(FORTUNE Magazine) – The hottest entry in the race to build faster, more robust phone networks is--surprise--Ethernet, a 25-year-old computer standard developed for linking PCs in office networks. Don't yawn. A handful of promising startups are using Ethernet to deliver high-speed data and Internet connections to schools and businesses. The thinking: The same technology that zips data around offices can help ease the bottleneck in the "last mile" of traditional telephone networks--the one between the switching center and the customer. And that edge, say proponents, means that Ethernet matters a whole lot more than the broadband technologies getting all the ink today, like DSL and cable modem.

Invented in the 1970s at Xerox PARC, Ethernet is very "scalable," which means networks that use it can easily expand to carry more traffic, and at ever faster speeds. That's one reason telcos love the stuff. Only a few years ago, corporate local area networks, or LANs, moved traffic at rates of 100 million bits per second. Today's Ethernet networks--and that means most of the networks operated by most FORTUNE 500 companies--boast speeds of a gigabit, or a billion bits, per second. (That's 666 times faster than a T-1 line, the workhorse of corporate telecommunications.) And ten-gigabit Ethernet technology is on the way.

All those corporate Ethernet LANs make the technology promising on a wider scale. Today a huge amount of corporate traffic starts and ends on Ethernet networks. If phone companies had Ethernet, there'd be no translation while data traveled between LANs--hence, there'd be quicker delivery.

Telcos that start building out big Ethernet networks of their own over the next few years won't be confronted by huge costs: Ethernet components, which have been around for years, are often cheaper than the gear needed to build conventional high-speed networks. The Dell'Oro Group, a tech research firm, estimates that the equipment to provide a customer with a gigabit of bandwidth on a gigabit Ethernet system costs about $1,200. That's about an eighth of the cost of delivering a gigabit with some versions of SONET, the optical networking standard used by most phone companies. By 2005, says the Dell'Oro group, sales of gigabit Ethernet switches to phone companies will reach about $10.4 billion, up from about $2.5 billion last year.

Venture investors are betting big on new privately held Ethernet carriers. In February, Yipes, a San Francisco startup that aims to build a nationwide Ethernet network, said it raised an additional $200 million. Around the same time, rival Telseon announced $100 million in new funding, and investors poured another $120 million into Giant Loop, which aims to use Ethernet in virtual private networks for businesses. A number of established Ethernet equipment makers, including Extreme Networks and Foundry Networks, are building robust gear for telecom networks.

Ethernet may take a while to win universal acceptance. Yipes, for example, can offer service only to customers with access to a fiber-optic line--eliminating most consumers and small businesses as customers. And though Cisco has just introduced a flavor of Ethernet for copper wires, the big local telcos, which pride themselves on their networks' reliability, are moving cautiously. "Gigabit Ethernet is portrayed as the technology that ate the world," says Mark Wegleitner, CTO of Verizon, which has installed Ethernet switches in some central offices to transmit data between LANs. "Verizon recognizes its value for certain applications, and we're deploying it appropriately." SBC and Qwest are also deploying Ethernet gear in parts of their networks.

But one thing is certain: Corporate Ethernet systems keep getting faster. If local telcos want to carry business traffic, their networks will have to get faster too.

--Stephanie N. Mehta