The technical term for Internet telephony is “Voice Over Internet Protocol” or “VOIP” in which sounds are transformed into digital packets of information and transported across the Internet much like e-mail. The digital information is then transformed back into sound when received by the recipient’s web-connected phone service. At first, the main adopters were businesses for internal communications. VOIP began to catch on in the early 2000s for international calls, and a large fraction of international calls are made using the technology. Today, improvements in VOIP-based telephony have made it available through DSL and broadband Internet service providers as an option for virtually all their customers. In addition, there has been a significant increase in entry into the VOIP industry.

Why is a single VOIP provider likely to emerge as a natural monopolist?