Now AT&T discovers Internet calling

Electronic News, Feb 9, 1998 by Carolyn Whelan

Washington, D.C.--AT&T finally understands that cost--not service--drives competition in the consumer space.

As a company with immense overhead watching its consumer business being eaten away, AT&T could only discard overhead costs, including billing and customer service, to stay afloat. Internet telephony was the answer.

At Comnet the company introduced its AT&T WorldNet Voice service, based on Internet Telephony, or voice over IP (Internet Protocol) for calls over the Internet which, according to AT&T, have good sound quality due to work it did to minimize delays sometimes associated with calls placed from a computer. AT&T's service is accessed via a regular phone and authorization code. State-to-state calls are priced from 7.5 to 9 cents a minute, which users prepay in larger amounts with a credit card.

AT&T also announced the AT&T One Rate Online, which lets consumers order long distance service directly from the Web at competitive rates. The company said that the virtual method of ordering and billing will yield significant cost savings enabling it to offer aggressive rates. Analysts agree.

"The Internet Voice over IP announcement is very significant," said Mark Winther, VP of WorldWide Communications at the International Data Corporation. "As the first mainstream company to sell phone services over the Internet, they are saying we are a new AT&T."

Most industry watchers were surprised that traditionally conservative AT&T beat out leaner competition to release the new service. By all accounts it will directly compete with AT&T's traditional telecommunications offerings and will probably drive phone call prices down.

Today, PC users can make Internet phone calls--virtually free of charge--directly from a computer, but quality is poor. This better quality service uses handsets. The only other company that has already sold the service is Deutsche Telecom, but Mr. Winther predicts the offer will change the industry as the Sprints and MCIs follow suit.

Internet telephony doesn't cost anything. Other than the connecting and terminating time and cost (2-3 cents), there are no billing, collectors', telemarketing, direct marketing, or customer service costs associated with the service.

Mr. Winther foresees others ponying up, because the market is elastic and won't cannibalize core businesses, but, rather expand the overall market.

AT&T will still bring value added services to the business market, and made several significant announcements in that space at Comnet.

Bruce Carlsmith, a communications equipment industry analyst for NationsBanc Montgomery Services, predicts that within four years service providers will generate $2 billion in revenues from IP calls, while equipment vendors sell $500 million worth of equipment to facilitate those calls.

The key to making money on Internet Telephony, says IDC's Mr. Winther, is minutes and volume. He suspects that AT&T will make more money on a 8-minute IP call than on a 15-minute presubscribed household call due to billing, marketing and advertising costs associated with that call.

"They may sacrifice top line revenue in the short term," he said, "but the bottom line in the worst case will stay the same."