A tale of two technologies?

This is a profitable service, allowing uis to compete in areas we couldn't before.

This is the death knell for the industry. If we're forced to offer this, it'll erode our access charges and customer base.

This technology has come a long way and the quality is there.

It'll be another five years before the quality is what it should be.

Considering the current litigatigation, there's a chance this technology will go away.

This technology is here to stay.

Imagine attending a telecommunications conference and hearing these statements. It would be tempting to believe they weren't referring to the same technology, but they are. Next, it would be logical to think that half of these statements are false, but they are not. What is the answer to this riddle? The technology being discussed is VoIP, which works by sidestepping traditional phone lines and instead sends voice information in digitalized packets over the Internet or private broadband networks. Experts estimate that a VoIP longdistance call costs 2 cents per minute, making it up to 40% cheaper than landline services. And most VoIP providers sell their service for a set monthly fee, with unlimited long-distance.

[ILLUSTRATION OMITTED]

According to ABI Research, a market research firm based in Oyster Bay, N.Y., there were more than 37 million VoIP subscribers worldwide last year, and the firm predicts that number will increase more than seven fold by 2012. Domestically, In-Stat, a market research firm headquartered in Scottsdale, Ariz., recently reported that 20% of businesses in the United States use VoIP; it predicted that percentage will jump to 66% by 2011.

But wait a minute--isn't VoIP service terrible? With echoes, delays and dropped calls? VoIP proponents argue that categorization is a relic of the past and not representative of the service today. Others contend that VoIP is still not without its glitches and flaws. While these are conflicting opinions, there's some truth to both sides. VoIP service offered at low circuit speeds on the public Internet is prone to hiccups; VoIP service delivered on private broadband networks at high circuit speeds is virtually indistinguishable from landline service.

Even if VoIP naysayers concede that VoIP under the right conditions is a quality service, many point to the ongoing litigation between Verizon and Vonage (see sidebar) and speculate that if Verizon wins its case, Vonage and other VoIP providers will go away, signaling the end of the technology. But David Lemelin, a senior analyst for In-Stat, disagreed, "Even if Vonage ends, VoIP is here to stay," he said, acknowledging that it's an attractive service to providers. "As VoIP begins to take off, it's less expensive for VoIP providers to maintain their IT networks versus wireline networks with copper cable and switching equipment." Given such diverging viewpoints, it's not surprising to find small telephone companies and cooperatives at varying degrees of adoption and opinion.

In Defense Mode

Rural Telephone Service (Lenora, Kan.) has been offering VoIP since 2004, but Larry Sevier, general manager, is less than enthusiastic about the service. In fact, Rural Telephone does not bundle its VoIP with anything else. "We have 280 subscribers, but we're not advertising it," he said. "If a customer calls and says they're going elsewhere, then we tell them that we have a VoIP offering because we'd rather have them stay with us than go to a competitor."

In the case of Rural Telephone, competition comes primarily from Vonage, which offers nationwide service, as well as a local cable provider in some of its competitive local exchange carrier (CLEC) and incumbent local exchange carrier (ILEC) areas. Sevier said that to aggressively market its VoIP offering would be a mistake.

"We don't want to cannibalize our regular customer base and that's what would happen if we advertised VoIP," he said, noting that most VoIP subscribers are small business customers. "They like it because it's easy to forward messages to a wireless phone and vice versa."

In-Stat's Lemelin agreed that VoIP's follow-me feature is particularly attractive to small businesses. "You can set up parameters like 'At five, ship everything to my cell phone,' or 'If a call comes in, ring my home phone, work phone and cell phone,'" he explained, adding that these features are not unique to VoIP, but more VoIP users take advantage of them because it's easier to do so with VoIP. "You can turn it on and off, and program specifically or on the fly. It's increasingly serving people's mobility needs."

In addition, Lemelin said VoIP's unified communications features are a boon to busy executives. "It allows you to click and listen to specific voicemails," he explained. "If you routinely have 30 messages, you traditionally have to go through them one at a time to get to the one you want; but with unified communications, you can use your laptop or PDA and go right to the one you want."

Although attractive to small businesses, VoIP doesn't seem to be popular with residential customers. Rural Telephone's residential customers are not demanding this service. "We're not seeing a lot of people who want VoIP--if they even know what it is," he said. "Only the tech savvy seem to know what it is. Looking ahead, I don't think that's going to change."

The biggest impact on the industry from VoIP is that increasingly telcos will have to price landline offerings with bundles of long-distance minutes, Sevier said, noting that customers like that style of pricing. "That's one of the reasons so many people like their cell phones. It's not just the mobility, but they think these minutes are free, and they can talk as long as they like. That's not true, and they still have to pay for them, but they like that concept."

A Competitive Strategy

Formerly with Penasco Valley Telecommunications (PVT; Artesia, N.M.), Mark Reams, commercial operations officer at Chibardun Telephone Co-op in Cameron, Wis., said he can understand why a telco wouldn't want to offer VoIP in its own market, but he explained how his former employer has been offering VoIP service for the past year and a half in its subsidiary area. "PVT doesn't offer it in their cooperative area because they don't want to erode their base," Reams said, noting that occasionally the co-op breaks that rule if a member is going to drop his or her landline anyway. "They're in a competitive strategy not in a defensive mode."

So far, it's a winning strategy. "They have 1,500 subscribers, and that's more than 25% of the market," Reams said. "They fill their schedule all the time. They're still in a growth mode."

Interestingly, the co-op doesn't market its service using the acronym VoIP. "They call it 'digital voice,'" Reams said. "VoIP doesn't identify what you're selling. And in some cases, it could be a negative if a customer had a bad VoIP experience back when the technology was still getting baked."

Penasco Valley's VoIP service is bundled with its video and Internet offering, so it's a triple play. Reams noted that the co-op initially viewed VoIP as a way to leverage its existing plant serving its cable customers. "With the cable plant, they already have a pipe to that customer, and VoIP uses that existing pipe," he said.

"They run their VoIP on their own private network, and that's different than putting it on the Internet--that's an uncontrolled environment," Reams explained. "This way, you don't experience the echoes, delays and dropped calls that you would on the Internet."

For the service, the company employs a softswitch over its cable plant using NCS (National Cable Standard) signaling. There are occasional glitches in the service, but customers are very happy with it. "But that's just like there are glitches in landlines," Reams said. "And they survey them to get that information."

Early on, the co-op had some hiccups getting its cable plant to run voice. "You have to realize that telco people and data people have very different mindsets, and you have to get everyone on the same page," Reams said. "The data people think nothing of taking down a network in the middle of the day, but if it's carrying voice, you just can't do that."

Reams's advice to other telcos that are considering VoIP is to keep an open mind. "If you've got a negative impression of VoIP, it's time to take another look at it," he said.

"We are past the days of VoIP being a substandard product--It's fully baked. The reality is that we're making money providing a good service and able to compete in an area that we may not have been able to without it."

Testing ... One, Two, Three

Hemingford Cooperative Telephone Co. (Hemingford, Neb.) has been testing VoIP on a wireless local loop. "The tests were positive, so in six months, we'll have VoIP," said Theron Jensen, Hemingford's general manager. "Our company is trying to diversify, and we're looking into other sources of revenue."

Like Penasco Valley, the co-op would only offer its VoIP service in its CLEC area. "Our customers will probably be residential users who still use a landline," Jensen said.

Hemingford also will use its own proprietary network. "We're looking at a 700 MHz proprietary wireless system to deliver VoIP," Jensen explained, adding that the co-op hasn't had good experiences with unlicensed spectrums." At 700 MHz, that's spectrum we own and have experience with, so that allows us to control the user experience and the quality. It also eliminates another operator from coming in and building over us.

"In addition, the 700 MHz range works up to 12 to 15 miles away," Jensen continued. "We've even pushed it to 22 miles. At 700 MHz, we have further reach, and it goes through vegetation well--If there are a lot of trees, it can't penetrate that--but it still goes through vegetation better than unlicensed spectrum."

Still Experimenting

David Schmidt, general manager of Heart of Iowa Communications Cooperative (Union, Iowa), agreed that it's wise to test VoIP service. "Too many times with new technologies, we've jumped in without testing it and we've bloodied our nose doing that because then our customers have problems with it," he said. "If you haven't fully researched it and it gives you a black eye, it takes a while to recover from it."

To avoid black eyes, Heart of Iowa has been experimenting with VoIP for the past five years. "This lets us work out the bugs, understand it, and gives everyone a chance to play with it," he said.

Even though the co-op has VoIP capability, it's not offering it to its subscribers. "We'd lose our access charges by selling that service," Schmidt said, adding that he doesn't doubt that some of his subscribers use VoIP from a national competitor, such as Vonage or Skype. "When subscribers cancel their landline service but keep their Internet, the customer service reps ask them what they're using for voice, and most of them are using their cell phones. We haven't seen too many drop their landlines for VoIP."

Even so, Schmidt said he plans to borrow a piece of equipment from Iowa Network Services (a consortium of independent telcos throughout Iowa) to see how much voice traffic is going over the telco's broadband network. "We're not listening to calls, but it'll allow us to see how many customers are using VoIP," he said.

Ready for Business?

One advantage that small telcos and co-ops have in the VoIP arena is their personal relationship with their customers, particularly when it comes to businesses, In-Stat's Lemelin said. "There's a certain amount of loyalty in rural areas," he said. "A lot of rural [business] customers will go to the local telco and say, 'I can save 40% on my total bill [with VoIP] because I have a lot of long-distance calls or international calls--can you do anything for me?' They wouldn't necessarily do that with a larger telecom provider. Rural telcos have to work with them to come up with a solution."

Chibardun's Reams offered a perfect example of this scenario. "A local hospital uses 250 IP CENTRIXS with us," he said. "If we couldn't offer it a quality service, we'd be in trouble. They're very pleased with the service, and that's a great testimony to us."

But Heart of Iowa's Schmidt said he doubts if VoIP is ready for business. "Some of our businesses make multimillion [dollar] deals over the phone. Can you imagine a business call with VoIP and someone says $10 million and other end hears $1 million and says, 'Okay, let's go with this,'--you've just lost $9 million," he said. "VoIP is too sporadic--businesses need a good landline phone. Until the quality gets better with VoIP, I don't see many businesses jumping ship."

Schmidt estimated that it will take five years before businesses get on board. "By that time, the quality will be good," he said. "That's probably the point that the technology will catch up with the hype."

Gauging When to be Proactive

In-Stat's Lemelin said he understands telco's reluctance to roll out VoIP. "To their sales people, it's contra revenue," he said. " Yes, they're getting a lower amount of money from these customers, but they have to weigh that against the risk of losing them altogether. As VoIP becomes more mainstream, more people will want it for the savings."

Lemelin disagreed with Schmidt's five-year projection. " Eventually, telcos have to make it less of a reactive strategy and more of a proactive strategy," he said. "They only have a year or two left where they can be reactive."

But Schmidt argued that demographics can play a role in the decision about when to roll out VoIP. "If your population base is older, stable people--50 and above--that's a different story than if you're in a suburban area with lots of young people," he said. "Older people would get frustrated with VoIP and won't put up with poor quality, even though they put up with it with their cell phones. There's a different outlook for the landline phone--that has higher expectations. People don't care what technology is behind it--they want it to work."

Lemelin countered by saying that telcos shouldn't discount the possibilities of people retiring to the country. "More and more people want to live in a rural area, but they still want the big city amenities," he said. "Rural telcos have to realize the importance of VoIP and begin getting this in their portfolios."

Schmidt agreed that small telcos only have two to five years to get ready for VoIP. "And if they wait until year five, they may not be here," he said, adding that this is particularly true if there are cable companies in the company's service area. "That's a threat because they're now offering customers $39.95 for phone, cable and Internet if you take it for a year, and then it'll jump to $49.95 or $69.95; but by then, people are hooked."

The telco industry has been slow to react to VoIP, Schmidt said. "We are set in our old ways and we don't want to change, but we should all be thinking about VoIP and preparing for it because you don't want to have to start from scratch," he said. "If access charges go as low as everyone wants them to go, all telcos will have to find other ways to make money."

Rachel Brown is a freelance writer. She can be reached at [e-mail].

RELATED ARTICLE: Verizon vs. Vonage

In June 2006, Verizon sued Vonage in the U.S. District Court in Virginia, alleging that Vonage infringed on seven of its VoIP patents. Vonage denied the charges, arguing that it uses its own proprietary technology that is licensed from third parties. In March of this year, Vonage was found guilty of infringing on three of Verizon's patents and ordered to pay $58 million to Verizon, as well a royalty of 5.5% from every sale to a Vonage customer. In April, Vonage was able to convince a federal appeals court to grant a temporary stay of the earlier lower court ruling while it files an appeal.