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An investor's guide to VOIP
You've heard the buzz. Here's a look at what's happening in the nascent world of voice-over-IP.
October 20, 2003: 10:50 AM EDT
By Eric Hellweg, CNN/Money Contributing Columnist

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SAN FRANCISCO (CNN/Money) - Anyone who even casually follows the telecommunications, cable, or high-end networking segments has likely heard the buzz surrounding voice-over-Internet protocol, or VOIP. Now investors are asking, "How can I make money on this?"

Before we address that question, here's a brief primer on VOIP: VOIP uses Internet protocol, the common method of transferring data, for voice traffic as well as data traffic. VOIP breaks up the sound waves into data packets, instead of streaming them through wires.

Sending voice traffic in packets offers benefits for carriers and consumers alike. Just as it doesn't matter if a Web site is based in Jakarta, Indonesia, or Juneau, Alaska, phone-call destinations and origins cease to matter. Thus consumers no longer need to pay for long-distance calls.

For telecoms, VOIP opens up the possibility of introducing additional data-based services, which of course means additional revenues. For cable companies, the technology provides an opportunity to add another service to their portfolios. And for gear makers, VOIP is a rare bit of good news in what has been a long, slow recovery from the dot.com bust.

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Some of the more histrionic coverage of VOIP predicts that the technology will wipe out the telephone companies, enabling smaller Net-based startups like Skype and Vonage to muscle in, la Napster and the record industry.

This makes for a great story, but it's not necessarily true. The brave remaining telecom investors need not run for the hills (again).

"[VOIP] is a disruptive technology," says Jeff Kagan, an independent telecommunications analyst. "But is it threatening the Bells? No. It's challenging the old models, not threatening the companies."

Which companies are making money?

So which companies are making money right now off the technology? As in most initial waves of technology adoption, not many. It's primarily companies that provide the hardware and software needed to power corporate VOIP services, and that sector is booming.

That means we're talking about providers such as Alcatel, Avaya, Cisco Systems, Nortel Networks, Siemens, and 3Com, all of which allow companies to change their phone networks from circuit-switched technology (the older method) to packet-switched.

Avaya says its global IP-based hardware and software division has grown 300 percent in the past year. According to Infotech, the general VOIP hardware and software market in the United States has grown 88 percent during the past year. Research firm IDC predicts that by 2008, IP-based corporate telephone networks will make up 41 percent of the corporate telephony market, up from about 14 percent today.

VOIP at home

For the residential market, the initial edge goes to the cable companies, which have been eager to bundle telephone services with their digital cable and Internet packages. Right now, they're leading the charge to provide VOIP to consumers, but very few have rolled out true VOIP services (some offer an older version of cable telephony, which doesn't cut the cable companies' costs as much as VOIP would).

Investors looking to catch this wave should watch Cablevision, Cox Communications, and Time Warner Cable, all of which have launched small trials of VOIP phone service.

Cablevision says it will offer the service to all of its 4.4 million customers by the end of the year. Comcast currently only offers cable telephone service using the older version of the technology. A Comcast spokesperson could not be reached before press time to discuss the company's future plans.

The large telecom players have not made as much noise about their plans to offer VOIP to the residential market. Investors shouldn't take this as a sign that the telecoms are sitting this sea change out, however.

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They've largely decided to target the corporate phone market, where they -- not cable companies -- enjoy a close relationship.

SBC Communications and Verizon Communications have been the most aggressive there, according to Tom Valovik, a research director at IDC. They are offering corporate customers hosted VOIP services, where the technology needed to run IP-based phone networks resides in the telecom's central offices, as opposed to the customer's office.


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