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As early as the mid-1990s, PC owners could use software from companies such as Newark, NJ-based Net2Phone to make low-cost calls over the Internet using their home or office computers. But until recently, Internet calling has been more of a curiosity than a serious rival to the traditional telephone network, frequently suffering from poor sound quality and spotty connections. With today’s faster Internet service and new hardware that can send Internet calls through regular phone handsets, however, Internet phone connections can be better than conventional ones. And that’s leading to the first real surge of interest in Internet telephony.

The key to Internet calling is that it’s cheap-for both the provider of the service and the consumer. Voice signals are broken into digital bits and shipped over the public network in the same form as e-mail, Web pages, and streaming audio or video; hence the industry term “voice over Internet Protocol,” or VoIP. Because it’s generally cheaper to send chunks of voice data on random paths through the Internet than to set up a dedicated telephone connection, voice-over-IP companies can charge less. Rates for international calls can be a fifth of those charged by traditional international phone services.

While Internet telephony startups like Skype have garnered the most attention, the traditional telephone companies are also busy getting in on voice-over-IP technology. In January, New York, NY-based Verizon announced that it will gradually replace traditional switching equipment with VoIP switches throughout its local and long-distance networks. AT&T of Bedminster, NJ, meanwhile, has rolled out a consumer Internet phone service called CallVantage in New Jersey and Texas, with plans to expand to 100 metropolitan areas by the end of 2004. Customers of the service plug their phones and their computers into special adaptors that connect in turn to their DSL or cable modems; to make calls, they simply pick up the phone. Among the other leading VoIP providers: deltathree (New York, NY), Dialpad Communications (Milpitas, CA), 8x8 (Santa Clara, CA), Voiceglo (Fort Lauderdale, FL), and Vonage (Edison, NJ).

Plenty of roadblocks remain before Internet calls become routine, however. For one thing, regulators at the Federal Communications Commission continue to debate whether Internet phone services should be subject to the same fees and taxes as traditional phone service or permanently classified as data services, which haven’t been taxed so far. Their decision could drastically change the economics of the industry. Then there are the questions of how to locate someone calling 911 over the Internet-a federal requirement for other kinds of phones-and how the FBI will wiretap Internet calls.

While most potential users of Internet calling won’t stay awake worrying about these issues, they will want to shop carefully if and when they finally decide to make the switch. Only a few companies will survive the inevitable attrition among the dozens now doing battle. Those that do, however, promise to give consumers their first realistic alternative to traditional phone service.

Wade Roush is a senior editor at Technology Review.

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