Year in review: VoIP's voice gets stronger

Internet telephones broke through the mass market in 2004, after nearly a decade in gestation, and became the telecom story of the year.

Once just for ham radio operators looking for new geek chic, phones that rely on the Net rather than the traditional phone network found their way into nearly a million homes in 2004.

Net-based service allow users to get or make calls using any kind of phone: landline, cell or Wi-Fi. Unlimited local and long-distance dialing usually costs 20 percent to 30 percent less than with traditional plans, and an ongoing price war is creating even more savings.

The players? Vonage, which has more than 300,000 subscribers, is the undisputed king of commercial voice over Internet Protocol (VoIP) providers. But it's unclear how long its reign will last. Cable companies blanketing TV and radio with advertising about their "triple play" packages--which include voice, video and high-speed data service--have closed the considerable subscriber lead Vonage once had. More than 250,000 people now get their phone service from cable provider Cablevision, and 200,000 get it from Time Warner Cable, which says it is adding 10,000 new phone subscribers every week.

VoIP providers have also managed in the last 12 months to quell a backlash among state utility regulators, which want VoIP providers to fund public services, as every other telephone company does. Enter the Federal Communications Commission. Within the last 12 months, there have been two major FCC decisions that are considered pro-VoIP, and they have stalled until at least January, perhaps much longer, any efforts by states to slap price-rising regulations on Net phone calls.

It was this regulatory-free status that persuaded cable operators to finally jump into the market. Once sitting on the fence, most cable companies chose to declare VoIP ready for prime time in 2004, then began aggressive rollouts. Time Warner now sells telephone service in 30 of its 31 markets, while Cablevision has blanketed its Northeast markets, including the lucrative New York City area, with voice services. Traditional phone companies made good on their intentions to move into mass-market VoIP services as well, with AT&T, Verizon Communications and other major local phone companies extending their VoIP services nationwide in 2004.

VoIP's success overshadowed other notable developments for cell phones, which are now owned and used by more than half of the American population. In one of the more promising developments of the year for wireless operators, long-suffering wireless data offerings like messaging, online games and ring tones morphed into a billion-dollar-a-year revenue makers.

The field of major U.S. cell phone service providers shrank by one, with Cingular Wireless buying an ailing AT&T Wireless for $41 billion. With 46 million subscribers, Cingular Wireless has supplanted Verizon Wireless as the new No. 1 cell phone service provider.

The year's biggest telecom losers were AT&T and MCI, the once-high-flying local phone companies that have now ceded the local phone market to BellSouth, Qwest, SBC and Verizon, which collectively own the telephone infrastructure extending into nearly every U.S. home. The retreat was the result of an FCC ruling that gave significant control over the local phone networks, which no longer have to open up their local phone networks to competitors at government-set rates.

--Ben Charny