White Paper:
The Future of Online Communication
Section I: The Evolution of Internet Telephony
H. Mine, Executive Vice President, Probe Research, Inc.
Section II: AT&T’s IP Telephony Initiatives
October 1998

Section I: The Evolution of Internet Telephony

Hilary Mine
Probe Research, Inc.
Three Wing Drive, Suite 240
Cedar Knolls, NJ 07927
www.proberesearch.com
Tel: 973-285-1500
September 1998
TABLE OF CONTENTS
VOICE AND DATA – CONVERGENCE HAS BEEN A LONG TIME COMING ...........................................4
EMERGENCE OF THE INTERNET ............................................................................................................................6
INTERNET TELEPHONY - MARKET EVOLUTION AND DRIVERS .............................................................8
HOBBYIST PHASE - IP TELEPHONY AS HAM RADIO SUBSTITUTE....................................................................................9
TARIFF ARBITRAGE - CALLING CARD REPLACEMENT.....................................................................................................9
TARIFF ARBITRAGE - ENTERPRISE TRUNK REPLACEMENT............................................................................................11
FEATURE PARITY..............................................................................................................................................................11
NEW APPLICATIONS.........................................................................................................................................................12
Conferencing Applications.................................................................................................................................12
Call Center Applications....................................................................................................................................13
IP Messaging......................................................................................................................................................14
IP Call Waiting...................................................................................................................................................14
COST PARITY....................................................................................................................................................................14
MARKET AND TECHNOLOGY BARRIERS TO INTERNET TELEPHONY AND THE NEW PUBLIC

modems) were also significant barriers to the success of ISDN.
Finally, however, there was a lack of mass market demand for data networking. This particular
market barrier remains, of course, subject to much debate. Despite the fact that 45% of US
homes have at least one PC in use, and the majority of those are Internet subscribers, there are
still those in traditional carriers (e.g. BellSouth) who remain convinced that end users are not
willing to pay the true costs to provide data network services, with the exception of a few large
business customers.
With the advent of the Internet, there is little doubt that end users in both the consumer and
business markets are very interested in data services. Willingness to pay has still to be proven in,
since the mass market Internet is arguably being subsidized at this time. Nonetheless, data traffic
even prior to the rise of the Internet, has been growing dramatically faster than voice traffic, and
this pattern is at the crux of the integrated network dream.
Terabytes/Yr
1997 1998 1999 2000 2001 2002 2003 2004 2005
Figure 1: GLOBAL NETWORK TRAFFIC
PSTN VOICE PACKET & PRIVATE WAN VOICE
PSTN DATA PACKET & PRIVATE WAN DATA
Source: Probe Research, Inc. estimates
Figure 1 shows Probe's estimates of total global communications traffic. PSTN refers to the
public switched telephone network, or the traditional telephone network. Private Wide Area
Networks (WANs) refer to leased line and virtual private networks (VPNs) that large companies
and institutions use for internal communications. Packet refers to packet network based traffic.
Today, over 70-75% of this traffic is still voice, but as we have observed, data is growing much
faster. By the year 2005, data will account for nearly half of global traffic. It is critically
important to note, however, that voice traffic will be growing as well over this period, and will
still be the bulk of traffic on many routes.
A few service providers have begun to observe portions of their networks reaching the magic 50%
data traffic threshold, and anticipate that on some segments (particularly international routes),
data traffic will account for as much as 80% of traffic within the next 5-7 years. This is generally
true of routes (e.g., Tokyo to London) that are dominated by business traffic. As a rule, the more

1992 - The number of Internet hosts reached 1 million (largely academic and military);
1993 - WWW and the Mosaic browser were introduced; and
1994 - The penetration rate of PCs in US homes reached 33%; 28.8 Kbps modem standard
was approved.
By year end 1998, PC penetration amongst US households is approaching 45%. Importantly, this
figure takes into account households with multiple PCs, and excludes those with inactive PCs.
-
500
1,000
1,500
2,000
2,500
3,000
1991 1992 1993 1994 1995 1996 1997
FIGURE 2: INTERNET TRAFFIC: 1991-1997
(Terabytes/Month)
Sourc e: NSFNet ac tuals to 12 /94; Pr obe estimates after 12/94
NSF Allows
Commercial
Internet Use
Global
Internet
Users pass
50M
Internet
Users
Pass
10M
PC Penetration
in US Homes

North America Latin America/Caribbean
Source: Probe Research, Inc. estimates
Internet Telephony - Market Evolution and Drivers
In its brief life, IPT has already seen two distinct phases of market evolution, and is on the verge
of a third. In this section we describe the expected development of IPT as a market, and explore
the factors that will drive each phase of adoption of the technology. Figure 4 provides a general
overview of the evolution, including Probe's projections of global voice and fax over IP in
minutes of use.
0.0000
10000.0000
20000.0000
30000.0000
40000.0000
50000.0000
60000.0000
70000.0000
80000.0000
90000.0000
Millions of Minutes
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Figure 4: GLOBAL VOICE/FAX OVER IP TRAFFIC
AND MARKET DRIVERS
Source: Probe Research, Inc.
Tariff
Arbitrage
Feature
Parity
New Applications
Cost Parity
Hobbyist

10.0%
12.0%
14.0%
16.0%
18.0%
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
Annual Percetnage Increase in Minutes of
Conversation
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
Annual Percentage Change in Price per Minute
Source: FCC and Probe Research, Inc. estimates
Price
Traffic
Early adopters of IP telephony quickly realized that the initial acceptance of the technology
hinged on its ability to bypass regulatory regimes and tariff structures. International call back
service providers, such as IDT, were among those most threatened. Their customers are amongst
the most price sensitive, and are willing to dial additional digits or suffer other inconveniences to
save money. Consequently, these types of service providers were the first to develop IP telephony
services. Other service providers, such as AT&T, Sprint, etc. also paid early attention to IPT as a
threat and therefore also an opportunity.
Simultaneously, vendors such as VocalTec, Vienna Systems, and Clarent Corp. recognized that
while the PC hobbyist market was a nice start, the installed base of multimedia computers was
rather limited compared to the installed base of traditional telephones. Moreover, the biggest