VoIP 1, telecoms giants 0: an upset in the group of death

Cheap web-based phone calls are tempting consumers, and now companies are being targeted in a threat to the big boys

Icy winds and snow showers rage outside CeBIT, the annual technology fair currently running in the northern German city of Hannover. But telecommunications executives would feel an even deeper chill if they walked into Hall 13.

This is where the telecoms equipment makers have their stands, and most are showing hardware or software for voiceover internet protocol (VoIP) - a technology with the potential to turn telecoms upside down in the way that the internet has transformed retailing.

With the call revenues of large telecoms companies such as BT already under pressure from mobile operators, the last thing they need to contend with is VoIP, which lets people turn their phone calls into digital packets and transfer them at rock-bottom charges over a broadband connection.

Internet telephony is already making inroads into the consumer market. EBay announced last year that it was buying the VoIP pioneer Skype, while Vonage gained investment from 3i. Low rates for international calls - and free calls between subscribers to the same service - have convinced consumers with broadband links to sign up in their hundreds of thousands.

This is becoming a big concern for the fixed-line phone firms. One estimate suggests that Deutsche Telekom is losing 100,000 customers a month, although this is split between subscribers switching to VoIP and those who prefer just to have a mobile phone.

But a far greater threat to the telecoms operators comes from companies trying to entice businesses to move to VoIP. The technology makes calls between sites free, without the need to rent expensive private circuits from the telephone company. Sign up with a VoIP provider, and external call costs will drop too, often dramatically.

Smaller businesses, as long as they can connect to broadband, are finding that VoIP offers the type of communications usually associated with large enterprises, such as video calls or linking their phone system with their business applications. Meanwhile, a recent German survey found that 30 per cent of large companies either have, or plan to use, VoIP.

Significantly, this year's CeBIT has dozens of firms demonstrating equipment that lets companies connect to VoIP without the need to replace their entire phone systems. This makes it much more attractive.

The approach makes sense to Don Peterson, the chairman and chief executive of Avaya, a telephony equipment company, who believes VoIP is far from an overnight phenomenon despite all the hype.

As part of AT&T, Avaya technicians made the first call over an internet protocol network in 1995. The firm then launched a dedicated internet-based phone system in 2000, the same year it was spun out of Lucent (which itself had been spun out of AT&T).

But it has since changed tack. Avaya now lets customers combine internet-based extensions with conventional phones, and use either conventional phone lines or broadband to carry calls to the public network. The company recently announced One-X, a "plug and play" internet phone system for small businesses, and has a partnership with Nokia to develop voice over wireless local-area networks.

Connecting mobile handsets to internet telephony is set to be the next big development, and one that is worrying both fixed-line and mobile operators.

Nokia's forthcoming E series business phones, for example, will come with WiFi built in. Avaya is working with Nokia on software for the handsets that will allow them to work as wireless extensions to office phone systems. When the user moves out of range of the wireless LAN, the phones will automatically switch to a cellular network.

For businesses with large sites, this could bring big cost savings, as employees will no longer incur mobile charges if they use their handsets in the office. They could also use WiFi hot- spots to connect directly to their office voice system over a secure wireless link.

The big test for this technology will come in three months, when the World Cup kicks off in Munich. Avaya and Deutsche Tele- kom are providing voice and data communications over a single, internet-based network. Avaya has committed $100m (£60m) to the project.

"The World Cup is a terrific example of the value of intra-enterprise connections," says Mr Peterson. "It will be a completely WiFi network: all journalists, for example, will connect via WiFi." With a 30,000-strong press corps covering 25 matches a day across 12 stadiums, this is no small task.

Although Fifa, football's ruling body, is not disclosing figures, it expects to save money on network costs.

For Avaya, the World Cup is a showcase. But Mr Peterson stresses that it is not a test bed: all the technologies in use at the World Cup are commercially available from Avaya today.

Meanwhile, the company is pressing on. One option that it is offering banks, for example, is adding VoIP to cash machines. If a customer needs to carry out a more complex transaction, the cashpoint can offer to connect them there and then to an adviser. The machine does not need a phone connection, only its existing data link, to do this.

"As IP technology goes further into the network, the value proposition shifts [from voice calls]," he says. "Costs are being driven down by the likes of Skype and Vonage but our future lies in maximising the value of applications."

CeBIT runs until Wednesday. See www.cebit.de for more information