The Ultimate Calling Plan

As phone service moves to the Internet, CFOs face a tricky cost/benefit calculation.

While SBC’s $16 billion acquisition of AT&T guarantees that 2005 will be a landmark year in telecom history, the more momentous development may prove to be the broad acceptance of Internet-based phone service. M&A activity has reached the point where no deal is truly shocking, even one that reunites entities that had been forcibly split apart by judicial fiat only a decade ago. While the news of AT&T’s demise carried plenty of symbolic weight, it won’t change life as we know it. But VoIP just might.

The idea of having voice traffic move across the Internet is almost as old as the Internet itself, but VoIP (pronounced “voyp,” for voice over Internet Protocol) has progressed slowly, beset by technical problems that hamper audio quality and, more important, economic issues that favor current telecom infrastructure. (While some make the distinction between VoIP, which, strictly speaking, pertains only to voice traffic, and “Internet telephony,” which refers to any and all combinations of voice and data traffic that move over the Internet, VoIP is often used interchangeably with Internet telephony. That is how we use it here.)

But while AT&T stumbled and sputtered and then was suddenly gone, VoIP has stumbled and sputtered and now seems to be everywhere, eagerly discussed from the halls of Washington to the snack rooms of Silicon Valley. Technical kinks have been worked out, vendor competition is fierce, and the promise of sexy new applications that boost productivity by combining voice and data functions in novel ways is suddenly very real.

And then there’s the simple fact that telecom gear wears out. At Prudential Northwest Properties, a Portland, Oregon-based real estate brokerage with 800 employees in 16 locations, the company’s PBX (private branch exchange, or switchboard) and supporting equipment began to show the effects of aging in 2000. Meanwhile, the cost and maintenance of its outsourced voice-mail service were also getting unwieldy. Something needed to be done, but the question was whether to upgrade using traditional technology or take a step into the future with VoIP.

Maybe it was millennium madness, but the company decided to be bold. Working with telecom provider Verizon Communications and systems architect 3Com, it built a VoIP network that, according to finance and operations vice president Jon Spencer, “replaced several aging telephone systems in various offices and eliminated an expensive outsourced companywide voice-mail system.” Spencer says the company’s telecommunications costs declined significantly almost at once.

Stories of hard-dollar savings, combined with softer benefits such as the ability to listen to E-mail and read voice mail, form a potent marketing message. But don’t expect the phone companies to shut down the public switched telephone network (PSTN). Few technology devices are as dependable as landline phones for quality, reliability, and security. There’s nothing like having 130 years to get the bugs out.

But that reliability comes at a price, and if you’re calling from a hotel room, that price may equal a year of your child’s college tuition. The fundamental appeal of VoIP—that a phone call is priced the same as an E-mail (that is, virtually free, except for the fixed cost of the Internet service)—is so alluring that the problems often associated with VoIP don’t seem particularly daunting. Voice quality, an overreliance on the Internet as an all-purpose network, the initial investment in new equipment, security concerns, and worries that the federal government will regulate (and tax) VoIP in unforeseen ways have not dissuaded vendors or customers from moving forward.

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