidth and interoperability hurdles to overcome before people stop dialing and start logging on to converse with each other. Nonetheless, confident software vendors have announced a stream of products since the beginning of the year. Meanwhile, a group of small telecommunications companies in the US is so worried about the impact on their future revenues that they have asked the US Federal Communications Commission (FCC) to step in and regulate Internet telephony.

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Internet telephony isn't on the radar screen yet in countries with less-developed telecommunications infrastructures where many people can't get regular phone lines, let alone Internet access. But the potential cost savings is attractive to companies, particularly multinational ones, that operate in countries where long-distance calls are pricier than in the US. Internet telephony allows people to make long-distance calls through their PCs over the Internet for the cost of connection time.

"What we're seeing is interest in international telephone calling because the PTTs are priced so high in Europe and Japan," said Gary Schultz, principal analyst at the Multimedia Research Group in Sunnyvale, CA.

Even so, telecom providers and others in Europe say mainstream use of voice on the Internet is so far off that it's premature to worry about its implications.

For instance, representatives from both the European Commission (EC) and British Telecom (BT) said that ongoing deregulation of the telecommunications sector in the European Union (EU), which will end monopolies in 1998, will result in tariff reductions and lower costs for users, thus reducing the appeal of Internet telephony.

"Obviously it is of some concern, but there are built-in limits to any massive extension in the EU, notably the fact that any intense use of voice communications would lead to the collapse of the Internet," said one EC official who asked not to be identified.

BT officials shared that view, saying that as a result, "the question of voice communications over the Internet is not yet a major issue," said Larry Stone, head of regulatory affairs for BT in Brussels.

Hello? Hello? Compatibility a problem
Hardware requirements could be the first obstacle for users who need a computer with a sound board, microphone and speaker, as well as Internet access.

"Our company's standard PC configurations don't include a sound card, so [Internet telephony applications] don't have much merit to us," said Alan Merriam, a systems engineer at Lockheed Missiles & Space Company in Sunnyvale, CA.

Other impediments are that both parties need to be using the same telephony software, as well as know each other's Internet Protocol (IP) address and coordinate on when they will both be logged on to make the connection. Users who get that far often complain about noise interference and lags that make for muddled conversations.

"Right now it's not going anywhere. There are a couple of essential problems, including [the fact that] nobody's product can talk to anyone else's and you have to have the same software and be expecting the call," said Nate Zelnick, an analyst at Meckler Media in Westport, CT. In addition, he said, "quality is not even close to being up to snuff, although that hasn't really held up anything else on the Internet."

These limitations have relegated the technology to cost-conscious individuals who have time on their hands, such as college students.

"A real live business user would find this inconvenient," said Stan Lepeak, an analyst at the Meta Group research firm in Stamford, Connecticut. "It's more geared toward people really looking to save costs or people looking to use it for the novelty effect."

Vendors line up in more ways than one
The pessimism rife among analysts isn't shared by US vendors or telecommunications carriers, though.

A slew of Internet phone-related announcements have cropped up over the last few months. They include NetSpeak Corp.'s WebPhone; VocalTec Ltd.'s Internet Phone 4.0; Advanced Micro Devices Inc.'s bundling Quarterdeck Corp.'s WebTalk with its multimedia modem chip set; CompuServe Inc.'s making VocalTec's Internet Phone software available to its customers; Netcom On-Line Communication Services Inc.'s plan to offer Internet phone calls; and IBM's plans to preload Thinkpads and Aptivas with Internet telephony software. (See the sidebar for more product information.)

Even browser powerhouse Netscape Communications Corp. executives see PCs replacing telephones in the future. Netscape is buying a stake in Voxware Inc., maker of TeleVox phone software, and acquiring InSoft Inc., which makes Cool Talk phone software that will be bundled with Netscape's Navigator 3.0, due in June, officials said.

In response, the America's Carriers Telecommunication Association (ACTA) filed a petition in March with the FCC asking the federal agency to ban the sale of software and hardware that enables people to make long-distance calls over the Internet and to regulate voice traffic over the global network as it does the use of public telephone networks. ACTA represents more than 130 providers who buy network access from larger carriers such as AT&T and resell it primarily to small business users.

Citing unfair competition, ACTA says Internet phone vendors are being allowed to misuse the publicly subsidized telephone infrastructure for which long-distance carriers are taxed. This will not only cut into their revenues, but will cause even more congestion on the already overburdened Internet and will eventually impact regular telephone service, ACTA claims.

"It's unfair competition because we've got these costs to bear providing our services and the Internet boys don't contribute a dime toward that stuff," said Charles Helein, general counsel for ACTA.

"We didn't say regulate the Internet. We said stop the abuse of the Internet," he said. "To the extent that we take common voice service off the Internet we're freeing up capacity to do things [users] really want to do with it.... People already are having the ability to use the Internet affected regardless of voice traffic."

The ACTA petition estimates that the average long-distance phone call comes to 22 cents per minute, while the average Internet call costs 3.3 cents per minute. Meanwhile, the average phone call lasts three minutes, while the average connect time for Internet users is 18 minutes, Helein pointed out.

"That's six times the capacity demand that regular phone service takes, and again this is not a free system or network," he said.

Opposition to ACTA was swift, mostly coming from the Voice on the Net (VON) Coalition, which has a server in Great Neck, NY, but whose executives are scattered.

ACTA's petition is a desperate attempt to maintain its revenue stream, said Sandy Combs, director of the VON Coalition. The FCC doesn't have jurisdiction over the Internet, he added.

The FCC also doesn't have the authority to regulate software, noted Neal Friedman, a lawyer at Pepper & Corazzini law firm in Washington, D.C. "I don't know how you're going to determine whether a packet contains graphics, data or voice" without intercepting it and looking at it and officials can't intercept every transmission, he said.

In addition, the US government can't regulate activities outside the US, said Patrick Hurley, an associate at TeleChoice Inc., a consultancy in Verona, NJ. That leaves companies such as Israel-based VocalTec free to do as they please, he said.

AT&T and MCI Communications Corp. were conspicuously absent from the debate. MCI remains uncommitted, but AT&T is hedging its bets with the Internet crowd.

"We don't have a position on this," said Allen Clark, Internet spokesman for MCI. "There are so many unknowns in the equation that for MCI it's very difficult to have a position until we know more."

Vint Cerf, former Internet Society president who now serves as vice president of data architecture at MCI, was more outspoken on the issue. "ACTA says voice is voice, but our response to ACTA is it's all data packets requiring service. We don't necessarily have to bear the burden of previous regulatory models," Cerf said.

The FCC doesn't "know what they're regulating anymore," he said, adding that Internet traffic can be transmitted on cable, broadcast satellite, radio or broadcast TV.

AT&T, meanwhile, takes a position "that's really diametrically opposed to ACTA's," said Mike Miller, district media relations manager for AT&T. "We feel that the interests of our customers, as well as those of the telecom and computing industries, are best served by an open and unregulated approach to the Internet."

The schizophrenia on the part of the large US telecom providers can be explained by the dual role they are serving. While AT&T and MCI are making money by providing long-distance phone service, they also are players in the Internet arena who offer network capacity and who stand to gain from providing new Internet services such as telephony. Although voice over the Internet might cut into their long-distance profits, MCI benefits from increased network traffic overall, said MCI's Clark. "It's probably even more of a strange case because it's putting money from one pocket into another pocket."

Internet telephony vendors, meanwhile, were quick to defend their right to develop this new market. One week after the ACTA petition was filed, Microsoft Corp. and Intel Corp. led a group of more than 100 companies in announcing plans to support industry standards for voice over the Internet to relieve some of the interoperability headaches.

Standards may supply relief
The vendors said they will deliver a new common implementation later this year based on International Telecommunications Union (ITU) standards and Internet Engineering Task Force (IETF) specifications, including the T.120 standard for data conferencing, H.323 standard for audio and video conferencing, Real-Time Protocol (RTP) for packet stream management and Resource Reservation Protocol (RSVP) for reserving bandwidth.

"The next step forward on the Internet is real-time applications," said Christian Huitema, director of research at the French government's INRIA (Institut National de Recherche en Informatique et en Automatique), which is conducting research for the World Wide Web Consortium. "And RTP will pave the way to those applications, just as HTTP (Hypertext Transfer Protocol) paved the way to widespread use of the Web."

A Microsoft executive acknowledged that bandwidth requirements intimidate not only certain telecom providers, but corporations as well.

"You'd be hard-pressed to find an MIS director or LAN administrator that was truly anxious to put voice over the corporate intranet now," said Blake Irving, group manager for Microsoft's Internet platform and tools division. "LANs are usually used for mission-critical information such as e-mail, and using a 10M-bit Ethernet as a standard method for holding phone calls would bring a Fortune 100 company's network to its knees pretty quickly."

On the positive side, the increasing demand will result in a quicker migration to higher bandwidth, such as 100M-bit Ethernet or ATM, Irving added.

Whistling past the graveyard?
An executive at Siemens AG, based in Munich, expects demand to drive capacity up with ISDN and ATM. Also, initial applications, such as calling a company to order something advertised on its Web site, are likely to require minimal bandwidth in the short term, said Paul Carroll, vice president of marketing for Siemens AG's Internet business unit in Boca Raton, FL.

In Europe, telecommunications carriers are generally ignoring threats to their revenues posed by Internet telephony, at least for now.

"The phenomenon has not caught on in Italy yet, so it is not a problem," said a spokesman for Telecom Italia. "If the practice does catch on it will be a problem for all telephone operators in Italy. Once deregulation takes effect it will be of concern to other companies as well."

"There are massive constraints when it comes to trying to make calls on the Internet, and Internet use outside of research centers and universities is very low in France," a France Telecom spokesman said.

In Germany, a spokesman for the Federal Ministry of Post and Telecommunications said it is illegal for anyone to offer Internet telephony services until Deutsche Telekom AG's (DT's) monopoly ends Jan. 1, 1998. Thereafter, companies will have to apply for a license and some already are sending in written requests, he said.

Voice over the Internet necessitates infrastructure upgrades, said a DT spokesman in Bonn. To turn the Internet into an alternative infrastructure for voice communications will require massive investments in order to support the numbers of users required to make commercial services profitable, said Jurgen Homeyer.

"Just picture, you would shift 10 percent of all calls made in Germany to the Internet?" he postulated. "You can imagine what would happen. The 'Net couldn't handle it, so you need to upgrade the infrastructure."

Only Telecom Finland welcomed the emerging convergence and said it is developing an Internet voice telephony tool that will be available in a year.

The killer app
Vendors and analysts concur that voice communication alone is not compelling enough as an application to merit a wholesale switch from phones to PCs.

"Audio over the Internet by itself is not much more valuable than doing audio over the phone," Microsoft's Irving said. "What makes audio appealing is that you can do more than audio in a connected call.

"I see Web-casting and audio-casting on the Internet, and one-to-many broadcasting over the Internet being more interesting," said Schultz, the Multimedia Research Group analyst. "I think those are the applications where you'll see some breakthroughs."

Other uses could be for whiteboarding, customer service and help desks, home banking, receiving voice-mail messages remotely and leaving voice messages for others, according to John Mears, director of solutions management in IBM's Internet division.

"We don't see this as supplanting the plain old telephone anytime soon," he said. "It makes the most sense as a device when it's integrated with things you are already doing on the Web.

Bandwidth and interoperability aside, the biggest barrier to Internet telephony isn't technology or economics, said AT&T's Miller. "It's really the installed base. Most people in the US have a telephone. Most people in the US do not have a PC."

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To make long distance telephone calls over the Internet users need a computer with a sound card, speaker and microphone or headset, as well as the same telephony software as the person they are calling and in most cases, the IP (Internet Protocol) address of that person.

In the future, calls will be able to be sent over the Internet to a local PBX so that only a telephone will be required on the receiving end, according to industry research firm International Data Corp.

Some of the products on the market offer shared whiteboard capabilities, as well as video conferencing, file transfer, World Wide Web integration, call blocking, call forwarding, caller ID and voice messaging functions. Most sell for about $50.

They include:

• Internet Phone, from VocalTec based in Herzliya, Israel, with a subsidiary in Northvale, NJ, at (201) 768-9400.

• WebTalk, from Quarterdeck based in Marina Del Rey, CA at (310) 309-3700 or (800) 683-6696.

• WebPhone, from NetSpeak based in Boca Raton, FL, at (407) 997-4001.

• Digiphone, from Camelot Corp., based in Dallas at (214) 733-3005.

• PGPFone, free from Massachusetts Institute of Technology. Another PGPFone server.

About the author
Elinor Mills writes for the IDG News Service at its San Mateo bureau. Also contributing to this report were Paris Bureau Chief Marc Ferranti and IDG News Service Correspondents Sari Kalin and Rebecca Sykes in Boston, Torsten Busse in Munich, Elizabeth de Bony in Brussels, Joanne Taaffe in Paris and Philip Willan in Rome.