End of Phone Companies As We Know Them?

Online phone calls are posing new challenges for the industry's telco giants as a growing clan of Internet telephony upstarts prove the service is more than just another cyberspace gimmick.

Moreover, Internet telephony executives say to succeed in the post-telecom reform environment, a telephone company not only must offer Internet service but also must be an Internet company.

Such startling talk has been amplified by an apparent lack of interest in voice over the Internet on the part of the telcos. That fact has delighted such Internet telephony players as VocalTec, IDT Corp., Micom Communications Corp. and others that have paved the road of a new technology and are now poised to enter the next generation of voice over the Internet. Other tech giants such as Netscape Communications Corp., Microsoft Corp. and Intel Corp. are hooking up with these little companies that already have the market figured out.

Two major surprises in the industry also suggested that the plain old phone company is going the way of the horse and buggy. AT&ampT President Alex Mandl stepped down to run a small but promising wireless firm. And earlier this week, WorldCom Inc., Jackson, Miss., announced it will buy Omaha, Neb.-based MFS Communications, the value of which was bolstered considerably by its recent acquisition of Internet access provider UUnet Technologies Inc. The acquisition is worth $14.4 billion and would make WorldCom a larger company than MCI Communications Corp., Washington. (See related story on page 22.)

AT&ampT, Basking Ridge, N.J., is interested in Internet telephony but is guarded about its plans.

Better do it fast. Consultant Jeff Pulver, an expert in the Internet telephony field, is holding the first conference dedicated to the issue in New York at the beginning of September. The Talking Net Conference is designed in part to show how a consumer product is being turned into a major business tool.

In fact, the driving force behind using the Internet and Internet protocol to talk to people is that it finally seems to have a business use.

VocalTec Ltd., which is based in Israel and has U.S. headquarters in Northvale, N.J., introduced Internet phone software in February 1995, which makes it a pioneer of the industry. This month, VocalTec launched its strategy to join traditional telephony with Internet phone, targeting its efforts toward business customers.

"This truly is the start of a new era in telecommunications," said Dr. Elon Ganor, chairman and CEO of VocalTec. The technology uses computer hardware from Dialogic Corp. "As more enterprises and individuals take advantage of the Internet for information delivery, developers and systems integrators will want to build enhanced solutions that maximize Internet-based communication," said Howard Bubb, president of Dialogic.

Next week, Micom Communications Corp., Simi Valley, Calif., plans to unveil its new Internet protocol phone product, also aimed at the corporate customer.

"We focus on squeezing the most out of the pipes," said Kenneth Guy, vice president for marketing and corporate strategy at Micom. The company was recently acquired by Nortel, showing another telco strategy to get into the Internet market.

The V/IP product allows business people to make free phone or fax calls within a company over its Internet protocol network. "Think of it as a prepaid phone card," said Guy. Micom estimates companies using the technology can cut intrabusiness communication costs by 70 to 80 percent.

Micom has also formed a partnership with Microsoft, said Guy, to work on compatible standards. Other alliances are forming, too.

However, Micom differs with some of its competitors in that it doesn't see Internet telephony -- as opposed to Internet protocol telephony -- ready for average use. There's still a problem with voice quality, said Guy.

Regardless, the Internet phone market niche is expanding now more than ever because businesses are interested. Explains the Internet Society's Heath, "This will move very fast because there is an economic incentive behind it."