The Globe & Mail
Wednesday, January 14, 1998

Phone companies rally against Internet threat

by Geoffrey Rowan, growan@globeandmail.ca

Canada's telephone companies used to snicker at the notion that they'll lose business to the Internet.

But as it turns out, they are more worried than they've let on. The phone companies are concerned that consumers will cut them out by using the Internet to make long-distance calls for a fraction of the usual costs.

They may not be able to stop it, but the phone companies hope to find a way to make money from it, and to raise your Internet costs in the process.

On-line telephony used to be laughable. You had to make an appointment to make a call. Both parties had to have a computer with a sound card and a microphone, an Internet connection and the same type of software running. Even then, the quality of the experience was just shy of two tin cans and a string.

But in recent months, some companies have set up on-line gateways that make it possible to place and receive Internet calls on ordinary phones, without an Internet connection.

The gateway acts as a bridge between the Internet and a telephone network. It receives the analog telephone signal, digitizes it, and breaks it up into packets that look like any other Internet data packet.

These packets are sent across the Internet to another gateway near their destination, where they are reassembled, converted back to an analog signal and sent over the local phone network to their destination. And voilà -- you've got a long-distance call for the price of a local one.

Companies offering these services have been selling them at discounts of 80- to 90-per-cent below average phone company rates, which is going to create demand.

In the United States, the market for Internet telephony will increase to $2-billion (U.S.) by 2004 from $30-million in 1998, says Forrester Research, a Cambridge, Mass.-based technology consulting firm.

The giant German phone company, Deutsche Telekom AG, is so convinced of the threat, it spent $48-million last August to buy a 21.1-per-cent stake in Northvale, N.J.-based Internet phone pioneer VocalTec Communications Ltd.

London-based telecommunications consulting group Phillips Tarifica Ltd. predicts that U.S. long-distance carriers could lose $620-million to $925-million in revenue in 2001, as a result of people using the Internet to make long-distance calls.

And that situation isn't fair, says Bell Canada and its partners in the Stentor consortium, who realize they will eventually lose a chunk of their long-distance cash cow.

The consortium has asked the Canadian Radio-television and Telecommunications Commission to make Internet service providers jump through hoops -- and pay for it -- because consumers might use the Internet to cut their phone costs.

Specifically, Stentor wants ISPs to register with their local phone companies and to pay fees that subsidize local phone service, all of which is about as popular with ISPs as chili dogs at a vegetarian cafe.

Right now, Internet traffic is exempt from these so-called local contribution fees, but the CRTC is re-examining its rules. The phone companies are lobbying hard to make sure that anyone using the Internet to save on long-distance charges has to pay.

But since all data packets look alike, ISPs would have to figure out a way to monitor their customers' traffic to determine who is using the Internet for voice communication. That's not a simple technological task.

It would be like asking the post office to start charging consumers different rates based on the contents of their mail, say some ISPs who have objected to the Stentor proposal.

ISPs whose Internet mentality is "live free or die" do not want to scrutinize the way their customers use their service.

David Hayward, president of North Shore Internet Services in New Glasgow, N.S., wonders where it will all end. Will broadcast and cable-TV companies demand contributions to make up for the revenue they stand to lose when Internet video becomes commercially viable?

Canada mirrors the situation in the United States, where the regional phone companies are arguing that ISPs should be forced to pay them a fee for every customer who hooks up to the Internet.

The U.S. Federal Communications Commission is collecting public and industry comments until Jan. 20 on whether ISPs should be reclassified as "telecommunications services."

If they are, the ISPs will have to pay fees to the phone companies. As in Canada, these costs will certainly be passed on to customers of ISPs.

It's not surprising that phone companies on either side of the border are lobbying to protect their revenue streams. But the submissions to their respective regulatory bodies indicates how seriously they are taking a threat they were laughing off just a few years ago.

Copyright © 1998 by The Globe & Mail. All Rights Reserved. Reprinted with permission.