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Breaking down VOIP's walls
The Internet promises cheap calls -- but carriers want to lock you in with special hardware.
By Om Malik, Business 2.0 senior writer

SAN FRANCISCO (Business 2.0) - If you are a consumer shopping for VOIP, welcome to the land of confusion.

You can scour the shelves of your local RadioShack for a Skype Starter Pack. Or you can go to Best Buy or Fry's and see row after row of products—this one for Vonage, another for AT&T (Research) CallVantage, and on and on. Want to switch services? You'll have to go buy more gear.

Here come the gadgets
Intel, Microsoft and Sony are all making big announcements at the Consumer Electronics Show. See our CES preview.

The idea of VOIP is simple: If you already have broadband, you already have more than enough bandwidth to route phone calls over your Internet connection. You can call other subscribers on the same VOIP service for free, most of the time, or call regular phone numbers at rates much cheaper than you'll get from traditional phone companies.

The trick is that you need specific hardware -- a small box that allows you to hook up a regular phone to your broadband connection, a headset that lets you place calls over your PC, or a special Wi-Fi handset -- to make the VOIP service work. And the need for that hardware is what VOIP providers are hoping to use to hook you.

It's enough to make you long for the days when you could change long-distance providers with a single call. Switching to MCI's Friends & Family plan never required buying a brand-new phone.

At this year's Consumer Electronics Show in Las Vegas, this consumer-unfriendly approach is on full display. Over past few days, equipment makers have been bombarding us with one announcement after another -- a Wi-Fi phone for Vonage, speakerphones and USB handsets for Skype, and so on. At his keynote, Microsoft (Research) chairman Bill Gates showed off handsets from Uniden and Philips that only work with Windows Live Messenger.

"Vendors and service providers are launching these service-specific devices because they are looking for differentiation, but in the end what they are doing is creating balkanization," says Jeff Pulver, CEO of Pulver.com and a VOIP pioneer.

"As someone who has fought for open standards in VOIP, I think this trend totally defeats the purpose. People are trying to differentiate their products when they should be focusing on making it easier for consumers to use VOIP."

The market seems ripe for explosive growth. An October report from Jupiter Research forecasts that by 2010, 20.4 million U.S. households will subscribe to some form of VOIP, or Internet-based broadband phone service. And a survey by Level 3, a telecommunications provider, suggests that two out of three consumers have at least heard of VOIP.

Players in the nascent VOIP business -- a group that includes AT&T, Vonage, eBay (Research)'s Skype and Microsoft, among others -- appear to be taking their cues from the cellular industry. In the U.S., wireless carriers have long subsidized the cost of cell phones in the hopes of tying customers to their service plans.

But the economics of Internet telephony, which has seen prices plummet and is increasingly dominated by free calling offers, may make this model infeasible. And that could unplug the VOIP industry before it even gets off the ground.

Mike Arden, a principal analyst at ABI Research, says that VOIP providers have to persuade customers to pay for additional services such as voicemail and PC-to-phone calling before offering deep subsidies. "If the carriers can start adding additional services, then subsidies might happen. First they need to add some revenues to their basic service."

For a sign of things to come, look at Vonage's $100 rebate on VOIP equipment you buy in order to sign up for its service. At service plans that cost $25 a month, Vonage will go in the red for months on every customer it acquires -- and the rebate will only look worse as prices inevitably drop.

But the real price of hardware tying may come in the form of consumer backlash. Imagine Mom's confusion when she finds that her Microsoft phone can't make free calls to your Skype phone.

"We make it very clear to the consumer (on the boxes) that the phone works with a specific service," says Brett Morrison, manager for VOIP and business communications group at Uniden. "Service providers are not giving us the option to interoperate."

As with most any emerging technology, VOIP is not an easy environment for hardware makers to navigate, to be sure. "We have to customize a device for each service provider," says Vivek Pathala, senior director for product marketing at Netgear.

Why? Though most VOIP providers support a common standard called session initiation protocol, or SIP -- with Skype as a notable exception -- Pathala notes that each company extends the SIP standard to add bells and whistles, which ends up making services mutually incompatible.

Putting VOIP services in incompatible silos will come to haunt the industry eventually, hobbling its growth just as it's set to take off. But there's an opportunity for a smart entrepreneur, someone with a devotion to consumer ease of use, to build software that bridges these systems. (For a taste of this, look to the instant-messaging world, where Trillian and Adium let you connect to multiple IM services.)

And eventually, VOIP providers will bow to the inevitable and provide for interoperability. Until then, they can expect a lot of hang-ups. Top of page

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