Say Hello to the Next Phone War

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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.