VoIP: Grandpa Bell Meets the Future

By Baselinemag  |  Posted 2006-10-02

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.

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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."

NEXT PAGE: Phoning Up the Future

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

Then and Now

Telecommunications: Voice-over-IP
5 Years Ago Today
Voice-over-IP services have limited features and uneven voice quality. VoIP widely available from cable operators and independent firms like Vonage.
Broadband services in early phases of adoption. High-speed Internet service widely available.