Phoning Up the Future

By Baselinemag  |  Posted 2006-10-02 Print this article Print

The advance of voice-over Internet Protocol technology increases AT&T's efficiency.

Phoning Up the Future

For AT&T, the increased competition for its traditional stronghold of long-distance service has resulted in shrinking margins. Back in 2001, AT&T was a $52.6 billion company with a 73.4% gross margin. With SBC, AT&T had $43.8 billion in sales in 2005—and a gross margin of 56.2%. Five years ago, AT&T had no voice-over-IP strategy and no longer had a broadband offering (in late 2001, it spun off its broadband unit, which merged with Comcast).

Fast-forward to the spring of 2004: AT&T introduced its own voice-over-IP service aimed at consumers, CallVantage, with unlimited calling plans. But the initial results were disappointing. Instead of the 1 million subscribers it expected to sign up in its first year, it landed just 53,000. In the second quarter of 2006, CallVantage subscribers numbered approximately 160,000, according to research firm Telephia.

AT&T says the migration to IP-based telephone service is still in its early days. "We see voice-over-IP as the direction that technology is going in," says Rick Stein, executive director of AT&T's VoIP services for business customers.

Stein notes that it's one of the fastest-growing segments for AT&T, though he wouldn't disclose exact numbers of the company's total VoIP customers. Still, he says, it's "dwarfed by traditional phone services."

He's right. Upstart VoIP services provider Vonage, for example, had 1.8 million subscriber lines as of June 30, compared with 70 million customers for a combined AT&T/BellSouth. In addition, analysts say, voice-over-IP services still haven't completely ironed out technical details such as finding the location of 911 callers. And VoIP also hasn't taken hold among business customers as quickly as some expected, according to Counse Broders, research director for telecom services at Current Analysis. "Companies are still getting useful life out of [traditional phone switches]," he says.

IP-only voice providers, though, says the genie's already out of the bottle. "For 100 years, consumers had to do things the way the phone company did things," says Michael Tribolet, president of Vonage America. "Voice-over-IP puts the control in the consumer's hands."

Meanwhile, high-speed Internet access to the home, a business that was basically nonexistent 10 years ago, will be an $85 billion market worldwide this year, according to IDC. By March 2006, 42% of U.S. adults—84 million people—had broadband service at home, according to the Pew Internet & American Life Project. In early 2002, fewer than 10% of Americans had high-speed Internet service.

Among telecommunications providers, the fight for customers will happen on multiple fronts, including television and wireless services. Verizon and AT&T are now building out even-higher-speed fiber-optic networks that can pump digital TV programming into homes, to offer a bundle that stacks up against cable guys like Comcast and Time Warner Cable.

"Most customers in 10 years will be buying their phone, Internet, TV and wireless from the same vendor," Kagan says. "And that means all the pieces have to be good."

At A Glance: AT&T Headquarters: 175 E. Houston St., San Antonio, TX 78205
Phone: (210) 821-4105
URL: http://att.sbc.com
Business: Providing voice, data and Internet services to businesses and consumers; the company operates more than 49 million access lines worldwide.
Chief Technology Officer: John Stankey
Financials in 2005: Sales, $43.9 billion; net profit, $4.8 billion.

NEXT PAGE: VoIP Then and Now


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