BusinessWeek Online
By Olga Kharif

For Mark Burris, Internet-based calling is a mixed blessing. Burris, who runs a branding and marketing business in Greensboro, N.C., is delighted because his Vonage service comes with cool features such as voicemail over the Web. Plus, it slashes about $260 a month off phone bills. The downside: glitches galore.
So many calls are dropped -- as many as half -- that company employees all use their mobile phones to make outgoing calls. Burris' operations manager lately is spending upwards of a half-hour a day trying to get to the bottom of the problem. For now, "we are bearing it and going on," says Burris. But other companies and consumers taking the plunge into Internet-based calling may not be so patient.

CROWDING FIELD.  Voice over Internet Protocol (VoIP) is a technology that transmits phone calls much the same way e-mail travels over the Internet or corporate data networks . It's a great way to cut communications costs and add a raft of features to calling plans, so early adopters -- many of them tech-savvy -- put up with the glitches that plagued VoIP calling from the start.

These days, quality is improving and VoIP calling is gaining wider adoption, but many kinks have yet to be worked out (For a product review of one service, see BW Online, 11/28/05, "Skype Has People Talking"). And pressure on providers such as Vonage to resolve the issues is higher than ever.

Already, 52% of all U.S. businesses and about 3 million of the nation's consumers are using VoIP, according to surveys by VoIP tester Empirix. The number is rising rapidly, and as it does, users will demand higher quality or switch carriers, say industry insiders. What's more, the market is crowding, with cable-TV providers such as Comcast (CMCSA) racing to compete product-for-product against phone carriers such as Verizon (VZ).

TURNOVER HURTS.  The higher the rate of customer turnover, the longer it will take carriers to break even. It can take as long as four years for some VoIP service providers to recoup the marketing and other costs associated with luring a subscriber. But customer churn at some VoIP outfits has been reaching 25% lately, primarily because of dissatisfaction with service, says Empirix Chief Technical Officer Jeff Fried.

The complaints don't stop with service outages. On average, VoIP call quality is worse than cellular, according to research by Internet performance consultancy Keynote. Audio delay (the time between when you speak and the listener can hear you) is often unacceptably long, leading to overlapping conversations.

Keynote also found that about 3.1% of all VoIP calls made don't go through at all. While that percentage may seem small, it can be deadly in an emergency. For traditional telephone service, the call-failure rate amounts to about 0.01%.

GROWING PAINS.  Today, the quality of as much as a third of all VoIP services is simply "bad," says Fried. Keynote's recent survey of seven VoIP providers found that Vonage offered the best call reliability (more of Vonage's calls went through than any other service's), while AT&T's CallVantage service had the best audio clarity. Other services covered were Lingo, 8X8's (EGHT) Packet8, Verizon's VoiceWing, and Skype.

What's behind poor service quality? VoIP is spreading rapidly, with its user base more than doubling each year. "As these services grow, [the service providers] don't invest enough in their network components," says Jon Arnold, principal at J. Arnold & Associates, a telecom consultancy focusing on IP communications. "Their internal infrastructure isn't keeping up with the growth of subscribers."

If that doesn't change soon, some VoIP providers might be out of business. Service quality is expected to be the make-or-break issue in the upcoming VoIP provider shakeout, when some thousand or so VoIP service providers currently operating in North America consolidate into a handful of major players, says Andrei Jezierski, a partner at venture consultancy i2 Partners in New York. DOES PRICE MATTER?  Today, VoIP service providers mostly compete on price. But price differences are shrinking rapidly. Studies conducted by VoIP provider America Online (TWX) show that users don't feel much of a difference between a $20 plan and a $30-plus plan. And that pretty much covers the gamut.

With most VoIP service providers yet to make any money, "I don't think there's a lot of room for more price reductions," says Ragui Kamel, general manager of AOL Voice Services.

And in the race to prove who has the highest quality, cable companies are likely to make a formidable early showing. Next year, cable companies offering VoIP service are expected to come out with major marketing pushes emphasizing quality and reliability -- and the lack thereof for rivals, believes Jezierski. "It's going to be a battle of perceptions," he says.

EXTRA MILE.  Already, cable companies such as Comcast and Cablevision (CVC) advertise their VoIP services as equivalent in reliability to traditional phone lines. Cablevision opens the description of its Optimum Voice VoIP service by calling it a "high-quality home phone service." And Comcast offers a 30-day satisfaction guarantee: a full refund if you're not happy with the service.

"Not all VoIP services are the same," says Greg Butz, Comcast's senior vice-president of marketing and business development. "We don't feel there's a better phone service available in the market today. Clearly implied is all the quality and reliability users have come to expect from phone service."

Comcast typically sends professional technicians to consumer homes to install gear; with most VoIP providers, a user had to install the adapters. Comcast also provides five- to eight-hour battery backup, allowing users to make calls even if their power goes out. Most other VoIP services simply play dead. Cable VoIP services also allow users to make 911 calls -- a feature some other services lack.

IFFY INTERNET.  Established VoIP outfits are getting the message. Starting next year, Vonage plans to collect and analyze data on the quality of every call made, says company CTO Louis Mamakos. It will use the data to track patterns and attempt to resolve problems before they're reported by customers. The tool will also allow Vonage customer-care reps to correct problems faster.

AOL already monitors line performance, and starting next year it will measure call performance. Other VoIP providers are starting to purchase special testing and monitoring software, so Empirix's sales should grow 35% year over year in 2005, to more than $75 million, says Fried. In the end, the software and other remedies may not be enough to fix every quality problem. The Internet is simply not as reliable as traditional phone systems. "People's Web sites are down all the time; you have denial of service attacks," says VoIP expert Jeff Pulver.

NO TIME TO WASTE.  And broadband providers can, potentially, adjust the priority and reduce the service quality of VoIP calls running on their networks. Also, Verso Technologies (VRSO) just began selling software that can allow broadband providers to prevent their networks' users from making calls via services such as Vonage or Skype. The legality of such filtering is still unclear.

What is clear, however, is that VoIP quality has a long way to go, and providers need to move fast to improve user experience -- or customers will call someone else.