Sometime before this summer, British telecom giant BT will introduce a service allowing some of its customers to make free phone calls. Pierre Danon, chief executive of BT Retail, tells Time that the company's broadband Internet service, BT Yahoo, will provide customers with software that lets them make free calls to others with the same software. "The real interesting part is that it won't just be voice, but video as well," says Danon. "You can click to see and call." How can BT afford not to charge for calls? And more importantly, why would it want to?

It all has to do with a long-dormant technology called Voice over Internet Protocol (VoIP), which routes calls through inexpensive Internet networks rather than over traditional telecom pathways. In the mid-'90s, some analysts predicted that VoIP would put an end to the high cost of long-distance telephony. But VoIP never caught on, except among a few hard-core enthusiasts. The problem was poor quality: calls were routinely and abruptly ended due to technical glitches, and conversations were made difficult by time delays. Now, after almost a decade of false starts, VoIP is finally coming through loud and clear.

The quality problem was solved thanks to the proliferation of high-speed broadband lines, over which VoIP calls sound far better than they do over poky dial-up lines. As the number of broadband users grows worldwide — research firm RHK says there were 122 million last year, a figure expected to nearly double by 2007 — VoIP will become increasingly attractive to consumers. This year in the U.S., AT&T, Verizon and cable-giant Time Warner (which owns Time) all plan to launch VoIP services that will enable users to plug their phones into the Internet to make or receive reduced-rate calls. Arizona market-research firm In-Stat predicts a global consumer VoIP market worth $741 million this year, growing to $3.7 billion in 2007. London-based Ovum says that almost half a

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nginx/1.14.0 (Ubuntu) million business phones will be equipped with VoIP this year, surging to 9.2 million in 2008. "VoIP will permanently change the cost base of telephony services in a radical way," says Ovum analyst Mark Main.

But how can a phone company make money by giving calls away? Danon says that BT intends to do it by charging for extra services, like connecting VoIP calls to nonsoftware users and providing voice-mail facilities. He's convinced the technology won't cannibalize BT's conventional voice business because VoIP users will be "incremental" callers whose traffic BT otherwise would not have.

VoIP is also making waves in the mobile market. Within the next six weeks, Skype — a software firm run by Swedish entrepreneur Niklas Zennström — expects to complete a deal with an unidentified handset maker to incorporate software allowing users to make free calls to other mobile or PC users with the same software. For such phones to work, the handset would need built-in wireless Internet access enabling mobile users to bypass conventional networks to make VoIP calls. The caller would also have to be in a wi-fi "hot spot" to get Net access. What does all this mean for the mobile operators who spent billions on so-called 3G networks to provide just these kinds of services? "We'll have to give market-clearing [i.e. cheap] prices on voice," says Vodafone chief executive Arun Sarin.

Another advantage for VoIP is that, at least for the moment, it's surprisingly unregulated. Traditional telephony is more heavily regulated than the Internet because it has been dominated by monopolies that could impose unfair prices. But U.S. Federal Communications Chairman Michael Powell tells Time that VoIP deserves a light touch because it's no different from other Internet processes that transmit bits of information. "If you think VoIP should be regulated, you're going to have to explain to me why not e-mail, why not photos, why not video," Powell says. The European Union has yet to make its regulatory position clear on VoIP. Meanwhile, service providers like BT and AT&T aren't waiting for regulatory decisions. They're moving quickly to establish a place in the market. VoIP has long been seen as a technology only a geek could love. It now looks like it's ready to go mainstream.

• MARK HALPER
• Voice-by-Net could slash costs — and challenge 3G