Web-based phone calls on the rise


John Lalley couldn't get anyone interested in making telephone calls through the computer seven years ago. The idea seemed too futuristic, too complicated, too costly.

But these days, all sorts of people are calling him to see how much the new technology can save them on their phone bills. His client list reflects the widening interest: Valley Motors, Mackenzie Cos. commercial Realtors, St. Paul's Schools, the Baltimore City Parking Authority, the Washington chapter of the NAACP and the city of Laurel, to name a few.

"When we first started, only the high-tech firms knew about it and wanted to try it," said Lalley, owner of Spalding Communications in Towson. "It's going to replace classic communications as we know it."

Internet-based calling is posing a new challenge to traditional telephony, which has been shrinking in recent years because of the boom in wireless telecommunications.

About 1 million customers use Internet telephones, compared with 104 million household wire-line phone users and 155 million wireless customers, but the field is attracting start-ups and big companies such as Nortel Networks Corp. and Qwest Communications International Inc.

Yesterday, the Federal Communications Commission began a yearlong evaluation of new rules to govern the emerging technology without impeding its growth.

FCC Chairman Michael K. Powell said his agency will resist the impulse to apply old regulatory structures to the new world of the Internet. The agency backed that up by ruling that pulver.com, a Long Island, N.Y.-based Internet-phone provider, should be classified as an information service and, like the Internet, be minimally regulated.

"Today we affirm our commitment - and fulfill our statutory obligation - to keep the Internet free from unnecessary government regulation," Powell said during a hearing in Washington.

IDC, a market research firm in Framingham, Mass., predicts that equipment revenue at companies that serve the technology known as voice-over Internet protocol, or VoIP, could balloon to $15.1 billion in 2007 from $3.3 billion last year. Revenue from VoIP service won't grow as quickly but will be substantial, IDC said.

With the 20 million U.S. homes equipped with high-speed Internet access as a huge potential market, the battle has begun over how regulators should handle the new service.

Unlike wire-line or wireless phones, Internet phone service is free of government fees such as the ones that support 911 emergency calling. Some states, including Minnesota and California, are eagerly anticipating the revenue that can be gained from taxing VoIP.

"The FCC is in a very difficult position," said Tom Valovic, program director for Internet protocol telephony at IDC. "They need to come up with some King Solomon-type decision, because this technology, it's been described as a ticking time bomb in the heart of the traditional telephone system."

VoIP systems record the sound, compress the recording and break it into small packets of data that are sent over the Internet. The receiving phone reassembles the recorded packets in proper sequence instantaneously. Unlike traditional phones, the system does not use circuit switches to connect calls.

Regulatory policy has long governed telecommunications by geography. Fees and taxes have been charged based on connecting calls through circuit switches from one network to another.

Forget the map

Internet telephony ignores maps. With VoIP, a person can be in Baltimore, place a call through his computer using a California number and connect to a San Diego number, bypassing long-distance charges and circuit switches if the call is completed online.

Yesterday's ruling to classify pulver.com as information service will affect how the FCC treats other issues. Federal regulators must decide the balance of authority between federal and state agencies on VoIP, how companies would charge each other to complete each other's calls, as do they with telephone "access fees," how emergency calls would be traced and whether VoIP customers will contribute to the universal service fund designed to make phone service available and affordable to under-served areas.

The issue of access fees could have an enormous impact on the infant market's growth.

Verizon Communications, for example, pays about half a cent a minute in access fees for each call made on its network and another half a cent a minute to a local carrier to have that call connected on a different network, said Link Hoewing, vice president for Internet and technology policy for Verizon.

That could translate into millions of dollars in access fees that VoIP providers would have to collect from customers to pay to connect calls from the Internet to traditional phone lines. The large telecommunications carriers already use the Internet to carry parts of regular phone calls.

"The FCC will key up on the issues and study it in a comprehensive way, but I think they will exercise a light touch in regulating it," said David Siddall, an attorney with Paul, Hastings, Janofsky and Walker in Washington who specializes in telecommunications issues.

"I tried it five or six years ago on a PC, and the audio quality was distorted and there were delays," Siddall said. "I stopped using it, but today the quality is a lot better. That's helped it take off."

The FCC is expected to issue a decision on Internet phone regulations in about a year.

Savings in Locust Point

For Blue Sky Factory, an e-mail marketing company in Baltimore's Locust Point area, the attraction of Internet telephony was simple. Switching three of its phone lines to VoIP last year helped Blue Sky save hundreds of dollars in long-distance charges every month.

"When I first tried it, it was basically because I wanted to play around with a new toy," said Richard Cruit, chief executive of Blue Sky.

"We still have land lines, but we began using voice-over-IP when our telephone bills became an issue with our bookkeeper. He said, 'You need to get your telecommunications under control.' We were paying in the hundreds every month to call all over the country to talk to our clients.

"We pay $39 a month for [VoIP] and we can call anywhere," Cruit said. "The cost savings are there. But once it's regulated, it will get more expensive, I think."

Industry experts caution that the quality of VoIP calls can be sketchy. Depending on the time of day, the quality of the Internet service and how much traffic is stressing broadband connections, Internet calls can encounter static and blips of silence. And power failures leave users not only without a computer, but also without the use of their Internet phone service.

In December, the Department of Justice and other federal law enforcement authorities expressed concerns about the ability to trace online calls in criminal investigations.

Despite those problems, VoIP can be a promising alternative for businesses that have satellite offices, work overseas and spend a lot on long-distance, said Ed Maguire, owner of Telesource Inc. in Timonium, a consulting company dealing with telephone system hardware.

Recently, Maguire helped a Hunt Valley company convert to an Internet calling system and save $3,000 to $4,000 a month on long-distance calls to Denmark, South America, England and Germany.

Maguire estimates that one out of five companies with which he works end up with a VoIP system.

Experts predict that Internet telephony will gain faster interest from business customers than households.

ToadNet Inc., an Internet service provider in Severna Park, is counting on that as it prepares to introduce VoIP service in the Baltimore-Washington region in May.

Chief executive David Troy likes to tell companies that during an ice storm last month he was able to go online from home and remotely forward all the calls coming into his office directly to his employees' homes on their VoIP system.

"I was able to do that without visiting the central office," Troy said. "We didn't miss a thing. No one calling our office knew otherwise. It was all handled transparently."

'Wave of the future'

Telecommuting then becomes more than just the ability to connect to a business online from home. It would also include the ability to move an office and number anywhere in the world with access to a high-speed Internet connection.

"That's the wave of the future," Telesource's Maguire said. "I figure it won't be long before you can be on a beach somewhere with wireless hand-held pictures and see the person you're talking to from some country somewhere while also reading your e-mail and staying in touch with the world.

"We won't have a cell phone, land-line and computer phone. We'll have just one device with one number assigned to us. People will be able to get us anywhere. Voice-over-IP will give us that.

"How do you regulate something like that?"

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