Internet telephony, or VOIP - voice over Internet protocol - is hot, but it has a bit of an identity problem.

While a rash of announcements from the big telecommunications carriers and infrastructure companies in recent months have indicated that VOIP is very definitely coming our way, most people familiar with the term still think of VOIP as a hobbyist activity - making phone calls over the Internet from a home PC, using headsets.

Yes, there is huge growth predicted in that area as well, as increased processor speeds and bandwidth and better applications make it possible to ring someone's phone rather than just another PC. New Net phone devices are beginning to go on sale too. But ringing mother at negligible cost from your Dell is only a small part of what has become a very big picture indeed.

According to analysts, the technology behind VOIP - Internet protocol (IP) - is about to transform the entire telephony scene for both consumers and businesses. The end result will be an altered telephony universe in which all types of digital data can merge - voice, video, text, the Web. Wireless and land-line networks will blend also.

People will be offered a smorgasbord of new applications and services for communication and entertainment that bring audio and video together seamlessly over television, PCs, mobiles, and new connectivity devices like net phones that mate full-size handsets and viewing screens.

Nearly all voice traffic at the moment is carried over circuit-switched networks. At one time, an operator connected calls by pushing plugs into a big switchboard, giving a complete circuit for a call. Despite the fact that most voice traffic on modern networks is digitised - converted into samples of sound that are transmitted across the phone network - each call still requires a dedicated route to be set up for it to link the maker and recipient of a call.

That circuit remains open for the duration of the call and claims a small slice of bandwidth on today's digital, fibre-optic networks, even when no one is saying anything and no digital information is moving across the line.

IP telephony, in contrast, uses the Internet's method of efficiently using bandwidth. The digitised sound samples of a voice are broken into tiny packets of information that scatter and reassemble, to be delivered into the recipient's telephone. Six times as many calls can be squeezed into the same amount of bandwidth. In addition, a single router can handle many times the amount of data at a tenth of the cost of expensive telephone switch "cards", without the additional wiring, software and management costs.

"This is not just a new technology," says Ms Susan Thomson, an analyst with the Dataquest/Gartner Group. "It's the way that voice is going to be carried and the big carriers are all investing heavily." Analysts are predicting the revenue stream from VOIP may pass $24 billion (€28.24 billion) by 2003.

Global Crossing, for example, announced last month that it was converting its entire fibre global network to VOIP, and transferred the first part of its US network onto VOIP routers capable of handling 1,600 calls per second. London and the rest of Europe will follow by the end of this year. Cable & Wireless signed a $1.4 billion deal two weeks ago with Nortel to convert its circuit network to VOIP.

There's one compelling reason why carriers want to move to VOIP, say analysts: cost. "IP as a technology is inherently cost-efficient, and a lot easier to deploy and manage," says Mr Jim Reilly, Cable & Wireless's senior vice-president of global networks. In addition, as revenues go flat from traditional switched voice networks, carriers must seek new markets, and those are clearly in data services, he says. Cable & Wireless gets 60 per cent of its revenue from voice services for businesses, but margins are narrowing and growth is slowing.

"The only place we see growth is in the delivery of IP services and applications that run on those services," he says.

That reality has spurred infrastructure providers like Cisco to regear towards VOIP as well. Mr Maren Bennette, emerging technology sales manager for Cisco UK, says VOIP is integral to Cisco's future. "It's one of our hottest areas. It's the cornerstone of much of what we're doing."

Businesses will be driven to VOIP because of cost savings as well, says Ms Thomson. Communications needs are the third-largest cost to companies, according to Mr Henry Woods, managing director of Dublin company Softech Telecom, which makes software for managing and tracking calls and data traffic. Most obvious is the price of making calls, which will drop drastically with VOIP. Less visible are areas the industry calls "moves and changes". If an employee changes desks and needs to move an existing extension, or if extensions or handsets need to be added, "quite a lot of work has to be done to make that switch", Mr Woods says.

"Sometimes, a company has different exchanges in different buildings, all managed by different software and different switch cards. And the cards are phenomenally expensive" - in the order of £2,000 to add four extra lines, he says. VOIP replaces the costly cards with much cheaper and more intelligent routers from companies like Cisco and Juniper, and allows all the extensions globally of a single company to be managed from one point. Move to a new desk and your extension follows you to the new phone.

That's another key plus of VOIP - the intelligence moves out of the cards at the middle of the network and into smart phones and other devices at the ends of the network. "The phone becomes an IP appliance and it's relatively simple to add new applications," says Mr Bennette, who addressed Softech's user conference in Dublin last week. "You can do a lot of clever stuff you'd never even think of doing with a regular circuit-based phone."

All very nice, says Ms Thomson, but carriers and service providers still need to come up with a business model. "They don't know how to price, bundle or bill for these services," she says.

Many also feel VOIP is not yet ready for mainstream take-up by either consumers or businesses because the quality is unpredictable. Nonetheless, companies are beginning to convert. Around 5 per cent of UK companies say they are testing VOIP systems and 15 per cent have told analysts Gartner Group that they will be trying out VOIP by the end of the year. The Business Communications Review predicts 60 per cent of companies will have VOIP in place within two to three years.

But very few have considered the legal and political ramifications of the move to VOIP. Because IP telephony networks place all data and voice on a single line, monitoring and surveillance is far easier than before, says Mr David Banisar, legal counsel for Washington DC privacy advocates the Electronic Privacy Information Center.

Those capabilities raise privacy concerns. Documents on the FBI's secret Carnivore surveillance system, recently released under court order to the Electronic Privacy Information Center, reveal the FBI is actively looking at surveillance over VOIP. "But using encryption is also easier," notes Banisar. He hopes the use of encryption will become widespread with VOIP's adoption.