Touching the Voip: a new age for phone calls

Broadband users can talk to each other for nothing, says Clayton Hirst, but the landline isn't dead yet

BT was rocked by a scam in the early 1990s. Fraudsters discovered that by jamming a bent paper clip in the slot of a public payphone, they could make a free call. In the few months before it cottoned on to the swindle, BT was conned out of thousands of pounds.

BT was rocked by a scam in the early 1990s. Fraudsters discovered that by jamming a bent paper clip in the slot of a public payphone, they could make a free call. In the few months before it cottoned on to the swindle, BT was conned out of thousands of pounds.

Today, people don't need to tamper with a phone for a free call. They can, instead, talk for as long as they want free of charge thanks to a technology called voice over IP (Voip). Using a broadband internet connection, computer users can talk for free to other Voip subscribers, though they are charged for making calls to traditional fixed-line numbers.

Until a few weeks ago, Voip was mainly the preserve of people with the necessary technical know-how. Making a call wasn't easy and it often took longer to set up the computer than it did to make a Voip call itself.

But all that is changing. On Tuesday, a new company was unveiled offering Voip to the mass market. Called Gossip- tel, it came hard on the heels of a similar launch by Skype, founded by the people behind music website Kazaa. The more established players - including BT, Thus, Wanadoo and Cable & Wireless - are waiting in the wings with their own Voip offerings for domestic and business customers.

Juniper Research says UK revenues from Voip will rise from £344m this year to £2.46bn in 2010. Some 22 per cent of homes and businesses with a broadband connection will have Voip by then, Juniper estimates.

"The big losers will be the incumbent operators like BT," says Marina Gibbs, a senior manager at Spectrum Strategy, a technology consultancy. "In Japan, which already has an established Voip market, the incumbent, NTT, was forced to dramatically reduce its charges when Yahoo! launched its service."

For its part, Gossiptel hopes to give BT a bloody nose. It is aiming for 100,000 subscribers within a year and, according to its co-founder, Kim Thesiger, many of them will have ditched their BT landline phones altogether.

More established firms, such as Level 3 of the US, are also eyeing the UK as a springboard to launch Voip in the rest of Europe. "This could be big. It is the number one product for us," says Jeff Tench, Level 3's European senior vice-president of voice services. "We are looking at growing this organically and through acquisition as we have a significant amount of cash. BT is not going to want voice over IP to happen. For them it is a threat."

In public at least, BT is backing Voip, if cautiously. It has already run a limited trial and it will launch BT Communicator, its first mass-market Voip service, in July. Broadband customers will be able to plug a special phone into their computers and make outward calls for nothing to other Communicator users; calls to landline customers will be charged at BT's standard rates.

But the company is playing down the significance of Voip. Andrew Burke, its director of online services, says: "Communicator will be used as a second phone line. It will complement existing BT services rather than replace them."

You wouldn't expect BT to say anything else: its fixed-line business generates billions in revenues each year. But some of its rivals are also trying to dampen the hype generated by Voip. Level 3's Mr Tench says: "A speculative bubble is developing here. It reminds me of late 1999. There have been a lot of announcements on voice over IP from companies we don't think will be around for very long."

Ironically, the biggest threat to Voip comes from the companies that are already fighting BT for market share in the domestic telecoms market. Through a process called carrier pre-select, they are able to offer discount landline calls through the copper wire into people's homes. Competition for customers has become so fierce that some operators are offering free calls - matching Voip's main selling point.

As a result, some telecoms firms have decided not to enter the domestic Voip market. Thus is one: it plans a launch purely for business customers. "I don't think voice over IP will be the death of the residential fixed-line phone because alternative carriers' charges are very cheap," says Kursten Shalfoon, Thus's head of product management.

If domestic customers do decide to sign up to a Voip service, they will be entering a world that is largely unregulated. Ofcom, the telecoms regulator, is promoting the development of Voip as it believes it will lead to further competition in the UK market. But the ground rules on consumer protection have yet to be established. The regulator won't properly address this issue until the summer, when it is due to publish a consultation document.

In the meantime, it has decided to focus on how to allocate phone numbers for Voip services. Traditional fixed-line numbers are based on geography - 020 for London, 0121 for Birmingham and so on. However, the regulator is proposing to issue a special number with an 05 prefix for Voip phones. This won't offer any clue as to where a caller is dialling from.

The proposal has divided the indus- try. Established operators such as BT and Cable & Wireless are supportive. Other companies, such as Level 3 and Wanadoo, are worried. "It will destroy the ability of Voip companies to compete effectively with fixed-line operators. I think the public often believes that a non-geographic number is at premium rate," Mr Tench says.

Not that this is dampening the spirits of Voip firms. Mr Thesiger at Gossiptel says: "This is the first time the big telecoms players have been faced with a direct competitor. There is good reason for the hype."