Say Hello to the Next Phone War

When a customer walks into any of the 150 branches of Sports Soccer, a retailer of sports clothing and merchandise in Britain and Belgium, he might as well be walking into all of them. If a certain product say, a soccer jersey is unavailable in the store he's in, the clerk can check the inventory of all nearby branches through a brief phone query. The clerk doesn't actually talk to anyone, but with a few keystrokes she uses the phone to check a database and locate the nearest store with the shirt.

Welcome to a world in which the phone becomes a computer, and the computer a phone. Sports Soccer is using voice-over-Internet protocol (VOIP) technology, which allows the transport of voice, data and video over the same network. And as the various kinds of communications become intertwined, the sum is greater than the parts. The phone that the clerk uses is an IP phone from Cisco Systems that packs more punch than your old handset could even dream of.

Eight years after its introduction, VOIP is having its moment. Indeed, 2004 is sure to be the year in which the technology hits prime time. While spending on a lot of telecommunications equipment is stagnant, sales of Internet-enabled phone systems to businesses are expected to grow 80% in 2003, to $1.6 billion, ultimately reaching $5.3 billion in 2007, according to Synergy Research Group. Some 30% of phone lines shipped are already IP-enabled, and many experts predict that IP shipments will surpass traditional phone lines next year. The opportunity has set off a scramble among equipment makers and service providers that is a welcome respite from their sluggishness of the past few years.

The competition includes such telephone-equipment makers as Avaya, Citel Technologies, Mitel Networks, NEC, Nortel Networks and Siemens, which are all pitching products to move customers from traditional phone systems to a converged voice-and-data network. On the other side, network-equipment makers like Cisco and 3Com are suggesting that companies dump their phone providers entirely and go with IP-enabled systems and phones. IP start-ups like Pingtel, Shoreline Communications, Sylantro, Veraz Networks and Vertical Networks are pushing both sides to innovate.

As with the wireless revolution, phone companies have to beat 'em or join 'em at the risk of cannibalizing their own business by pitching VOIP services to their customers. But even if the phone companies' long-distance revenues plummet Vijay Bhagavath of Forrester Research figures that a company with 10,000 employees can reduce its long-distance bill 70%--some of that lost revenue can probably be regained over the long term through value-added services that the voice-data combination is just beginning to make possible. For that reason, most of the major phone companies AT&T;, BellSouth, Qwest Communications, Sprint and Verizon have already announced a VOIP offering of some sort. They too are responding to upstarts like end-to-end IP service provider GoBeam, based in Pleasanton, Calif. Ultimately, residential customers will reap some of the same rewards.

Here's how VOIP works. Instead of using traditional "circuit switched" phone networks, which utilize a dedicated connection between callers, companies can digitize sound waves, divide them into packets of data and send them over a data network the same way you would send e-mail. VOIP first gained prominence in 1995 as geekware. The initial draw: avoiding long-distance charges a concept known as "toll bypass"--by steering clear of the "public switched-telephone network." The technology was beset by a host of technical glitches, though, so most phone companies and businesses wouldn't go near it.

We're now entering the second phase of IP telephony, one in which companies can not only save money by consolidating voice and data traffic on one network but also reap productivity gains that would have been impossible in the past. Industries with heavier information needs financial services, health care, retail have been quicker to adopt the technology, but industry observers say the benefits are just too great for any holdouts to remain that way for long.

The Holy Grail of IP telephony is a new breed of application that will improve information flow within an organization and with its customers and suppliers. When calls come in to customer-service reps at Harley-Davidson, for example, custom IP telephony software from Cisco automatically brings up on the reps' screens information relevant to the callers such as recent purchasing or repair activity. That has improved the reps' efficiency as well as the quality of customer interaction. Another plus: cost savings. Reid Engstrom, director of information services for the motorcycle maker, which is based in Milwaukee, Wis., predicts savings of $550,000 a year in staffing costs from that increased productivity and savings of $1.3 million annually from improvements like reducing warranty costs through earlier resolution of problems.