Internet Telephony Service
Comes to
Japan

The hottest new Internet application in Japan today is Internet telephony. With the recent development of gateway technology, even calls made from an ordinary telephone can be routed over the Internet - at huge savings over normal phone rates. Computing Japan talks with representatives of Internet telephony leaders AT&T Jens and Rimnet about their services, and where they see the market heading.

by Tina Lieu
The door to international Internet-based telephone service in Japan was officially opened on August 26. That was when the Ministry of Posts and Telecommunications (MPT) released its "Settlement on the Guideline to Liberalize the Provision of International Internet Telephony Services." Subject to MPT approval, both Type I carriers (phone companies owning their own facilities and lines) and Type II carriers (companies leasing lines from Type I carriers) can legally start offering international Internet phone services.

After a trial run in August, Internet service provider (ISP) AT&T Jens began offering international Internet phone service, dubbed AT&T@phone, on September 1. (The company also launched domestic long-distance Internet phone service in August 1997.)

ISP Rimnet is also offering Internet phone service for long-distance domestic and international calls through its RIM Phone service. Rimnet's domestic service began in April, followed by international service in August.

Drew Randall Freyman, Rimnet's new business development manager, stresses that Rimnet is not interested in becoming another NTT. Rather, "The real interest of Rimnet is to create the industry and help make Rimnet's technology a standard. We've deployed the technology hoping to create motion and momentum for more development. Internet telephony is still a very immature market, and we're interested in growing this market and technology. Rimnet is interested in working with other companies and forming partnerships in this area."

Freyman believes that, in the Internet telephony arena, Japan is ahead of the world. "The Japanese can see the bottom line, because telecommunication costs are so high. The US emphasizes 'finding the next,' but the Japanese are using what they've got [to its potential], and they are poised to make a jump ahead of the US."

Why Internet telephony is cheap
The same types of physical lines are used for normal telephone services and for Internet telephony. The difference is the protocol used for transmitting the signals.

At the start, an Internet phone call is similar to a regular phone call, in that the voice signals travel over the local PSTN (public switched telephone network). But instead of going over a long-distance carrier's lines to the destination phone, the voice data enters a local Internet telephony gateway. There, it is digitized and compressed before being sent over the Internet as a series of IP (Internet protocol) packets. At the destination, another local gateway reverses the process and routes the call back onto the PSTN and to the destination phone. After the connection is made, this operation occurs simultaneously in both directions to enable two-way (full-duplex) conversation.

This difference in protocol is the reason that international Internet telephony service is so much cheaper than traditional international phone services. First of all, traditional international phone companies have been able to demand high phone rates simply because until now there was no alternative, and government-regulated tariff structures designed to protect the telephone industry have helped to keep prices (and profits) abnormally high. Second, since international Internet phone services go over leased lines using TCP/IP protocol, they are not subject to existing bilateral agreements between countries that govern phone costs. (See the "International call settlement charges" sidebar.)

International call settlement charges
World governments and private sector international carriers coordinate global telecommunications networks and services through the ITU (International Telecommunications Union). As an example of the current international call settlement system, let's suppose that the US and Japan have a bilateral agreement that the termination fee of Japan-originated calls to the US is $0.25, while the fee for US-originated calls to Japan is $0.50 (negotiated based on the level of each country's domestic phone rates).

The total monthly volume (minutes) of US-to-Japan and Japan-to-US phone traffic is then calculated and multiplied by the negotiated fees. The side having the higher figure then pays half of its surplus, called the "settlement charge," to the other country's international carriers. Since the US makes more outgoing calls than any other country in the world, these settlement charges cost US phone companies as much as $5 billion per year.

Recently, the US Federal Communication Commission (FCC) proposed setting up a system of "benchmark" prices that would reduce the rate for connecting overseas calls. In September, however, KDD appealed this change (with more foreign carriers expected to follow suit) since it would stand to lose about two-thirds of its revenue from the US if the FCC proposal is implemented.

A third reason for the low cost of Internet telephony is that it is a more efficient use of existing network bandwidth. According to an AT&T study, at least 40% of a typical phone conversation is silence, but a traditional phone call monopolizes a set bandwidth even when no sound is flowing through the line. Internet telephony, on the other hand, converts voice signals into digital data packets and, during periods of silence, packets from other phone conversations (and other Internet traffic) can be routed through the same line.

The quality issue
When I inquired about the sound quality of AT&T@phone, AT&T Jens gave me a demonstration. We used the AT&T Jens Internet phone system to call a recorded movie information number in New York City, then made the same call via a traditional long-distance telephone call. To my ear, the difference in sound quality was indistinguishable.

Simon Clayton-Mitchell, deputy general manager at AT&T Jens, explains that unlike the variation in downloading speed that Web surfers can experience, "With telephoning, you aren't going to get 200,000 people calling the same place at the same time like you might [accessing] the Disney homepage. You don't get that with normal phone use.... There are no specific capacity restrictions for Internet telephony which do not also apply to traditional phone service." Naoya Hirano, director & general manager of AT&T Jens' Strategy & Market Development Department, adds, "The network equipment we use is scaleable. AT&T monitors traffic and replaces equipment as needed. This is one of AT&T's strengths."

According to a Rimnet survey of 80 users, 80% rated the quality of Internet phone calls better than that of cellular phones. Asked why there is a general public perception of Internet telephony as being low quality, Rimnet's Freyman points out that the business is still immature. "There is inconsistency of quality among providers, and one 'bad egg' can transfer that image onto the whole Internet telephony industry."

Consumer or business use?
Regarding the near-term future of Internet telephony, Rimnet and AT&T Jens have different views of the market segment to which the service will appeal. AT&T Jens' Clayton-Mitchell believes that Internet telephony is "a very popular consumer offer. Consumers are often the worst off because they can't get the volume discounts that businesses can. The consumer is our best market, but as it gains acceptability, [Internet telephony] will expand to businesses."

Rimnet's Freyman, on the other hand, thinks it will be a very attractive service for businesses. "Internet telephony is consumer-oriented," he acknowledges, "but businesses have such a high volume that even a tiny savings per minute translates into huge savings."

Whatever it's future, Internet telephony undoubtedly will benefit everyone by forcing international phone carriers worldwide to continue to drop their phone rates. And pressure from the deregulation of telecommunications, as agreed upon by the WTO (World Trade Organization) earlier this year, will also serve to further sharpen competition. In fact, traditional international carrier KDD is already taking an active part in what could be the next telecommunication revolution in Japan. (See the "KDD follows the bandwagon" sidebar.) Japan's phoning public could finally be getting the break it's been waiting for.

KDD follows the bandwagon
Not one to ignore a potential business opportunity, Japanese international carrier KDD, too, is investigating Internet telephony. On July 28, KDD Communications (KCOM) began running domestic Internet telephone trials between Osaka (06) and Tokyo (03) for both voice and fax transmission. The service was run on weekdays, from 9 AM to 5 PM, with each trial participant (after having filled out a survey and received a user ID) allowed to make 10-minute calls. According to KCOM, response to the trials was much greater than expected.

These domestic Internet phone call trials concluded on September 22, and international Internet phone trials were to begin on October 1. In KDD's international Internet telephone trials, slated to run for about two months, participants can call from Japan (Tokyo or Osaka) to the US and UK (voice only; no international fax trials are being conducted).

For more information, or to apply to participate in the trials, access http://www.kcom.ne.jp/intertel/index_e.html.

- Internet telephone service rates and sign-up information -
Rimnet RIM Phone service AT&T Jens AT&T@phone service
Membership or other fees (excluding call charges) At press time, service was available only to Rimnet members (Rimnet's Internet access users), but the system was expected to change in October. None; customers of AT&T's WorldNet Internet access service receive an additional 10% discount off call charges
Current area codes with toll-free 0120 access number (no. of area codes given in parentheses) Tokyo (13), Osaka (13), Sapporo (16), Yokohama (10), Nagoya (17), and Fukuoka (15)**; Rimnet offers access from these area codes only and does not support PHS or cellular phones. 03 (Tokyo) and 06 (Osaka ) only*; customers in other area codes, or using a PHS or cellular phone, can call a 03 or 06 toll number (with cost of call to the gateway paid by the user).
Domestic rate ¥60/three minutes ¥69/three minutes
International destinations & rates US and Canada: ¥90/ three minutes 37 countries; rate varies by country (e.g., US, ¥99/three minutes; UK, ¥135/three minutes)
Contact information Rimnet Corporation phone 03-5489-5655 fax 03-5489-5640 fax-back 03-5489-5567 http://www.rim.or.jp AT&T Jens Corporation phone 03-5561-5750 http://www.attjens.co.jp/index_e.html
* AT&T Jens plans to add toll-free access for Sapporo, Sendai, Chiba, Hachioji, Yokohama, Nagoya, Hiroshima, and Fukuoka by the end of 1997.
** Rimnet is currently working on partnerships to extend its service to 16 other areas in Japan.



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