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The Call to Voice

Voice over IP may be built upon broadband, but it doesn’t need to follow the same anti-competitive path. In fact, the VoIP business could remain wild and wooly (and cheap).
December 9, 2004

One of the goals of the 1996 Telecommunications Act was to open up broadband access beyond cable and phone companies to alternative providers and technologies such as fixed-wireless and satellite.

Thanks to the phone and cable companies’ clout in the U.S. government (and a few good loopholes), it didn’t happen that way. The alternative broadband providers were pushed aside to niche markets, and broadband satellite and fixed-wireless services failed to take off.

With only two major broadband technologies, dominated by a handful of companies, price competition has been modest. Phone companies finally dropped their DSL pricing below $30 per month, but cable-modem customers still regularly pay over $40. Even the new bundled-services discounts have yet to generate significant cost savings.

Now, Voice over Internet Protocol (VoIP), which has thrived within the business community in recent years, is following the same broadband pathways into the home. Although those channels are controlled by less than a dozen big cable and phone companies, VoIP services will not be as easily dominated.

One encouraging sign for upstart companies is the recent Federal Communications Commission (FCC) ruling that categorized VoIP as an interstate service, settling a dispute between Vonage and the state of Minnesota and sending a message to cash-strapped governments to look elsewhere for new tax sources. A side benefit was that it also gave smaller VoIP service providers the chance to keep dropping prices.

The ruling, though, won’t save independent VoIP providers from competition. In many respects, the squeeze is on. Citing the FCC ruling, SBC Communications announced it would launch its own residential VoIP service in 2005, joining Verizon Communications and Qwest Communications International.

Yet, there are several reasons why larger companies will have a harder time dominating this market.

  • The continuing lack of taxation and regulation will offer more advantages to the independents. Vonage, BroadVoice, VoicePulse and Net2Phone lack the resources to compete in a heavily regulated industry with all the overhead and price pressure.

  • Unlike independent DSL providers that were forced into bankruptcy, due in part to  onerous “unbundling” terms, VoIP providers don’t require equipment to be housed within the Baby Bells’ local access centers. As a result, they’re much less dependent on the broadband providers. A sign of the times: DSL provider Covad has emerged from bankruptcy and is on the rebound thanks in part to adding VoIP to its services.
  • The arrival of Voice over WiFi technology should provide independent VoIP providers with another way to further extend their networks, and compete with both traditional broadband providers and cellular services. In recent months, VoIP providers, including BroadVoice, Vonage and Net2Phone, have announced Voice over WiFi phones. If consumers have a phone that works in their home, on their WiFi networks at work, and at public hotspots, they may not need either a cell phone or a standard landline.

True, the big cable and phone companies will add VoIP and WiFi, too. Starting in 2006, SBC’s Cingular Wireless will offer dual-mode cellular/WiFi phones which will work as 3G wireless devices as well as connect to its growing FreedomLink hotspot business for data access.

According to Frank Hanzlik, managing director of the WiFi Alliance, all the cellular providers will follow T-Mobile’s lead in announcing plans to support hybrid phones that span both its cellular and WiFi networks.

“Forward-thinking companies like T-Mobile see that WiFi and 3G can coexist,” says Hanzlik. “They see that WiFi can provide some good benefit for offloading cellular capacity and provide better coverage inside buildings where it might be costly for cellular stations to reach.”

In the long run, IP-based systems should be cheaper to operate, saving the Bells considerable money. However, they’ll need to develop new services while simultaneously supporting their old packet-switched infrastructure even as price pressure from Vonage, AT&T CallVantage and Skype continue to push prices down.

If SBC, for instance, prices its residential VoIP similarly to Verizon VoiceWing’s $35 per month, it will beat cable’s even pricier offerings, but may have trouble competing with the $20 to $30 per month plans from the independents.

For now, the phone companies are banking that people will use VoIP as a second line, according to SBC spokesperson Destiny Belknap.

That may be a false supposition, though, as younger people are more willing to go totally cellular, perhaps with a cheap VoIP line for long distance calls at home. The phone companies may own big chunks of cellular providers, but they can never be sure their customers will defect to the right ones.

The genie is out of the bottle, so it’s better for the Bells that they catch some new customers than have them go elsewhere. And once the fiber-optic upgrades to support video are completed, they will be able to match cable in offering multi-service bundles over all-IP networks.

These all-in-one packages may ensure that the phone and cable companies will lead the way in VoIP, but with cellular and VoIP service competition, the pie is finally getting some new slices.

The VoIP independents can focus on IP-services and start adding value, bringing conferencing and other services into the home. Phone companies can do the same, but they may be distracted by their desire to get into video. In the meantime, there will be so many new angles in the mix, including an emerging industry standard for fixed wireless broadband called WiMax, that nimble competitors will find opportunities.

Even if shakeouts limit the number of major players, the disruptiveness of the technology will be of such magnitude that VoIP should act as a competitive force of its own, keeping prices low and accelerating the delivery of new services.

VoIP is never likely to be as lucrative a business as broadband access, but at least it’s a business that has a more level playing field.

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