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JULY 9, 2003
By Alex Salkever With iChat, Who Needs a Phone? [Page 2 of 2] VOICE OR DATA? Already the Baby Bells and long-distance companies are seeking to consolidate their hold on that role with fierce lobbying efforts aimed at regulating so-called voice-over-IP communications, like iChat. Upstart companies, such as New Jersey-based Vonage, have the audacity to tap into the phone system the cheap way. Rather than pay stiff interconnection fees to complete long-distance calls or costly tariffs to rent high-capacity local circuits, Vonage and others others sell specially equipped phones that can turn any home broadband connection into a phone hook up. The voice traffic flowing over these users' broadband connections is virtually indistinguishable from data traffic. On the Net, surfing to Amazon.com and phoning grandma can be one and the same. Vonage charges a flat monthly fee $40 for local and long-distance calls inside the U.S., and calls to foreign countries are a rather cheap 5 cents or 6 cents per minute. This development fulfills the often-made prophecy that voice communications, both local and long-distance, will become another flat-fee service. The Baby Bells and long-distance companies know this, too: MCI (WCOEQ ) offers a flat-fee local and long-distance plan to millions of U.S. subscribers. The Baby Bells, most notably Verizon (VZ ), have also begun experimenting with such packages (see BW Online, 6/6/03, "Phone Companies Find Bundles of Joy"). 500 MILLION USERS. Still, all of this presupposes a phone network and a system designed specifically to move voice traffic. Now, though, there's no longer any need for someone to sell voice service. Consumers can piece together their own phone networks over the Internet, thanks to the rising tide of iChat-like technology. Since most Internet traffic still travels over dial-up connections, that part of the phone network will still be necessary, and users will continue paying for connections to the Net. But there would be no reason to pay special fees, such as long-distance charges, for antiquated, dedicated voice phone service. Let's do the numbers. America Online (AOL ) alone has 350 million users on its two IM services, AOL Instant Messenger and ICQ. Several technologists have told me that what Apple has done, while technologically sophisticated, wouldn't be hard for other IM services to replicate. In fact, iChat and AOL IM are already compatible. iChat users show up on the buddy lists of AOL IM users and vice versa. Give all those users an iChat-like voice capability, and all of a sudden you have a phone network with more than 350 million users. These number don't include Yahoo and MSN's IM customers. If at some point those two interconnect with AOL's dominant IM network, the tally would likely eclipse 500 million. And once word gets out that you can have free phone service simply by signing up for IM, I guarantee millions more people will come aboard. YEARS, NOT MONTHS. The net effect on the telecoms would be nothing short of catastrophic. The rise of IM as a viable mechanism for voice communication would undermine the pricing power of flat-rate voice plans by virtue of being even cheaper than Vonage, which mails out phones that it sells below cost. A desktop microphone suitable for iChat costs $15. It will also eliminate the need for a middleman to mind the huge chunk of the phone networks used for interconnecting dedicated voice calls and the services associated with those calls. Everyone will be able to connect directly. That would hasten the decrease in the value and utility of legacy phone networks, which rely on massive penetration and use to make money. Granted, none of this could happen overnight. Big shifts in technology take shape over years, not months. Although Apple is making a big splash, it remains a bit player in the grand scheme, without enough users to shift markets. CELLUAR LIFELINES. Further, traditional phone service carries all sorts of regulatory baggage that makes replacing it with IM tricky. For example, voice-over-IP won't work if someone can't afford to buy a computer. Likewise, the phone goes down if power or the Internet connection goes down. That would be a serious problem because the legacy phone system remains a lifeline, although cell phones are a potential replacement here, too. After all, most users find their cell phones as reliable as local phone connections because no one buys a cell with a coverage plan that doesn't work in their own home and neighborhood. Further, cell networks have proven more resilient. Witness the aftermath of September 11, when mobile networks held up while Lower Manhattan's wireline circuits remained dark for days. In the past, Apple has contributed to big technological shifts such as introducing the graphical user interface to consumers and, more recently, creating a viable platform for digital music sales online. If past is prologue, then Jobs's latest innovation could hasten a coming age when anyone who wants to can use their PC to bypass traditional phone services. They could do this using simple connectivity, cheap hardware, and free software that's familiar to and widely accepted by hundreds of millions of Net users. That's bound to feel like a phone book dropping on the Baby Bells' heads.
 Salkever, Technology editor for BusinessWeek Online, is alternating with Charles Haddad on Byte of the Apple Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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