by Jack Cupples
The advancement of Internet telephony is likely to cause the greatest change the long distance telephone market has seen since the break-up of AT&T. What was once regarded as a harmless forum for computer nerds is now wreaking havoc among the long distance giants. In the next ten years, the structure of long distance communications as we know it should drastically change.
Internet telephone essentially functions in the same manner as the Internet. A worldwide network of interconnected computers exchange data between terminals. The same servers, routers and transport lines that are used to carry e-mail messages can also carry digital information generated by voice interface software. Like traditional Internet communication, users who access the Internet to send voice communication pay only monthly fees charged by the Internet Service Providers (ISP’s) and the normal flat monthly charge from the local telephone service provider (LEC’S). This allows consumers to circumvent the long distance providers and avoid long distance charges.
This technology has manifested itself in three formats. First, there is the traditional communication between two computers. Consumers purchase voice software such as Phone Free for their computers. This allows transmission of audio, video, graphics and data. The software costs around fifty dollars in addition to the computer equipment for both parties. This format requires the user to log-on the computer to access the Internet.
The second format available is from a remote telephone. Products such as FNET by Franklin Communications allow consumers to call a local phone number, enter a PIN number and the local FNET switcher routes the call over Internet lines. This service does not require a computer or software. The consumer uses a standard telephone and pays a significantly lower charge.
Finally, services such as Innomedia provide a small module that connects between the phone line and wall jack. The module contains software that automatically switches long distance calls to Internet lines. This module cost around three hundred dollars and merely requires payment of local telephone fees and Internet connection fees.
The extreme profit generated by long distance is an essential driving force behind the development of Internet telephony. "Long Distance is still the most profitable business in America, next to importing illegal cocaine". Such extreme profits have created a vast array of new, powerful competitors. Initially, the major long distance companies left Internet telephony alone due to the low voice quality of the software and the belief that Internet telephony was not a serious threat. However, substantial breakthroughs in compression technology and software development have created an acceptable product.
Due to this perception, the companies that were first involved were small high tech companies with relatively little capital and minimal name recognition. Internet telephony was regarded as "the stuff entrepreneurial dreams were made of". The breakthroughs have now caught the eye of the major corporations. The small start-up companies such as Innomedia, FNET, and Qwest are now competing with Lucent Technologies, Worldcom(MCI) and AT&T.
The vast amount of capital now being invested by large companies will likely cause smaller companies to either merge with large companies or force them out of business completely. Essentially, it appears the market will reconfigure itself over time to resemble the current oligopoly. There are even early signs of this phenomenon. Worldcom’s purchase of MCI will give the conglomerate control of almost sixty percent of all Internet fiber optic traffic in the United States. Additional development of hardware devices from the major providers could effectively ruin the small upstart companies. By using their market power to make user friendly, compatible devices, the major companies can maintain their hold on the market. However, despite their continued dominance, the consumer should still see a benefit in the form of lower prices.
The Future of Internet Telephony
Internet telephony appears certain to be the wave of the future. The market competition has driven technology to a point that has substantially overcome the early quality problems within the industry. The addition of large corporate players should provide the final technological push needed as well as providing some of the tremendous capital required. Unfortunately for the smaller companies, this market power will drive out most of the smaller firms. The market should eventually settle into the same oligopoly that currently exists. Only a drastic change in legal classification could dampen the rush to Internet telephony. However, barring such a change, Internet telephony will likely succeed.