Market Overhaul

Deutsche Telekom said this week that it joined computer-chip maker Intel in lending an investment round totaling 15 million euros ($20 million) to Jajah, an Internet startup that promises to save cash for its users by rerouting their phone calls through the Internet. The actual amount that each company invested has not been revealed.

This is the first time that a traditional telecommunications company such as Deutsche Telekom invests in a provider of the so-called Voice over Internet Protocol (VoIP). The two branches of the telecommunications industry were previously seen as competitors: more than 4 percent of international phone calls are nowadays conducted via Skype -- one of the pioneers of competitively priced Internet telephony providers.

Jajah -- which describes itself as a "true 'flat world' company with very small offices of very dedicated people working around the globe" -- was started in 2005 and went live in Feb. 2006. Today, it has more than two million users in 55 countries, and it expects those numbers to increase to five million by the end of the year.

Phones are not dead

Unlike Skype, which lets its users conduct phone calls via computers using headsets, microphones and a special software that needs to be downloaded, Jajah asks their users to enter two numbers on their Website -- their own and the number they wish to call. The company then calls both numbers and, once the connection is established, both phones ring. The caller and the party called pick up their phones and can start talking immediately.

"This deal shows that traditional telecom firms need to position themselves," said Justus Haucap, a professor of competition theory at the University of Bochum.

Experts believe that within five years the majority of calls will be made over the Internet. Dutch phone company KPN is planning to transmit all its calls over the Internet in three years, while Deutsche Telekom will need a little longer for that -- until 2012. In Slovakia, however, Telekom's daughter company Slovakia Telecom already has the first Internet-based telephone network in the European Union.

Sinking costs

Telecoms see a clear advantage in VoIP: telephone switches are no longer necessary and networks can be run with fewer resources and much smaller personnel. While the transmission of a traditional phone call blocks one entire line, thousands of VoIP conversations can simultaneously travel as data packages across a glass-fiber cable.

Customers will hardly notice any difference -- except in seeing their phone bills getting smaller. Experts believe that it won't take long before everybody starts paying monthly flat rates. VoIP is also expected to make a dent on the mobile market.

The widespread adoption of internet telephony and sinking long-distance costs, however, will not only affect the customers.

"They will also have effects on politics," said Paul Welfens, a researcher at the University of Wuppertal and an expert on structural transformation, innovation and digital economy.

"We won't be able to regulate the American and the European markets separately in a meaningful way anymore," he said. "We'll need common rules."

In addition, the three markets -- landline, mobile and Internet -- which are currently regulated separately, will sooner or later be merged into one.

Making money

It is not yet clear how phone companies will be making money in the future. Potential sources of income include the infrastructure and catering to corporate clients. According to Welfens, services like film archives, information services or other target-specific offers will become increasingly important areas of business.

"We still don't know if the future world market leader in telephony will be Google or Microsoft," Welfens said. "Perhaps they have a few ideas up their sleeves."

It is also not entirely impossible to imagine a scenario in which large players such as Telekom are completely driven off the market.

"You have to be really well positioned in this business," Welfens said. "Amiga and Commodore were pioneers on the PC market, but does anybody remember them today?"