Fri Jan 28, 2:29 PM ET
By Justin Hyde, Reuters

WASHINGTON (Reuters) - One technology promises to harness the power of the Internet for voice communications. Its competitor has been around for a century, and has an industry shorthand that needs two adjectives -- "plain old telephone service" -- to describe just how boring it is.

The battle between the two is expected to heat up in 2005, as we move further into the much-hyped "Year of the Internet Phone." But even if the most optimistic predictions come to pass, industry analysts say, plain-old telephone lines will still have a tight grip on much of the market. The Internet-based business has a number of hurdles to clear before it becomes a mainstream technology.

Still, even if it doesn't take over the phone market, Internet telephony, or VOIP (voice-over-Internet protocol), seems poised to make inroads in the United States, thanks to growing numbers of high-speed Internet connections and companies pushing Internet phone services.

Early adopters of Internet phones say the main attraction is a monthly bill that can be half as much as what the local phone company charges. But VOIP's backers say the biggest benefit could be the wide range of features, such as voice messages through e-mail, that traditional lines can't match.

James Jeffries said he signed up for VOIP service from Vonage because it was the first competitor to Sprint Corp. in his rural Pennsylvania town. In lieu of paying about $40 per month for his Sprint service, Jeffries took Vonage's basic plan of 500 minutes a month for $15. Vonage also offers unlimited calls for $25 per month.

"So far we're on track to stay under our 500 and we're not really trying too hard," Jeffries said. "If we go over and need to switch to the unlimited plan we will. It will still be far less than we were paying at Sprint."

Analysts figure that the number of home VOIP lines in the United States was roughly 1 million at the end of 2004, a drop in an ocean compared with about 160 million landline and 170 million cellular phone subscribers. But some estimates say VOIP subscribers could triple this year, thanks largely to cable company campaigns to sign up phone customers, and hit 20 million by 2008.

Other countries that have more widespread broadband use have seen faster VOIP growth, with Japan's Yahoo Broadband the largest provider so far at 4.4 million VOIP lines.

NUMBER CRUNCHING

The most popular independent VOIP service to date has been Vonage. Seeing its success, dozens of other providers, including AT&T Corp.'s CallVantage and VoicePulse, are offering unlimited calling for about $25 to $30 per month.

VOIP companies do not always offer phone numbers in every area code, and may not have numbers available in popular area codes such as New York's 212.  But VOIP also severs the physical tie between an area code and a telephone. Like an e-mail address, VOIP numbers can typically be used from any broadband connection. Users can also get a "virtual" number in far-off area codes or even foreign countries.

For the more tech savvy, even less expensive options exist. A number of services, such as Skype and Free World Dialup, offer free calling between computers with their software around the world, and free or low-cost calling to telephone numbers.

HITTING A WALL

But VOIP service today has a number of drawbacks, and some analysts say unless those hurdles are overcome VOIP may never pose a sizable threat to traditional phone lines.

One looming issue is emergency service. There are no industry standards for connecting VOIP calls through 911 systems. Some VOIP companies don't offer 911 service at all, while others offer 911 that works only from certain locations.

VOIP lines typically do not pay the raft of state, local and federal taxes that traditional telephone lines are charged. Federal regulators are still wrestling with what fees VOIP services should pay.

Many reviewers of VOIP, from online sites such as Broadbandreports.com to Consumer Reports magazine, have found VOIP sound quality and reliability equal to or better than regular phone lines. But some customers have also complained of glitches due to technical issues and network congestion.

Keith Nissen, senior analyst for InStat/MDR, said many of the independent VOIP providers will have to upgrade their networks to handle more customers while maintaining quality.

"You're not going to get a mass migration to VOIP until such time as the service becomes the equivalent of what you have today," Nissen said. "You have to offer people more than they can do today."

So far, cable companies have offered VOIP services that differ in several ways. Many cable companies use Sprint's landline network as a backbone, allowing them to offer 911 service, and usually offer installation. But prices from cable companies tend to be higher, and many do not allow traveling access.

And the large local carriers aren't standing still. Verizon Communications Inc. has launched its own VOIP service, while SBC Communications and BellSouth Corp. say they're ready to jump into the market this year. SBC has been in talks to acquire AT&T, and could piggyback on its existing VOIP effort if that deal goes ahead.

While the Bells will be late to the game, they could also offer some unique features, such as cellular phones with integrated VOIP that uses either the cellular network or a home Wi-Fi network, whichever is cheaper. SBC and Cingular are planning just such a device for 2006.

link to the original posting