Internet telephony is a relatively new technology that has started to get the serious attention of traditional long distance and local phone carriers. Through this technology, users can communicate via real-time voice under five applications. This communication can take place via PC-to-PC, PC-to-phone, phone-to-phone, PC-to-fax, or fax-to-fax. The underlying concept behind Internet telephony is that voice is transferred over packet-switched networks as opposed to traditional dedicated switching circuits. The threat this technology poses to traditional long distance and local phone carriers is becoming quite viable due to the continued exponential growth of Internet use. The ultimate success and adoption of internet telephony will hinge upon the ability of this technology to deliver added value such as speed, flexibility, integration of data and voice all at a cheaper price than a traditional telephone network.

As previously mentioned Internet telephony works through the use of packet-switched networks, which are significantly different from the circuit-switched networks that the traditional telecommunications industry is based upon. Circuit-switched networks are hinged upon an infrastructure known as Public Switched Telephone Network (PSTN). Within this infrastructure, calls are "switched" to open circuits to complete a phone connection. This system was designed under the notion that no more than 30% of a subscriber base would be on the phone simultaneously. Due to the recent boom in Internet usage, this capacity notion is receiving some scrutiny, and is forcing Local Exchange Carriers to add more capacity. Packet-switched networks do not require such an intensive infrastructure.

More recently, Internet telephony application has become quite immense. While access to advanced integrated services is still at an early stage, the opportunities it presents are significant. This is mainly attributable to the notion of integration of conventional telephony with Internet protocol technologies. Within this concept, integration is accomplished through the use of gateways. These gateways bridge the IP environment of the Internet with the circuit-switched environment of the public telecommunications network. These gateways are devices that make it possible to construct application specific network structures that provide for real-time, two-way communication between circuit-switching and packet switching technologies to create an integrated, networking fabric.

Upon further development of this concept, Internet telephony will be a fundamental part of modern life. Without homogenous equipment limitations (interoperability), Internet telephony will be used for all transactions in the traditional business environment, the e-commerce environment, and the personal communication environment.

"Brief" is the opportune word to describe the history of Internet Telephony (IT). Before 1995, IT was mainly an area permeated by researchers and hobbyists. The interest level was similar to that of amateur (HAM) radios. Real-time voice communication over the Internet was not thought to be a feasible economic product until VocalTec released the first Internet Phone in February of 1995. Since then numerous players, large and small, have entered the race to become an IT leader. Examples of companies that are players in the IT market are Lucent, PSINet, Cisco, Ascend, VocalTec, NorTel, Delta Three, Vienna Systems, IDT Corp., Quaterdeck, Intel, Microsoft and others.

In conjunction with the phenomenal growth of IT, the Internet Telephony Consortium (ITC) was created in 1996. The consortium is used as a forum to discuss technology, regulation policies, and market structures for the industry. The consortium does not set standards but it identifies gaps and issues that require standardization.

The original us of Internet Protocol (IP) telephony required a significant amount of coordination. The process required the use of personal computers with the same application software running on both the originating and receiving computer. Both PCs needed to be connected to the Internet Service Providers (ISPs) and equipped with a sound card, a microphone, and speakers. With the advancements made in gateways that connect the Public Switched Telephone Network (PSTN) to the Internet combinations of PC to Phone, Phone to Phone, PC to PC connectivity have been made possible.

The two most important developments in the past three years regarding IT have been (1) the creation of the gateway between the PSTN and the IP network and (2) the definition and recognition of the H.323 standard for communication over the IP network. Both elements create a market potential that poses a serious threat to the traditional telecom industry. These gateways bridge the IP environment of the Internet with the circuit-switched environment of the public telecommunications network. These gateways are devices that make it possible to construct application specific network structures that provide for real-time, two-way communication between circuit-switching and packet switching technologies to create an integrated, networking fabric.

While the growth potential is huge, there are still several limitations that must be addressed before the likes of ATT and MCI/Worldcom will feel threatened. The following offers a brief description of some of the limitations:

• Scalability: Current PSTN-to-IP gateway technology allows a few hundred concurrent calls at best. For wider acceptance, a gateway must be able to handle the current and future needs of an entire voice network. An alternative solution could be to have multiple gateways in specific locations, but this is something that will only be determined over the course of time.

• Reliability: There is probably no other network as reliable as our current phone system. Customers will not acceptance outages of voice communications for extended periods of time. Additionally, quality of sound is important to users as well when substitutes are abundant. CB-like quality will not be acceptable in the main stream.

• Billing and Tariffs: If calls cannot be tracked and billed, providers will be able to obtain fees (with the exception of a flat rate) revenues from the end users. This is an issue that must be addressed before larger companies will feel safe implementing a network.

International Data Corporation ("IDC") has identified three critical factors for success necessary before this technology can reach widespread use and acceptance. The first is ease of connectivity. Ease of connectivity relates to the ability for anyone connected to the Internet to dial another party direct, whether or not the other party is on the Internet. For instance, the application of this technology is currently primarily limited to PC to PC utilization. However, estimations concerning PC-to-Phone services shows that the effect of routine computer upgrading will mean that well over 70% of the world’s installed base of computers will be ready for internet telephony. The second aspect is the requirement for an open set of standards. To date one of the most important developments regarding a standard platform for Internet telephony has been H.323. This development allowed regular PSTN phone users to now have access to inexpensive or free long-distance services via the Internet. The third aspect was that Internet telephony efforts must include ubiquitous telephony features available today to be coupled with value added features and options available through new communication technologies.

Similarly to the Internet itself, IT is growing at exponential pace. Experts say that the question is no longer whether but when most consumers and businesses will start using the Internet for calls and faxes. Industry analyst Jeff Pulver states, "This is the start of the next generation telephone industry." Some forecasts say that by the year 2000 15% of all international phone calls will be carried over the Internet. The international market is estimated at $60 billion today (Frost & Sullivan, 1997; The Wall Street Journal, 1997). Research by Killen & Associates estimates that 35% of all calls will be made using an IP network by 2002.

The most dramatic acceptance is expected to initially relate to the fax usage of Internet telephony acceptance. Currently, the average employee responsible for fax transmissions at Fortune 500 companies sends 41 five-page documents per day. It is easy to see the cost savings applicable to fax applications.

According to one expert, international telephony market will fragment into three distinct operations:

• Between countries – Internet telephony from international facilities owners selling direct to consumers and from the growing spot-market in resale rates will increase dramatically.
• For call origination – Internet telephony and resale will compete with conventional carriers in the callback area.
• For Call termination – PTO’s will seek to charge the highest rates possible for call termination while they still retain a dominant position.