VoIP: Grandpa Bell Meets the Future

In the past 10 years, information technology has practically blown the roof off the telecommunications industry. The twin storms of voice-over-Internet Protocol and broadband Internet access mean that phone companies don't have a lock on dial tones anymore: Phone calls can go through your cable TV provider, or over any Internet pipe.

In short, now you don't need the phone company.

Those technologies, along with regulatory changes like the Telecommunications Act of 1996 that spurred new competition for communications services by requiring phone companies to open their local access lines to other providers, have cut the profit margins of the old-line Ma and Baby Bells and forced the industry to focus intensely on attracting and retaining customers.

AT&T's recent history reflects the change in the weather. The phone and network services company, incorporated in 1885, was bought last year by SBC Communications in a $16 billion deal. The combined company adopted the more recognizable AT&T name, then this March announced plans to buy regional phone company BellSouth for $67 billion.

What drove those deals? In part, industry watchers say, the rise of voice-over-IP services has created a landscape in which cable operators have become direct competitors to the phone companies. VoIP technology transmits voice over data networks, unlike traditional circuit-switched telephone networks that require dedicated lines to homes and offices.

VoIP is more efficient than traditional phone networks, and can potentially allow a service provider to deliver voice, videoconferencing and other time-sensitive communications services at lower cost. In fact, eBay's Skype service lets individuals make calls to other Skype users for free.

And the ramp-up to IP voice is expected to happen fast. Research firm IDC projects that U.S. subscribers to residential VoIP services will grow from 3 million in 2005 to 27 million by the end of 2009.

"The entire industry is being rewritten," says Jeff Kagan, an independent telecommunications analyst based in Atlanta. "We're in the middle of a 30-year transformation."

The biggest technology challenge for AT&T and other phone companies is to turn the rapid changes in communications technology to their advantage, rather than falling victim to competitors—like the cable companies—that could gobble market share using those same innovations.

AT&T, by combining the old long-distance company with the local assets of SBC and BellSouth, hopes to become more efficient by eliminating redundant operations, such as duplicate network facilities, and to expand its reach. The company also is spending $4 billion on Project Lightspeed, a high-speed fiber-optic network to deliver video-based services, which will pit it head-to-head against the cable TV operators that have encroached on its turf with voice.

John Stankey, AT&T's chief technology officer (formerly CTO of SBC), believes tremendous bandwidth—to handle an explosion of new content and communications services—will be the company's strongest asset in the years ahead.

"No matter how advanced the service you offer, it's only as good as the network that stands behind it," he said in a keynote at the GlobalComm 2006 conference in June. "About 5.6 petabytes of data"—roughly 5.6 quadrillion bytes—"travel over AT&T's network. That sounds like a lot, and it is. But the day will come when that is not enough."

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