Telephone Companies Get Riled Up By Competition From Internet Rivals

On any given day, they gather to talk, speaking through their computers, reaching far-flung places like South Africa and Brazil. It doesn't really matter how long they converse. For these computer users, overseas calls are practically free.

Their secret? The Internet. Using a new breed of software, computer enthusiasts are turning the Internet into a worldwide telephone system.

"I really want to make friends in other parts of the world," says first-time user Claudio Alves, who reaches the United States from Fortaleza, Brazil. "And I think the Internet is the best way to do it."

"I talk to a lot of people from around the world," adds Leif Lieng, a civil engineer in Drammen, Norway, who has been using an Internet phone since the spring. He not only used the technology to send verbal greetings but also a color picture of himself with his two grandchildren. When his brother hooks up a computer in his Ft. Lauderdale, Fla., home, Mr. Lieng expects to have long transatlantic conversations with him - at a cost of only about $1 an hour.

"This revolution is such a huge wave," says Elon Ganor, chairman and chief executive officer of VocalTec, an Israeli company that makes one of the leading Internet telephone products. "It's not something that anything can stop."

If his and other companies can perfect the technology, Mr. Ganor expects people to talk, share pictures, and maybe even hold a live video conversation over the Internet as routinely as they send electronic mail today.

Colleagues thousands of miles apart could simultaneously edit a document. New parents could send along a photo of their baby as they talk to relatives. And smaller Internet telephone companies like CallWare Technologies in Salt Lake City have upgraded their programs to include voice-mail.

Interest in the technology is exploding. Eighteen months ago, only two companies were offering Internet phone programs. Today, there are 24, says Jeff Pulver, author of the Internet Telephone Toolkit published by John Wiley & Son. Earlier this month, industry-leader Netscape Communications released the latest version of its Internet browsing software, which includes a telephone program. And Microsoft introduced new browsing software that allows users to hold a conference call over the Internet.

Interest is getting so big that telephone companies, which pooh-poohed the idea a year ago, have begun to cast a wary eye at competition from the Internet. This spring, a group of small long-distance phone carriers called America's Carriers Telecommunication Association asked the government to stop the sale of Internet phone software. The group argued that the software allows Internet companies to compete with the phone system without paying the tariffs and complying with the regulations imposed on traditional carriers.

The Federal Communications Commission has not taken any action, but in a speech delivered in June, the commission's chairman, Reed Hundt, said he was "strongly inclined" to oppose regulation of Internet telephone programs.

Still, some long-distance phone companies support the technology. In June, Sprint Corporation joined a coalition of computer-related companies and individuals backing unregulated Internet voice communication. Other carriers are keeping a close eye on it.

"We will continue to evaluate technology that provides voice over the Internet," says Bill Kula, spokesman for GTE Corp, based in Stamford, Conn. "But as of today, we're not ... satisfied with the quality that's being provided."

Quality, in fact, is a major stumbling block for Internet telephones. For all their advances, they still operate more like ham- radio sets than telephones. Voices are often muddied; transmissions are delayed. The result is that many Internet voice conversations are slow, marked by repetitions and long silences between responses.

Many analysts say the quality problems are so big that Internet phones will never replace the traditional telephone. "Like it or not, the phone system works really well," says Pat Hurley, research associate with TeleChoice Inc., a Verona, N.J., consulting company and author of a new book on Internet telephones. "There's not that reliability and guarantee on the Internet."

Another challenge: Internet callers can only reach other users of the same phone software. Worse, both parties have to be logged onto the same Internet telephone site before they can connect.

Eventually, these challenges will be overcome, analysts and industry officials say. High-grade Internet networks specialized for voice and video transmissions could solve the quality problems, Mr. Hurley says. And VocalTec hopes to offer gateways that bridge the gap between the Internet and the phone network. Properly equipped, a caller could ring up anyone else through the Internet without ever having to use anything more complicated than a touch-tone phone.

Of course, building high-grade networks and installing gateways will cost money - money that Internet telephone users will have to fund through some kind of fee system.

"We will see that happen," says Mr. Ganor of VocalTec. That will boost the costs of Internet calls initially, perhaps above those of a traditional long-distance call within the United States. But "those cost-differentials will gradually decline," he adds.

Hurley is less optimistic that Internet phones can compete head-to-head with the telephone networks. The industry's future lies in combining images, video, and text with voice communication, he says. "Video conferencing is a pretty important application that really could be a big hit" on the Internet.