We've seen this happen before. A new technology promises cheaper and better service.

But when consumers try to take advantage of it, the new "cheaper", "better" service ends up being a degraded level of the same old thing, and usually for more money when all is said and done.

Think cell phones. Think internet connections.

The problem with cheap new technologies is that they don't provide sufficient profit to be developed at a mass level. That's why telcos and cable companies dragged their feet for years before getting serious about broadband internet. Do you remember when 128k connections cost $300 a month? Why give people ten times as much capacity for much less money?

Which brings us to VoIP. There appears to be no incentive at all for the major telco and cable carriers to get into this business yet. Until they find a way to leverage their infrastructures for their own profit in the VoIP business, you can expect them to throw up obstacles. Like tollgate fees. The idea of charging companies like Vonage and Skype for use of the "free" IP network has been floated, and is not likely to go away any time soon.

Fracturing of the VoIP market

That leaves companies like Vonage, Skype, and Microsoft to compete at the consumer end of things. They are fighting over who will get the most customers. Just like the cell phone companies, they are using specialized hardware and added services to differentiate themselves from the others.

You can expect they will all be taking a page from the cell phone marketing book. Offer cut rate (or free) hardware to get customers signed up to a long term contract. But the catch is, the hardware will only work with one system. That way customers will not jump ship without thinking twice about investing more money in new hardware.

The strategy was apparent at this year's Consumer Electronics Show in Las Vegas. Each of the major players unveiled new gadgets that only work with their system: a special Wi-Fi phone for Vonage, speakerphones and USB handsets for Skype, and handsets from Uniden and Philips that only work with Windows Live Messenger. The dilemma is that the major players in the VoIP business need to generate cash. They hope to do that by tying up lots of customers with exclusive hardware that is not compatible with their competitors. But the risk is they will alienate a lot of the same consumers they are trying to convert.

Will new handsets make Microsoft a VoIP player?

Bill Gates announced at CES in Las Vegas in January that Uniden American and Royal Philips will have new VoIP phones available for MSN Messenger users by the time the new VoIP-enabled version of Messenger is available. According to Microsoft, there are 200 million MSN Messenger users worldwide. The new version of MSN Messenger, called Windows Live Messenger will have advanced VoIP capabilities, and an interface with the traditional phone system through an agreement with MCI. The handsets available from Uniden and Philips will be cordless dual landline-VoIP phones making them a complete replacement for both traditional phone service and PC to PC services like Skype. The companies hope the three way combination of Microsoft and MCI along with Uniden and Philips will make the MSN Messenger service a leader in the VoIP battle for subscribers.

The new Uniden phone, due out in the spring will be a 5.8GHz unit and will cost in the $ 100 range. The Philips phone will have similar features and price, but will be targeted to non-North American markets. The combination is aimed at putting the Microsoft/MCI service on par with Skype and making it a serious alternative to providers like Vonage.

As with Skype, PC to PC calls will be free using Windows Live Messenger. Microsoft and MCI claim that PC to landline calls will cost only a few cents a minute, and much less than some other alternatives currently being developed.

Who is Microsoft targeting? Skype or Vonage?

According to Russel Shaw, writing in the ip telephony blog (http://blogs.zdnet.com/ip-telephony/?p=821), the real target of the Microsoft/MCI project is not Skype, but Vonage and other "pure play VoIPs" like Packet 8, as well as the traditional telcos waiting in the wings to pounce once the market gets going.

Services like Vonage are extremely vulnerable because they rely on the infrastructure of the telcos without paying a surcharge to use it. Those costs are off-loaded to their customers who pay connection charges. But it is almost a certainty that the telcos will not sit idly by while companies like Vonage use the telcos' own capacity to take away their customers.

That means the "pure play VoIPs" are going to get squeezed between Microsoft/MCI on one hand, and the telcos on the other.