The new services are based on Voice over Internet Protocol, or VoIP, which lets people make telephone calls using a broadband internet connection instead of a regular analog phone line.

Telephone monolith Bell Canada is offering a "digital voice" service, as are smaller phone companies such as Primus and Saskatchewan's Navigata.

Telus hasn't yet offered a residential VoIP product, but it does offer one called IP-One to its business customers.

But because the technology doesn't require a phone line, cable companies are getting into the market as well. Rogers, Shaw, Cogeco and Videotron are all offering VoIP services.

Billions of dollars at stake

A multibillion-dollar industry is up for grabs.

In 2002, about 95 per cent of the local residential and business phone markets were controlled by former monopolies such as Bell and Telus Corp., according to the telecom regulator, the Canadian Radio-television and Telecommunications Commission.

The two markets stacked up to nearly $10 billion that year, the CRTC says.

It could be even more lucrative with VoIP, because the technology doesn't need the expensive wires and elaborate switching equipment required by traditional analog lines.

The savings could translate into lower prices to lure consumers, who can typically expect to save 25 to 40 per cent on monthly phone bills when calling through the internet.

The battle to converge

The battle forms part of a larger war for convergence, whereby one company would be able to deliver a bundle of telephone, broadcasting and internet services.

Primus, an internet service provider that also offers long-distance and some local phone packages, became first out of the gate when it offered VoIP to broadband customers in January 2004.

Others quickly followed, including Navigata, owned by the Crown corporation Saskatchewan Telecommunications, which offers local telephone, wireless and internet services.

Traditional telephone monopolies face an even bigger threat from television giants such as Rogers Cable and Shaw Communications, which have hefty finances and a widespread infrastructure to deliver VoIP.

Michael Sabia, president and CEO of Bell's parent BCE Inc., said Bell wants to channel all of its phone traffic through the internet by sometime in 2006.

Both are going head-to-head against Bell Canada and others, by providing local and long-distance telephone service to their customers digitally through their cable networks.

The telephone companies – which have already seen their markets eroded by the rise of e-mail and low-cost competition in the cellular phone and long-distance businesses – are racing to beat them.

Bell Canada launched its IP telephony service in the Toronto region and Hamilton, Ont., in September 2005 and has since expanded the service in Ontario and Quebec.

Bell already offers Sympatico high-speed internet, cellphone and satellite TV services. And it's an arm of BCE, which also owns CTV, the Globe and Mail and about half of Aliant, the dominant telephone company in Atlantic Canada, among other holdings.

Bell has also moved to muscle in on the cable industry, filing an application with the CRTC in June 2004 to offer cable service in the most populated areas of Ontario and Quebec.

CRTC wrestles to set rules

The telecom watchdog, the CRTC, now struggles to develop a policy on voice-over-internet services, even as the pace of technological innovation threatens to outstrip it.

Most of the telecommunications industry, including services for cellular and long-distance phones and internet access, is already largely deregulated. Local telephone service remains the last big exception.

The CRTC now restricts the companies that monopolize local phone services in order to boost competition and protect consumers. It regulates their prices and makes them share their infrastructures with competitors.

The regulator wanted to speed through a VoIP policy in the summer, but objections from the former monopolies forced its delay.

They feared the regulator would follow its preliminary view released in April of 2004, which said:

• It sees essentially little difference between traditional phone service and new internet-based telephone.
• Because it tries to be neutral when it comes to technology, it would apply the same rules that now regulate traditional telephones services.
• In other words, it would continue to restrict the dominant companies while letting new competitors operate without regulation to set prices and offer services.

But new entrants to the industry, such as the cable companies, countered that the regulations should stay in place for a time to let competition flourish.

CRTC decides to regulate VoIP

As expected, the CRTC opted for partial regulation when it issued its eagerly-anticipated decision on VoIP on May 12, 2005.

The regulator said internet-based local phone service would be regulated in order to build "sustainable competition" in local telephone service. The big telcos, like Bell Canada and Telus, were told they couldn't price their local VoIP service below cost to stifle competition.

But the CRTC told new entrants in the internet telephony market that they can set their local VoIP rates as low as they want – only the large phone companies like Bell and Telus would have their VoIP rates subject to regulation.

"Why did we find that VoIP is a telephone service?" CRTC chair Charles Dalfen asked. "Because Canadians use it as a telephone service, it's being sold as a telephone service and it functions as a telephone service," he said.

Telus said it was "extremely disappointed" with the CRTC's decision. The phone company said the decision would "restrict its ability to provide Canadians with competitively-priced IP services."

Bell Canada said it would appeal the decision to the federal cabinet. "IP is a disruptive technology that is changing the telecom industry and the way it enables the Canadian economy," said Bell's Lawson Hunter. "The commission has misunderstood this new competitive paradigm in what may turn out to be a historic mistake with significant consequences," he said.

Bell, Telus, Aliant and the provincially-owned SaskTel appealed the CRTC decision in June 2005.

In May 2006, the federal cabinet asked the CRTC to reconsider its policy of VoIP, saying in a statement, "It is in the public interest for the CRTC to reconsider its decision."

The phone wars aren't over yet.