Telephony

Telephony is the technology that allows telephones to work. When a telephone call is placed, sounds are converted into electrical signals, transmitted over telephone lines, and converted back into sounds. Early telephony was analog; a single pair of copper wires carried signals over short distances. As the number of telephone calls increased, telephone companies attempted to overcome the limitations of early analog telephony by devising a process known as frequency division multiplexing; this allowed a single pair of copper wires to handle more than one call by routing calls through different bits of the frequency spectrum in much the same way radio stations are assigned a specific frequency. Eventually, analog telephony was replaced by digital telephony, which uses a binary format. By digitizing speech into a binary code, in a manner similar to the digitization of music on CDs, telephone companies were able to reduce noise, increase capacity, and reduce costs.

Internet telephony, the use of Internet technology to make and receive phone calls, emerged in the mid 1990s. In February of 1995, Vocaltec Communications Ltd., which was founded six years prior, created its Internet Phone software application. Internet Phone allowed Internet surfers around the world, most of whom used a local phone connection to access the Internet, the ability to speak with other Internet Phone users at a much cheaper rate than offered by traditional long-distance providers. Soon thereafter, the Information Systems Group of Motorola Inc. began including a copy of Internet Phone with its 28.8 desktop modems. Eventually, personal computer (PC) owners were able to gain access to Internet telephony technology simply by purchasing a telephony board, which integrated modem, sound board, speaker phone, and voice-mail hardware and software. Many Internet telephony packages also included microphones and headphones.

The leading Internet telephony carrier, Net2Phone, Inc. was founded in 1996. The firm released the world's first PC-to-phone application that November. Within four months, more than 2 million Net2Phone calls had been completed. However, by most accounts, the industry was still in its infancy; in fact, Internet telephony accounted for less than half a percent of all telephone usage in 1997. By the year's end, Net2Phone had unveiled its phone-to-phone over IP (Internet Protocol) technology; it launched its Net2Fax service, a fax-to-fax over IP service, and Click2Talk, an e-commerce customer service solution that allowed online shopper to speak to customer service representatives, early in 1998. That year, Frost & Sullivan named Net2Phone the Internet Telephony Services leader. IDC dubbed the firm the IP Telephony Services leader in 1999.

Panasonic announced its intent to incorporate Net2Phone technology into its new cordless phones in 2000. As part of a similar alliance, software behemoth Microsoft Corp. added the technology to its MSN Messenger. In March of that year, Internet portal Yahoo! purchased a 5 percent stake of Net2Phone for $150 million. Telecommunications giant AT&T Corp. paid $1.4 billion for a 32 percent stake in Net2Phone in August. Minutes per day of use reached 8 million in December, compared to 1 million in July. Although sales grew to $72.4 million, the firm posted a loss of $118 million. Customers totaled 1 million.

Despite the many advances made in Internet telephony—particularly in transmission quality and reliability—in the late 1990s and early 2000s, voice over IP (VOIP) calls accounted for less than one percent of all voice traffic in 2001. According to a February 2001 issue of Business Communications Review, this is due, at least in part, to reluctance on the part of traditional telecommunications firms to enter the fledgling market. "While start-ups have forged into the market, the established carriers have moved much more slowly." MCI WorldCom's decision to begin testing VOIP services in mid-2000 may well prove to be a turning point if other telecommunications giants follow its lead. "If the major carriers were to join the fray, the analysts believe customers will accept the concept."