Promise, Confusion Collide In Internet Telephony Market

As broadband Internet access slowly blankets the country like a fog, phone suppliers, ISPs and telecom companies are angling for ways to exploit broadband's ability to simultaneously carry data and voice into consumers' homes.

All agree that Voice over Internet Protocol telephony (VoIP ), or Internet telephony, has a potentially rosy future, offering users more options (such as checking e-mail, receiving sports scores, etc.) than traditional landline phone service.

But VoIP's future still hasn't come into sharp focus.

Current incarnations of VoIP telephony include conventional 900MHz cordless phones that route landline calls via an auto-dial button to a central network server, which hands off the call to the Internet. Another incarnation is the PC-connected handset or microphone that makes use of a home's existing Internet connection to make calls. Then there are residential gateways that, among other things, support voice calls over a broadband Internet connection.

Another manifestation, not yet implemented but seen by market analysts as offering the most potential, is one in which VoIP service is delivered as part of a suite of services by a local telecom company, ISP or cable MSO through a broadband Internet gateway. Generic handsets and phones would be given away by service providers.

"I think the bulk of the VoIP market will be on the service provider side and occur out of view of the consumer," said Jed Kolko, an analyst at Forrester Research.

To this end, Thomson recently announced a VoIP broadband modem, the RCA DHG450, which it is marketing to cable MSOs. The device provides two telephone lines to accommodate voice needs, Internet browsing and related Internet services, including e-mail and streaming audio/video.

The cable modem also features integrated HPNA, a networking technology that distributes IP services throughout the house via phone lines to multiple PCs and other devices.

Currently, the only VoIP offerings at retail are Net2Phone's Yap Phone products and the Panasonic 1800 series of 900MHz cordless phones, which incorporate an auto-dial function that brings the caller to Net2Phone's server, which routes the call over the Internet.

Reaction to the retail products has been mixed.

One problem, said Rex Leetham, merchandiser manager at RC Willey Home Furnishings of Salt Lake City, is that the products require a lot of explaining, and phones traditionally have been a self-service category. Leetham declined to carry the products.

"I'm not saying this feature might not carry weight with the customer in the future, but right now it's not something our customers are asking for, and it's not a compelling product for us," he added.

John McNenney, Panasonic's assistant telecom GM, admitted that "getting the word out on these products, educating the consumers, has been a challenge."

Nonetheless, at least one phone manufacturer, Uniden, still plans to join Panasonic in the market. Although the long-awaited VoIP products from Uniden and ZeroPlus.com evaporated when ZeroPlus declared bankruptcy, Uniden is investigating alternate VoIP providers and hopes to bring a VoIP product to market by the end of the year, said Uniden product manager Stacy Hamilton.

For its part, Toshiba doesn't plan to develop a VoIP product but plans to announce a promotional partnership with telecommunications company CallManage, which offers a variety of telecom services. One service is low-cost long distance service via VoIP. According to the agreement, Toshiba will bundle promotional material with select cordless phones to refer purchasers to CallManage to sign up for one of its calling plans. The VoIP plans let users dial an access code to place their call over the Web.

"It's not a VoIP phone," but it will expose consumers to the service, said Toshiba marketing manager Mark Balinsky.

Other phone manufacturers have been reluctant to embrace the market.

"We think there are too many quality problems with VoIP technology," said Les Burger, Sony's senior telecommunications marketing manager. "In general, there are a lot of returns in the cordless market because consumers expect the quality of a corded phone, and we just haven't been impressed with the quality that these VoIP providers have shown us."

However, he did mention that Sony was looking into options, like a home gateway, that bundle and distribute voice and data.

Eldon Chuck, marketing VP for Atlink/Thomson, explained that his company seriously considered the technology (in partnership with a VoIP provider) a year ago but decided not to go ahead. "This is technology that is still well ahead of the consumer market," said Chuck. "There's a real imbalance in terms of how to generate revenue, what services to offer, and voice quality. Right now the industry is unregulated, and so [VoIP providers] can offer these real competitive long-distance prices, but what happens when the FCC takes an interest?"

Manufacturers agree that crucial to VoIP's success is increased adoption of broadband Internet access and increased customer exposure and education.

"I guarantee you that the average individual on the street has no idea what VoIP is," said Uniden's Hamilton. "That's going to take time. I don't expect to see this have an impact on the consumer market in any large way until the fourth quarter of 2002."

Consumer exposure is sure to experience a shot in the arm when Microsoft rolls out its Windows XP operating system in the fall. Amid the programs embedded in XP are telephone and directory features that let consumers make VoIP calls, provided they have a headset or handset and improved versions of NetMeeting and Microsoft's Internet voice chat software.