Article 23 of 54
Business/Financial Desk; Section C
Millions Phoning Online, Finding Price Is Right Even if Quality Isn't
The New York Times
Page 1, Column 2
c. 2000 New York Times Company


Shortly after moving from Albuquerque to Portland, Ore., last year to teach philosophy, Peter Boghossian discovered he could keep in touch with friends and family around the country by placing telephone calls over the Internet. Since then, he has not paid a cent for long-distance service.

Like millions of others, Mr. Boghossian has begun to slash the cost of his telephone calls by plugging into a fast-growing trend for Internet-based voice communication. Seeking to tap the industry's potential, nearly two dozen companies have begun offering long-distance calls over the Web -- free or substantially cheaper than otherwise available.

''Why would you pay one penny for something when you can get it for free?'' asked Mr. Boghossian, who is 33. Or to cite Jurgen Habermas, a contemporary philosopher who is a common reference in Mr. Boghossian's courses, ''When technology gets cheaper and more accessible it has a liberating effect across the board.''

The quality still has a way to go, with the best of conversations resembling a choppy cell-phone call and the worst a wobbly walkie-talkie transmission. But much of the growing interest in so-called Internet telephony has to do with its relative simplicity.

Most users need only an Internet hookup, headphones and a microphone plugged into a computer. Then, after shopping around with companies providing Internet telephone service, one can start placing domestic and international calls to people with any kind of phone.

According to an estimate from Jeff Pulver, an independent analyst of the Web-based voice communication industry, roughly 15 million people in the United States use voice communication over the Internet, compared with 5 million a year ago. In addition, there are several million users abroad, where the popularity of services allowing people to call the United States has spread.

Counting on rapid growth rates, the combined revenue of Web talk providers is seen growing at a compound annual rate of 200 percent a year over the next several years, to $16.5 billion by 2004 from $208 million in 2000, according to the International Data Corporation, a research company in Framingham, Mass. More of the revenue is expected to come from selling advertising on the companies' sites than from fees for placing calls.

''As an outside observer I'm supposed to have a jaded view of this new whiz-bang stuff,'' said Mark Winther, vice president for telecommunications research at International Data. ''But the brilliance of voice communications on the Internet is in the merging of the Internet's power with the ease of use of the telephone. It's a no-brainer that this industry will take off.''

One company, of Menlo Park, Calif., exemplifies the industry's expansion. Using technology developed by Korean engineers that aids the transmission of voice calls over the Internet, the company offers free service to any number in the United States from anywhere in the world. Such calls might cost 5 to 25 cents a minute through a conventional long-distance carrier and as much as $1.25 a minute if the caller was in, say, Brazil. (The calls are not altogether free, because they require dialing a local access number, for which the local phone company collects either a flat or per-minute charge for a local call.)

Dialpad says it has signed up 7.5 million users in the last seven and a half months without any promotion.

''We've grown grass-roots style through viral marketing,'' said Peter Hewitt, Dialpad's vice president for communications.

Essentially, this means that users of Dialpad's technology informed others about it by communicating over their system or through word of mouth, much the way free e-mail addresses on services like Microsoft's Hotmail began to spread several years ago. Analysts say Dialpad's growth has been much quicker than its free e-mail counterparts.

''Dialpad is probably the fastest-growing Internet service ever,'' Mr. Winther said.

Like most other Internet start-ups, Dialpad loses money, though it does not disclose how much because it is privately held. Instead, the company prefers to emphasize such growth indicators as the doubling of its work force in a year, to 40 from 20. Eventually, Dialpad hopes to become profitable through the sale of advertising on its site.

''When harnessing change-the-world technology with such growth rates, you can be assured real estate on your site will get quite valuable,'' Mr. Hewitt said.

Other companies, like Net2Phone Inc. of Hackensack, N.J., offer long-distance calling all over the world, but charge for service. A call anywhere in the United States costs 3.9 cents a minute. A call to the Netherlands from the United States costs 5 cents a minute, compared with $1.25 to $2.05 a minute using AT&T.

Companies like Dialpad have made it simpler to place long-distance calls over the Internet by discarding cumbersome credit card registrations. But the underlying technology is not so simple, explaining in part the current limitations of the industry.

Transmissions of information online, like e-mail, other written data, or even voice and video, are generally sent in small packets of information over the World Wide Web. When a real-time exchange of information is not necessary, as is the case in most e-mail exchanges, a small delay in the delivery of the packets is not that important. But in real-time voice conversations, these delays can make a big difference.

When taken together with an Internet connection of dubious quality, an Internet voice call can become risky. Often, if voice packets are delayed beyond a given threshold, software programs will guess at the packets' content and transmit a distorted version of what was said.

While the effect can be disconcerting -- like having a discussion next to a windswept thoroughfare -- companies are working to improve the technology. In the meantime, an individual can improve voice calls over the Web by using a quality Internet connection, with a high-speed telephone line, for instance.

Despite its limitations, Internet telephony has caught the attention of large telecommunications companies. This is no wonder, given even conservative estimates that the nascent industry, which first showed promise after growing in popularity among hard-pressed graduate students in the mid-1990's, will account for at least 15 percent of long-distance traffic in the United States in five years, up from roughly 1 percent today.

In Europe, for instance, Deutsche Telekom has introduced its own Web-based voice communication services in an effort to capture part of the market. And in the United States, AT&T, after introducing its own Web-based voice products, led a group that plans to invest $1.4 billion in Net2Phone.

''We recognize that Internet telephony has evolved from a geeky, hobbyist thing into something we want included in our array of offerings,'' said Glenn Edens, president for strategic ventures at AT&T. Not everyone is bullish on the prospects for the Internet-based voice communication industry. Skeptics point to the telephone's convenience and the trend of ever more competitive prices for traditional telecommunications services, regardless of Internet telephony's growth.

''I don't doubt that Internet telephony is a cheapo substitute, but a telephone is more convenient and getting cheaper,'' said Amanda McCarthy, a telecommunications analyst at Forrester Research in Cambridge, Mass. ''Plus, what type of advertising are you going to want to sell for people who are such penny-pinchers?''

Another concern for the budding industry is the looming possibility of taxation. Traditional telecommunications companies have lobbied to make Internet telephony companies subject to the same treatment as other communications companies, including taxes and fees paid to the local phone companies that complete the calls. (Such fees are already assessed by carriers in some foreign countries on calls placed over the Internet.)

Opponents of this proposal, though, assert that potential investors would be scared away and that the creative capacity of the industry to hone its technology would be stifled if taxes were introduced. So far, the Federal Communications Commission has been reticent to introduce any taxes, fees or other regulatory measures.

But it could only be a matter of time before these issues come to a head if more consumers make long-distance voice calls over the Internet and prices for conventional services fall further as a result.

''Either prices go down and the current regulatory system is discarded or you start to regulate the Internet,'' said Nicholas Economides , an economics professor at New York University whose specialty is telecommunications networks. ''Clearly, for now, the first choice is better for consumers.''


Photo: Peter Boghossian, a philosophy professor, has cut his long-distance bill by making calls over the Internet. (Shane Young for The New York Times)

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