Internet Telephony

What's to Come?

by Daniel Jiang

December 6th, 1996

ABSTRACT: Since the introduction of Internet Telephone by VolcalTec in March 1995, the development in so called internet telephony field can only be described as intense. The single most important reason for all the interests in internet telephony is its low price. What does this mean to the future of voice communication market? This paper attempts to answer this question.


Internet Telephony


In March 1995, VocalTec released Internet Telephone, a software for voice communications between two users through the internet, and the dam of so called internet telephony is broken...

The immdiate reaction to VocalTec's pioneer work can only be described as intense. Since its introduction, over 600,000 copies of Internet Telephone's demonstration version were downloaded. Other companies soon followed. By now there are over 20 internet telephony software and products available. One major entry is Insoft's CoolTalk, which is bundled with netscape. Since Netscape claims an installed base of 25-30 million users, the scope of internet telephony's availability is clearly enoumous. In another instance, America Online, the nation's number-one online service, plans to roll out net phone calling for its members by year's end. The media reaction has also been dramatic: VocalTec's PR firm claims that 1,000 stories were published about Internet Telephone in the first month of its existence.

The attraction of internet telephony is obvious, the huge price difference between long distance phone calls through internet and long distance telephone carriers. For example, at $0.15 per minute, one hour's long distance call between two cities in the United States costs about $9.00. One hour's call through internet, on the other hand, may cost as little as $1.00, in the form of internet access fees.

Is the promise of internet telephony too good to be true? What's going to become the future of internet telephony? This paper attempts to answer these questions.

The rest of the paper is organized as following:

How It Works

In this section, I describe the mechanism through which internet telephony is realized. Also, the reasons for the price advantage of calling through internet to traditional long distance telephone carriers calls are discussed.


As its name indicates, internet telephony works by using internet for transporting the voice information between the two users instead of the traditional public switched telephone network (PSTN). The figure below shows the difference between these two connection methods.

How Internet Phone WorksThe using of PSTN is straightforward. A caller picks up the phone, which is already part of the PSTN, and dials the destination number. If the receiver phone is not busy, a circuit is set up all the way from the caller to the callee through the long distance carrier network. For the duration of the call, this circuit is maintained to provide a reliable connection.

To use the internet for telephone calls, all voice communication must be converted to digital information at the speaker side, transmitted through internet to the receiver side and converted back to analog voice signal. There are three ways of doing that:

The quality of internet telephone calls depends on several factors, including the network condition, voice compression algorithms, etc. When the internet is not congested, the voice quality of a connection can be as good as calls placed through PSTN.

Another common problem of internet telephony is the long delay users may experience. Because internet is really a store and forward network, and time it takes for some sound bits to travel from one end to another may vary greatly. Below is a casual measurement of delays between Berkeley, CA and some other cities. Please note, this is done at about midnight, when the internet is relatively lightly loaded. This is only meant as a casual view of how the delay for internet voice call may be like.

In the above table, a round trip measurement is taken between Berkeley and all the listed cities. The minimum, average and maximum round trip times are reported. As the table shows, a coast-to-coast call over the internet is expected to have about 50 to 75 ms one-way delays.

Assuming both users use modem to connect to internet, then a modem delay should be added for both ends. The above table shows the measurement for round trip delay in a local modem connection at Berkeley, CA. The average value is around 150 ms.

In short, if both ends of an internet telephony connection use modem connections, the one way delay should be about 200 ms given a reasonable network condition. This value is within acceptable delay bound for interactive voice communications, which is about 300 ms.


The simple truth is that, internet telephony is attractive because it is cheap. According to Andrew Sears of MIT, there are three major ways through which internet telephony produces pricing savings.

Internet is a shared resource, and as a collective open network, its cost of leasing T-1 or T-3 lines is about 5 to 10 times less than the cost of leasing individual lines of the same bandwidth. Furthermore, due to the efficiency of voice compression and packet switching, up to 10 times the number of calls can be made over the same lines with reasonable sound quality, in comparison to analog PSTN routing. That means internet telephony could be up to 100 times less expensive in its backbone transport pricing than calls through conventional long distance telephone transport.

Another reason for the low price is the absence of local access charge on internet access lines. For a traditional long distance call, the long distance carrier is required to pay 2.5 cent per minute to the local telephone companies for the connections to and from the users' phone. Internet service provider (ISP), however, is not required to do so. With the pricing of unlimited internet access at 28.8 Kbps at about $20.00 per month being the trend, the pricing of internet telephony is indeed very cheap.

Based on the above assumption, Andrew Sears shows that ISPs and phone gateways can charge voice calls twice the price for data and still be competitive against long distance companies' pricing.

International Discount Telecommunications (IDT) has announced that it will provide a Net-to-phone service that will allow domestic and international Internet Phone users to place calls through the POTS network in major United States cities for only 10 cents per minute. According to the above model, this is still a profitable price.

The Players

The intense reaction to the introduction of internet telephony naturally brings up a question: does this new technology represent a loss of revenue and market share for the long distance telephone companies? If so, what are the reactions from them? In this section, I describe the positions and strategies of various players in the voice communication market on this issue.

Long Distance Resellers

From a long distance reseller's point of view, new companies such as VocalTec Ltd. are providing phone service over the internet, but they aren't regulated like phone companies. And internet access providers, like America Online Inc., are using years-old rules that exempt them from paying local phone companies to complete their internet access calls. Furthermore, because internet telephony reduces barriers to entry and increases competition, resellers are naturally alarmed.

In response, America's Carriers Telecommunication Association (ACTA), which is mostly a resellers' association, filed a petition before the Federal Communications Commission (FCC) on March 4th this year. Their demands mainly consist of the following three:

Robert McDowell, an attorney for ACTA, said the issue is one of fairness.

Long Distance Wholesellers

Since most of the internet is carried by the long distance wholesellers (AT&T, MCI and Sprint), they are basicly making money on both the internet telephony and traditional telephone business. From this point of view, they do not view internet telephony with the same alarm as the ACTA members.

In fact, MCI and Sprint are expected to actively look into internet telephony as another way to take away market share from AT&T. AT&T, on the other hand, also plans to participate in the internet telephony. Its spokesman Russ Glover thinks internet telephony is a "potentially large opportunity. We're looking into the technology and economics of providing voice service over the Internet. But we need to consider the large installed base of telephones already out there in relation to the number of PCs there are." In other words, he doesn't believe the majority of people will replace their phones with this technology.

Internet Telephony Providers

The internet telephony market is just emerging. IDT, with its recently announced Net2Phone service would provide the first commercial service that allows internet users to make calls to regular phones. VocalTec, just very recently annouced its Telephony Gateway, which would provide telephone to telephone service through internet. MICOM Communications recently announced that V/IP (Voice Over IP) phone/fax IP gateway product. According the its press release, this product creates an overlay voice/fax network on top of an enterprise IP (Internet Protocol) data network. V/IP allows any user, from any telephone or fax machine in a company, to make free, G.729 toll-quality intracompany calls over the company's IP network.

But by and large, the internet telephony market is still in its earliest stage. Regarding the petition by ACTA, Shabbir Safdar, co-founder of Voter's Telecommunications Watch in New York, put his perspective as:


FCC is likely to keep its hands off the internet telephony. One reason, as said by FCC Chief of Staff Blair Levinn in an address to the INET '96 conference is that regualting the internet may simply be too difficult.

What's to Come

At present time, the potential for internet telephony service clearly exists, as exmplified by the strong interests shown by users, but the growth of the market is still going to be checked in the short run due to the following reasons:

Given the current limitations, the internet telephony market is likely to largely remain a niche market. In other words, Internet telephony market will be defined by a relatively small group of technology savey users who are willing tolerate less than perfect quality voice communication for low price.

Another interesting likelyhood is that some corporations would have incentives and technology knowhow to integrate telephone systems with their own IP networks. The technology is already avilable, as announced by VocalTec and MICOM Communications.

In the long run, however, the limitations discussed above would likely be resolved. That is, a standard for internet telephony would emerge. Internet backbone bandwidth would be substantially upgraded. And internet telephony would become user friendly.

Under such conditions, a wholely new "integrated services" network is likely to emerge. In addition to lower cost to consumers, one immediate result of such integration of computer and voice data would allow for whole range of new service such as voice-data integration (two or more callers can play a game while communicating vocally), web tours, customer selected audio quality, etc.


Internet telephony is in the process of rapid development. Although it hasn't yet to create a sizeable market, its impact on the future of voice communication is certain to be strong. Two important points are:


  1. The Internet Telephony Consortium
  2. Net2Phone offered by IDT
  3. VocalTec Offers Telephony Gateway
  4. FCC To Leave Net Telephony Unregulated
  5. AT&T Will Be In Net Telephony
  6. IPhone from HotWired
  7. The Effect of Internet Telephony on the Long Distance Voice Market
  8. An analysis of the ACTA Filing to the FCC on Internet Telephony
  9. V/IP Adds MICOM's Voice To Your IP Network
  10. Net calls cool' but worth it?
  11. Internet Telephony Is Cheap But Fickle
  12. 12 Webphones to Make Net Calls
  13. Internet-phone convergence makes for murky regulatory picture
  14. Internet telephony awaits FCC call
  15. Companies to offer computer to telephone system