Just three years ago, a company called Skype launched itself with a simple proposition - to offer virtually free phone calls around the world to anyone with a personal computer and a broadband connection. By last September, when Skype was snapped up by online auction site eBay in a deal worth $2.6 billion, it had attracted more than 53 million users and it was estimated that two million people were using the service at any one time.
Skype is the most high-profile application of a technology called VoIP (Voice over Internet Protocol) and its success sounded a warning bell to telecommunications companies that the days of rich profits from regular telephone calls were over.
VoIP had existed long before Skype - and other companies offering similar kind of services - came along. But the Skype model, which made it easy for PC users to download a free piece of software and basically stick two fingers up to telecoms suppliers, helped to create a huge surge of demand.
So what is VoIP and does it really mean you can throw that old telephone exchange in the skip and cancel the standing order to BT? Not quite, but it opens up a lot of new possibilities for how we use the humble telephone.
First let's look at how standard telephones work. Traditional phone calls rely on setting up a circuit between you and the person you are calling.
This requires a continuous piece of cable linking you both for the duration of the call. For long-distance calls, that means tying up a lot of expensive resource for your exclusive use, which is why calls used to cost so much.
By contrast, VoIP sends voice signals over a data network, where the sounds are treated like any other piece of information. The voice is digitised and split into packets of data that share the network with other packets of data - other phone conversations, database enquiries, website access and so on.
Each packet has a destination address and sequence number, so that when these fragments reach their destination, they can be reassembled and converted from digital data into analogue waves - ie, sound. That obviously makes much better use of the existing cabling and therefore brings down the cost of transmission.
The lingua franca of networking and the internet is IP - the Internet Protocol. Anything that can be digitised and broken down into standard-sized packets following the Internet Protocol - and this includes voice, music, images and film as well as traditional computer data - can be squirted down a network cable and transmitted anywhere in the world where there is a connection.
IP is the technology that allows us to download music and video clips from the internet and, being a standard, it has created a free-flowing platform for communication. You don't need to know which kind of computer is sending the information, or which kind you are downloading to. As long as all equipment sticks to the IP standard, any technical differences become invisible to the user.
So why is it that, according to recent DTI figures, fewer than a third of large British businesses and just 8% of all businesses in the UK have implemented VoIP for their own telecommunications? After all, communications costs are one of the biggest incurred by industry.
The main reason is that phone systems are familiar and tend to work pretty well. Telecoms engineers have had more than a century to build resilience and reliability into the public switched telephone network (PSTN). When you pick up a handset, there is a dial-tone every time and maintenance of a corporate phone system is minimal. So there has to be a compelling reason to rip out a telephone exchange and start again.
For most companies, the move to VoIP is more of a gradual transition.
While the traditional central phone exchange remains in place, VoIP may be the answer for a small new branch office, or for people working from home. It is only when the old exchange comes to the end of its life or the company moves to a brand-new building that most companies can justify the expense of a root-and-branch switch to IP telephony.
VoIP, or IP telephony as it's also called (because the system will carry images as well as voice), brings some undeniable benefits, although the cost-savings are not quite as clear-cut as some suppliers claim.
To start with, if you are cabling a building from scratch, you have to put in only one network to handle all your communications, both voice and data. That brings an obvious saving in capital investment and it's easier to maintain than having two distinct sets of wires running round the office building.
Once the network is installed, you have free phone calls between everyone connected to it. That's also the case with traditional internal phone systems, but connection is usually limited to phones within the same building or relies on expensive leased lines to link different buildings. With a converged (voice and data) network, calls to branch offices and even remote workers are effectively free and the cost of calls outside the network, which need to go over the PSTN, can be greatly reduced.
But call costs are just the start. Think of the disruption caused by moving staff or whole departments around. Telecommunications specialists have to physically reassign telephone extensions, which is a long and tedious process.
With VoIP, however, each member of staff is allocated a number and all calls are automatically routed to wherever they are and whatever handset they are using. This means that if staff are moved to a new part of the building, they just tap in their name and password and they are fully connected. Any calls to them are automatically routed to their new handset.
This flexibility also makes hot-desking much easier and allows mobile or remote workers to operate as if from a desk in head office.
And if someone wants to work from home, they dial in on their broadband connection (which has a standard monthly cost regardless of usage), tap in name and password (or whatever means of authentication the company chooses) and they are linked into the phone network. If someone calls their extension, the call goes straight to them. And that would work equally well if they were linked into an internet connection on the other side of the world.
Company call centres can be reorganised to use home workers, making the job more attractive, for instance, to disabled people or mothers of young children.
Being able to link offices and remote workers allows you to treat designated staff as a pooled 'virtual' resource and enhance the efficiency and productivity of customer service/call centre operations. Using automatic call distribution, you can direct callers to the agent best equipped to handle their enquiry first time.
In addition, close integration with the data system allows all types of message - e-mail, faxes, voicemail - to be brought together. Unified messaging will, for instance, put all voicemails and faxes into your e-mail inbox. Click on the voicemail and listen to it, or view the fax and, if necessary, print it on the nearest printer.
Flexibility of working is one of the most attractive aspects of IP telephony.
Much more than a mobile phone, it gives users the complete office experience (access to colleagues, as well as computer applications), even when they are on the road or travelling abroad. All they need is a laptop computer, telephone headset and an internet connection and they are completely integrated into the organisation's facilities.
One other useful feature of VoIP is the concept of 'presence', which allows users on the system to see whether you are available to take a call, engaged on another call, in a meeting or away on holiday.
A simple example will illustrate how VoIP could be used to good effect.
You have a client on the phone who needs a specific piece of information that you cannot provide and that only your highly paid expert John Smith can handle. Seeing via VoIP that he is free, you ring Smith and conference him into the call, where he explains the point to the customer and then leaves the conference.
If Smith is already on the phone, you send him an instant message, which shows up on his screen saying: 'Can you call me when you're finished?
Mr Jones needs some important information.' When he clears his call, he comes through to you and joins your call.
IP telephony systems are extremely easy to configure, manage and upgrade and can be supported by the same staff managing the computer network. The work can usually be carried out from a central monitor with a few clicks of a mouse, rather than engineers physically having to go out to offices to make changes on the ground.
IP telephony offers many advantages over traditional phones, but only the most enthusiastic vendors will deny that the technology is still immature and its rough edges need to be ironed out. Since Alexander Graham Bell made his first call in 1876, the basic phone has had plenty of time to mature into the solid, reliable device we know today. IP phones, by contrast, are essentially computers running over computer networks, so they are only as reliable as other computers.
Then we have the network to think about. If you're going to run phone calls over the data network, then the network must have the capacity to handle all that voice traffic, even at the busiest time of day. The point about voice traffic is that it has to arrive immediately and in the right order. If an e-mail message takes seconds to arrive, it makes no difference, but even the slightest delay for voice is noticeable and unacceptable in the business context.
To overcome this, network engineers have developed a scoring system known as Quality of Service (QoS) that allows the network equipment to fast-track certain kinds of traffic. When it detects voice traffic, this is given priority over other types of data sharing the cable. Experts say it is essential that all components in the network have QoS built in, otherwise voice traffic can get disrupted.
Loading everything onto a single network requires a certain degree of faith. If your computer network has never failed, you might feel more sanguine, but for many companies, the 'eggs in one basket' risk has proved too high and they have opted to keep a separate network for voice traffic, despite the potential efficiency of working off a single network.
And then there are the hidden costs of IP telephony. For a start, the handsets themselves are more expensive than the bog-standard office instrument.
You can expect to pay anything from £100 to £600 for a device that is essentially a computer terminal that looks a bit like a phone.
And whereas you'd expect to change an office telephone handset maybe every six or seven years, the lifespan of the IP phone is going to be more akin to the office PC's - three, maybe four years at most.
On top of that, the network will normally need to be upgraded to cope with the extra traffic. This may involve a complete recabling of the building and expensive new network switches. You also need to factor in UPS (uninterruptible power supply) for all networking components and servers - you don't want to lose the phones if there is a power cut.
And don't forget that if you're to make full use of the new facilities, you'll need to budget for staff training.
Now we come to industry standards. As we saw with the early days of mobiles, it takes a while before suppliers are prepared to adopt a general industry standard, because they are all trying to defend any initial gains by locking customers in.
This is partly the case with VoIP, where a couple of standards have emerged.
The favourite for universal adoption is SIP, the Session Initiation Protocol, which allows the phone to talk to the communications server. Most big suppliers have adopted SIP but have then added special functions of their own. It means that if I make a VoIP call from supplier A's equipment to someone using supplier B's, not all features may be available.
The final problem is one of security. Once telephony becomes just another computer application operating over the data network, it is prey to all the dangers that afflict other information systems - such as viruses, spam and illicit access.
Some of the dangers were outlined in a recent briefing paper on the subject by the Information Security Forum, a member-based organisation representing more than 350 large companies worldwide. The risks range from theft of voicemail messages and the illicit recording of conversations to using voice modifier software to impersonate someone else's voice. It is even possible to inject new packets into a conversation so that, for example, a hacker could make someone sound like a Tourette's sufferer by inserting expletives into their otherwise diplomatic effusions.
Think about it.
The dangers are so far largely hypothetical, but they have been demonstrated at technical conferences. Security professionals fear that once VoIP reaches critical mass, it will become a natural target for hackers to play their games, just as computers and networks have been.
SHOULD I GO OR SHOULD I STAY?
There's no doubt that one day we will all be using IP telephony. The only question is when. Just as we will all be forced to watch digital television from 2012, when the analogue signal is finally switched off, so the suppliers of telecommunications are fast discontinuing manufacture of old-style exchanges and moving to IP-based equipment.
Major players such as Mitel, Ericsson, Avaya, Toshiba and Nortel are bringing their telecoms skills to the IP world, while Cisco, a giant in the data networking world, has already established itself as a major supplier of IP telephony. Closer to home, companies like Colt Telecom now offer VoIP as part of their integrated network services. And new companies in the field, such as Swyx, are offering software to run on standard computer servers.
Few companies can justify the cost of ripping out the established telephone system, so initial implementations of IP telephony tend to happen when, for example, a new branch office is opened. A single network is installed and connected to the company's wide-area data communications network.
The central exchange is then IP-enabled - linked to the data network by a bridging device - and a telephone service is established at the new branch without incurring the cost of calls.
Then one of two things happens. Either the central branch exchange comes to the end of its life and needs to be replaced or the company decides to relocate. Both of these can act as a catalyst to make the move to a full IP-based system.
The benefits of making the move are certainly attractive, but the technology is still not without risk. The advice from those who have taken the plunge is to build resilience into the network with duplicated components that will kick in if any main component fails. And always have a few old analogue lines for good measure.
INNOVATION AND SAVINGS SWING IT FOR SYNERGY
Synergy Distribution is a three-year-old company that imports musical instruments - electric guitars, keyboards and amplifiers - from the US, Italy and Germany. Howard Greensall (left) is managing director, business partner Peter Brown is sales manager. They have three sales reps and turnover has just recently topped £1 million.
Communication is key to the business, but in its second year Synergy hit big problems when trying to move to broadband with its then supplier, BT.
'We found that being in the country, we were too far from the main exchange,' says Greensall. 'In the 1970s BT was cutting costs and had started to use aluminium wire instead of copper cables. We were at the far end of an aluminium cable and phones went down for a week.'
Brown was already travelling 50 miles a day to get to the office at the warehouse and the poor connection was a catalyst for them to try to organise the business in a different way.
They took a small-business VoIP package from Vonage and it transformed the way they work. 'We asked if there was a way we could run the business in a more innovative way,' explains Greensall. 'Could we use homeworking running on broadband for the main work of the office and use the barn for a warehouse? We don't need to be where the stock is every day.
'With Vonage, we get facilities not available to us before. I can have the phone ringing in the warehouse, or on my computer. If I'm abroad, I can have it ringing on the mobile.'
After 11 months of using VoIP, costs have halved. 'With Vonage, you can see on the internet who has been transferred, forwarded and who has answered the calls. You can also track your costs on a daily basis,' says Greensall.
He says that 80% of costs are due to transferring to mobile phones. Calls to any landline in the UK are free.
The quality of sound has improved. 'At first, people moaned about a slight echo, but we don't have that now,' he says.
'With freight, heating, insurance etc going up, small businesses need to focus on areas where they can save money quickly and one of the biggest chunks of expenditure is communication. It is essential to grab control of costs.'
UPS AND DOWNS OF VoIP
- One set of cabling
- Free calls on the network
- Easier staff moves and hot-desking
- Free calls to and from home/remote workers
- Virtual call centres
- Computer/telephone integration improves customer service
- Unified messaging - faxes, e-mail and voicemails in one place
- 'Presence' and ease of conferencing
- Ease of management
- Technology still maturing
- Reliance on one network - all eggs in one basket
- Handsets expensive and need to be replaced often
- Network upgrade cost
- Cost of power back-up
- Cost of training staff
- Standards not fixed
- Security concerns
NEW HQ LETS WELLCOME CROSS OVER TO VoIP
Founded in 1936, the Wellcome Trust has an endowment of £11 billion and is the UK's largest non-governmental source of funds for biomedical research. It gives out more than £400 million a year in grants and has 750 employees housed in four buildings on London's Euston Road.
The opportunity to upgrade to VoIP came with the recent construction of a new headquarters. 'With the new building, we had to decide whether to run traditional telephony,' says Paul Stafford (left), infrastructure services manager. 'The cost-savings of cabling alone justified going to VoIP.'
Wellcome already had a Cisco data network and a Mitel telephone exchange.
Stafford considered both companies, as well as Avaya, as potential providers of a VoIP system. 'Cisco gave us best fit for the business,' he adds, 'and we're pleased with it.'
Nevertheless, the department did a lot of load-testing on the network to ensure that it would take the extra traffic. 'We are transferring a lot of data over the network - telephony, videoconferencing, multimedia streams - and yet we are not registering more than 2% utilisation.'
For security, some elements of the network have been duplicated and a stand-by generator and uninterruptible power supply will keep the phones operating through any power failure.
At the moment, the organisation is running a hybrid operation, with 350 staff on one side of Euston Road using VoIP and 250 on the other using traditional handsets. 'Non-VoIP users feel a bit envious,' reports Stafford.
'The phones we've chosen are very graphical and look very inviting.'
Once staff move into the refurbished building, the Mitel switch will be turned off and one network will carry data, voice, video streaming and Bloomberg feeds, all under one management control.
Meanwhile, the technology is already influencing the way people work.
'Telephone conferencing is so easy that we've even had to encourage people to meet face-to-face again sometimes.'
Stafford believes the move to VoIP was inevitable: 'A PBX will not take you to the future.' But he has a word of warning. Since Wellcome's first phones went live, colour screens and other new features have been introduced.
The lifetime of a VoIP phone will be far shorter than the traditional handset.