Talking on the Web

RAY SUAREZ:

Today, AT&T became the latest company to offer long distance and local calling by using Internet technology. It's been a busy week for this part of the telecom world.

On Monday, Time Warner, the nation's number two cable operator announced a similar joint venture with Sprint and MCI, and yesterday Qwest Corp. began offering Internet phone service in the Minneapolis area.

For years telephone lines and wireless cell phone networks have carried most calls to their destination, but a growing number of consumers are bypassing local and long distance carriers and using the Internet to place their calls. It's called voice over Internet protocol, or VOIP.

Today, I got a quick demonstration of how one corporate giant's system works. AT&T's system is being tested in a handful of trial markets nationwide. Technology specialist Larry Crenshaw showed me the ropes.

RAY SUAREZ:

Let's begin at the beginning. What do I have on my desk at home that makes this different from just having an Internet access account and a telephone?

LARRY CRENSHAW:

Well, the only addition to your home desk setup would be this d-link router box here. What this box does is it hooks up to your high-speed Internet connection at home and then it enables you to place phone calls through this box.

RAY SUAREZ:

Do I need my computer on to be able to make a phone call?

LARRY CRENSHAW:

No, this is non-dependent on your computer, so your phone basically acts on its own.

RAY SUAREZ:

So I want to make a phone call, what do I do?

LARRY CRENSHAW:

Making a phone call is just as simple as making a phone call today over your regular phone line.

RAY SUAREZ:

Where did that phone call just go that is different from where anybody else's call goes?

LARRY CRENSHAW:

The difference is that phone call travels over AT&T's Internet, so that call went out through the telephone set through the box, and it went over the Internet to the phone on the other end.

RAY SUAREZ:

And did the phone on the other end need to have a d-link box to receive the call?

LARRY CRENSHAW:

No, the great thing about this is this phone will call any phone out there, so you don't need to have any special phone lines. It works hand-in-hand with the phone network that's in place today.

RAY SUAREZ:

Until recently, Internet phone technology was used mostly by businesses. Most cable, broadband, and phone companies say they plan to add Internet phone service to the basic consumer packages within the year.

RAY SUAREZ:

More now about this emerging technology and competition within that industry. It comes from David Bennahum, the media and technology columnist for Slate Magazine. David, welcome. Since this is not a new technology, why is it such big news that giants like Time Warner and AT&T are getting into the pool?

DAVID BENNAHUM:

Well, the reason it's big news is that by having AT&T and Time Warner get into this, it's making it a lot easier and a lot more accessible for less technologically sophisticated consumers to start using these kinds of services.

RAY SUAREZ:

What have the barriers been until now for home adoption, widespread consumer adoption of this method for placing a phone call?

DAVID BENNAHUM:

The main barrier has been the complexity of setting up, wiring your house to do this with all those boxes. When the guy just now on the segment showed you the d-link box, that in itself is a big leap forward in terms of making things simpler.

In principle, the consumer can now get the simple box, connect it to their high-speed cable modem or other high speed connection in the house. If all things work as they should, they plug in their phone box, they are getting a dial tone and suddenly they're using their Internet system. That's a leap forward from where it was maybe 18 months ago when it was extremely cumbersome and difficult for the average person to do something like that.

RAY SUAREZ:

The number of people in the United States with home broadband accounts of various kinds has been growing very rapidly. Will this force the cost of local and long distance service lower?

DAVID BENNAHUM:

That's really the big business question that is being opened up by these developments right now. By routing calls on to the Internet and by having so many homes with high-speed Internet connections, you are fundamentally changing both the nature of how phone calls are completed, but what we charge for phone calls.

That's really the underlying big business issue tonight and today which is simply that the price of phone calls is going to continue to drop and perhaps even collapse to unprecedented low rates.

RAY SUAREZ:

You have already talked about how these new entries into the market will make it easier for the non-tech savvy user at home. What about those people who are a little bit familiar with how their computer works now, know how to download software off the Internet, are there cheaper options out there for making point-to-point phone calls over the Internet?

DAVID BENNAHUM:

Well, the most extreme version would be to make the phone call through your computer without even that box that AT&T was giving out. There's a program called Skype and Skype is a free program that you can download for the very tech savvy and actually make phone calls directly to other people who have Skype completely for free with no additional hardware other than a microphone hooked up to your PC, which most already have.

In the case of Skype, I think that went public in late August of this year and they have I believe over 4 million users currently on that network. So that's for the more advanced user who is willing to take the leap forward, and the advantage is it's completely free.

RAY SUAREZ:

So is this another one of those technology stories where eventually down the road less sophisticated users become more sophisticated and the more challenging technology becomes a real threat to the simpler one?

DAVID BENNAHUM:

I think in a sense, in this case it's an example of technology actually being very sophisticated that gets simpler to use. In my case — and I consider myself a fairly sophisticated user — I did sign up for one of these new phone systems five weeks ago.

I have been using it for five weeks in my home. It's been extraordinary and it's very hard for me to imagine ever going back in a sense to the way things used to be partly because as a tech savvy user I get all these neat features that I never would get with a normal phone.

For instance, I can log on to the company's Web site that gives me the service when I'm away from my house and actually look at my caller ID and see who may have called me and not left a message while I wasn't at home. I can also tell the system to get a copy of my voice mail and send it to my e-mail address so when I'm not home, I can get my voice mail through e-mail.

Additionally if there's a problem and I am not able to get home I can remotely tell the system to forward my phone calls just for the next few hours to my cell phone. I can do that remotely. Those are lovely features that for a more tech savvy person are very easy to use and completely hard to do using a traditional phone.

RAY SUAREZ:

Let's look at the challenges that this throws into the marketplace. Telephones, regular old telephones have been one of the most heavily regulated industries in the United States for what — like a century. Is this an unregulated part of the telephone world or less regulated?

DAVID BENNAHUM:

Let's put it this way, for the moment it's unclear where this falls. Is this an Internet service and right now the Internet is largely unregulated — or is this a phone service that fills regulations and should be subject to tariffs and fees?

Actually right now the FCC having hearings or discovery on whether or not this phone service should be taxed and regulate as traditional phone services are. There are players on both side with different points of view depending on what they have to gain and lose in this situation.

So it is a profound change in the nature of business in terms of how things will be taxed and regulated and where this falls out is going to have a big impact or what consumers pay for these services, for these Internet-based phone systems.

RAY SUAREZ:

But for the moment, anybody who brings high speed Internet service to your home can make themselves essentially into a phone company?

DAVID BENNAHUM:

That's correct and even the people who don't bring the service into your homes can ride on top of it. So in the case of a high speed provider — let's take Time Warner for instance — Time Warner Cable provides over 9 million houses now with high-speed Internet access; they've started selling a telephone option on top of the Internet that they give.

They started with a trial in Portland, Maine. They have five or six thousand households using it. It's been very successful according to them, and so now they've announced that they're going to roll it out — make it available to every household in the United States that can get the Time Warner cable signal. So that's an example of a company that owns a broadband that sells the service.

There's a company that I'm using that doesn't provide access. They sell this box and give you a phone number and if you have Internet high-speed access you can call them up and they'll send you the equipment and connect it yourself at home.

RAY SUAREZ:

This must also represent a profound business challenge to the companies providing this service not on the Internet like the local Bell operator companies?

DAVID BENNAHUM:

That's correct. For them they have a legacy which is this infrastructure built over the last 100 years that has been upgraded and so forth but nonetheless has certain high fixed costs. And they are suddenly competing with another provider let's take Time Warner who actually is delivering high-speed access partly out of a cable television offering, a high speed Internet offering, and now a telephone offering. Time Warner is getting a lot of revenue from the pipe.

The phone company on the other side isn't offering cable TV and they don't have as many revenue streams coming in. And for them to really cut prices, at some point they can't cut prices as far as Time Warner for the simple reason that they are not offering other services like television on the same cables.

Theoretically, the phone company, the local traditional phone company would have a harder time staying profitable and matching the low pricing on these competitors. They could match, of course, match it but it could you tear a hole into the balance sheet in terms of actual losses on a quarterly basis.

RAY SUAREZ:

And when you look back at how Americans have adopted different technologies over the last ten to 20 years, what is your feeling being how quickly this will become a regular item in our daily lives?

DAVID BENNAHUM:

I think within the next five years it will be completely widespread and a regular item in anyone's life with a high speed Internet connection.

I think in the corporate environment remember this is a huge application for businesses because as a company you can say, you know what, we already have fiber optic high-speed Internet access coming in to service our hundreds of employees with computers on their desks, let's migrate all the phones over to this kind of network, this Internet based network and cut our prices tremendously in terms of what we pay to the phone companies.

RAY SUAREZ:

And your phone number moves in effect wherever you move, right?

DAVID BENNAHUM:

That is the huge development that has been going on. In the old days it used to be that if you switched phone companies you couldn't keep your phone number.

Most recently on Nov. 24 the FCC said if you switch wireless carriers you can switch it. Not only that you can but you can take your wireless number and switch it on to your land line at home. This has removed kind of what was an artificial barrier in the phone business because frankly many people kept the same phone company for the simple reason they didn't want to lose their number.

Everybody has their number in their rolodex; they didn't want to have to deal with having to update everyone's information. Now you can simply switch companies, keep that same number and no one is any the wiser who is calling you and you may be suddenly saving a lot of money.

That's a huge change in making it easier for consumers to have choice and of course increases competition in this marketplace.

RAY SUAREZ:

David Bennahum thank you for being with us.

DAVID BENNAHUM:

A pleasure, Ray. Thank you for having me.