Internet Voice
This year's winner is attacking the very foundations of the telecom industry.
By Om Malik

(Business 2.0) – Smart technologies make industries more efficient. Truly historic ones shift the balance of power. Case in point: Internet telephony, which blew through the telecom industry this year like a Category 5 hurricane, upending companies, inciting chaos, and trashing time-honored practices.

Consider AT&T. Remember when it was the phone company? In July it announced that it will stop actively selling traditional landline telephone service. Instead, rather than pay local phone companies for access, it will concentrate its marketing efforts on Internet-based telephone services. "The low cost of Internet voice makes it as disruptive as e-mail," says Frost & Sullivan analyst Jon Arnold.

While telephone networks have been moving from circuit-switched systems to Internet protocol-based technology since 1999, this year Internet telephony reached the tipping point. One reason is a critical mass of potential customers: 22 percent of Americans (63 million people) now have broadband connections. Meanwhile, advances in specialized hardware and software from companies like Sonus Networks brought the cost of starting a phone company to as little as $500,000, a pittance compared with the multimillion-dollar price tag of traditional gear. Now almost anyone can be a phone company, and startups are rushing to get into the space: Today nearly 100 companies in the United States compete for consumers and businesses, offering flat-rate Internet voice plans.

That's a stake through the heart of the old telephony business model, in which phone companies charged by the minute. With flat-rate plans, like $19.95-a-month unlimited calling from Primus Telecommunications, Internet phone companies don't care how often you reach out and touch someone. Their marketing focus, like that of cell-phone providers and cable companies, is on selling premium services. Want to give your company an international image? Primus will sell you a London phone number for an extra $9.95 a month.

So much competition, of course, means it's going to be hard for anyone to make a profit. With other big phone companies now introducing their own flat-rate Internet plans—Verizon launched VoiceWing in July—analysts predict that Baby Bell revenue will actually fall by $8 billion, or 12 percent, by 2008. Friedman Billings Ramsey forecasts that overall U.S. telecom revenue growth will fall to 1 percent annually through 2006, a far cry from historical growth rates of more than 5 percent.

Yet, down the road, voice giants like AT&T, SBC, and Verizon should be able to sign up subscribers thanks to the most valuable assets they own—their brands. Whether they remain dominant depends on how successful they are in selling creative ancillary services that Internet voice makes possible, like videophone calling. Other big winners will be corporate offices, which are already replacing expensive analog PBX boxes with cheap, IP-based ones.

Of course, as usual with disruptive technologies, the real winners of Internet voice will be customers. Phones will work wherever you're connected to the Internet—in the home, at work, or on a Wi-Fi-enabled beach in Tahiti. You'll be able to call your supply-chain computer and ask it to read off the day's sales. Dialing Dallas will cost the same as calling Calcutta. To be sure, it will take a few years. But in 2004, the possibilities finally became real. — OM MALIK