February 2, 2005 11:14 AM PST

AT&T buy shows how far voice calling has fallen

SBC Communications' plan to buy AT&T illustrates how far the traditional phone business has slipped--and how much it needs to change.

The prospects of the crumbling circuit-switched phone business have fallen so low that AT&T, which once controlled all phone calls across the country, sold itself for a mere $16 billion. The once-impervious phone giants that controlled the nation's telephone networks are being humbled by Internet technology--and the cable television giants and scrappy Net calling start-ups that embrace it. With high-profile Internet-based services driving the market, basic voice calling could become an afterthought.

"Voice service will eventually be low-cost enough that it could be free," said Brad Wilson, a telecommunications analyst with Legg Mason. "It could be a giveaway they bundle with other, advanced products."

The traditional phone company has seen that it can't keep up with cheaper, more versatile Internet technology, so now it's making the painful switch. Industry executives concede that selling voice calls over a vast network of circuit switches has become too costly to make sense in the long run.

Analysts say the only way for today's phone companies to survive is to adapt to a changing business reality. AT&T took their advice, abandoning its consumer local telephone business earlier this year to focus on promoting its CallVantage service, using VoIP, or voice over Internet Protocol, technology.


What's new:
Imagine that phone service is free, just something tossed in with your broadband services.

Bottom line:
The SBC-AT&T merger is another sign that voice calling is declining, and even the biggest providers have to make some changes.

Full coverage of the acquisition

"They can't just be an old-fashioned regulatory-protected monopoly anymore," said Albert Lin, an analyst at American Technology Research.

Keepin' up with the Joneses
AT&T is not alone in transitioning to IP. Phone companies of all shapes and sizes, including the Baby Bells--SBC, Verizon Communications, Qwest Communications International and BellSouth--are investing billions of dollars to move from their decaying circuit-switched network to the Internet. Though SBC and AT&T say that consolidating their networks will save as much as $15 billion in costs over the next decade, they add that the greater benefit will be weaning customers from the old phone networks to IP.

An IP network will allow the Bells to pipe more services into peoples' home, such as voice, multichannel video, high-definition television, faster broadband Internet access and various wireless features over a single low-cost network. The move will keep the Bells in competition against cable rivals that have largely succeeded in bundling video with broadband and voice.

The voice calling that was SBC's and AT&T's original product has become a pervasive commodity, widely available from numerous sources. The Bells see selling higher-end services such as video and broadband Internet as their future cash cows.

"None of us are really interested in playing in a commodity business," John Stankey, senior executive vice president and CTO of SBC, said during a conference call Tuesday.

An SBC spokeswoman said the possibility of offering free phone service is distant, but not out of the question.

"Certainly as services converge onto one network our packages and offerings will change, but we don't yet know exactly what those future packages will look like," SBC spokeswoman Bridget Stachowski wrote in an e-mail comment. "SBC is always evaluating the market and will always be competitive."

Small mammals outwit dinosaurs
The shift in strategy comes none too soon. The Bells have already been facing competition from upstarts taking advantage of cheaper IP technology.

Three years after launching, Vonage is the largest VoIP provider. for a flat fee, the company lets users make phone calls over the Internet using their existing broadband connections. Skype, which offers free software for Internet calling, has signed up 28 million users--and counting.

Cable companies are planning to roll out their own Internet phone services. Time Warner Cable and Cablevision have begun selling voice calling over the Internet, and Comcast plans to join the crowd later this year. The old-model phone providers can't keep up.

"In an IP world, voice is easy and cheap," said Scott Cleland, chair and chief executive officer of the Precursor Group, an independent research company. "The traditional telecom companies are an anachronism."

Yeah, MCI, he's talkin' to you
Cleland said AT&T is only the first casualty in the changing telecommunications climate. He said he expects MCI, another traditional long-distance phone carrier, to follow a similar path toward acquisition. Sprint, which has a strong wireless business, may also be an acquisition target.

The consolidation will likely not end there, he added. Since IP shifts the value from inside the network, where switches once controlled services, to the edge, where a handset or PC controls the service, it's easier for competitors to offer advanced services over networks they don't own.

"In the IP world, you don't have to own the facilities to do business," Cleland said. "Look at how Internet companies like eBay and Amazon operate...We see the decline happening rapidly on the long-distance side to AT&T and MCI. But it will eventually happen to the Baby Bells, albeit much more slowly."

Some analysts say that, though the phone giants' current business models might have to change to accommodate new services, there's no reason to start writing eulogies.

"I wouldn't give up on the local phone companies just yet," said Eli Noam, director of the Columbia Institute for Tele-Information. "They own one of the two major pipes into people's homes. But the days of a communications company only selling wireline voice is over. If they turn into bit transporters and offer more valuable services on top of those connections, they can grow strong."


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Here's the funny part
the phone companies will gouge the consumers and keep any "savings" as profit increases.

Add in all the misc state taxes and surcharges and VOIP has telcos CLEARLY BEAT!

(at least until net VOIP startes getting taxed)

i just switched from mainstream to cable phone service at a $25/monthly savings for the exact same service.

the phone companies are doing too little too late.
Posted by Lite Rocker (42 comments )
Reply Link Flag
What about rural America?
I don't have broadband and cannot get it. No DSL either. I still have a modem. I bet the first tax will be....
Posted by TheMidnightCoder (61 comments )
Reply Link Flag
It's a matter of reliability for me.
I live in Los Angeles and have Time Warner Cable service and Road Runner as an ISP. I would be quite upset if my phone service had to depend on the reliability of the internet. Besides going down from time to time for scheduled maintenance, the internet is often just clogged full of Trojans, worms and zombies taking up all the bandwidth.

My land-line is solid and reliable. If somehow the internet could become that solid and reliable, then they can talk about using it for general voice service.

Posted by Crunchy Doodle (41 comments )
Reply Link Flag
Rural reliability
Reliability is also a problem when it is dependent upon the home computer, which usually does not work when the power is off. And, in a large part of the country there is no high speed anything unless is is by satellite. One more thing 9-1-1 does not work the way it does with a wired phone. Be prepared to explain exactly where you are because the location stuff is not there. VoIP on 9-1-1 is a ten year leap back in technology. And until the 9-1-1 tax is applied to these services it probably won't change. Good luck!
Posted by GEBERWEIN (75 comments )
Link Flag
A sensible purchase for SBC
SBC's purchase of AT&T makes good business sense. SBC enjoys
the incumbent role in a few large regions of the country. They
derive substantial revenue for providing the last mile of service.
Providing local infrastructure is expensive but vital to
maintaining their customer base.

AT&T divested themselves of their peripheral business
components (i.e. wireless) and is now a lean b-to-b company.
They arguably have the best IP backbone in the country. AT&T
has taken a leadership role in developing the VoIP technology.
They nicely compliment the product line that SBC already offers.
The purchase buys a potential competitor for long distance
service (via VoIP).

My company is in a region controlled by SBC (the ILEC). We are
considering using AT&T for VoIP through a T1 circuit that will be
provisioned by SBC for AT&T. Quality of service issues have
already been addressed by AT&T and I am confident their service
will meet or exceed that of our existing analog. We will retain a
couple analog lines to maintain E911 service and as a failsafe (in
case a backhoe cuts our fiber optic line).

Many consumers elect to strip or dump their landline phones.
Maintaining a DSL circuit may require you maintain the service
but you can strip down to the most basic, local-dialing plan. If
you have a cable modem, dumping the landline altogether can
be a viable option as telcos are required to maintain a virtual
dialtone even after service is cancelled  this allows you to dial
one number: 911. This is what I have at home - just make
certain your cable modem, router and VoIP adapter have battery
backup. Mine's been running almost continuously for a year.
Posted by (3 comments )
Reply Link Flag
Woudnt your lines most liely be in the same place with the fiber? So that reasoning doesnt make any sense. Also most T1's dont come over fiber. They com over copper.

Most telephone companies use backup power to the remote switching facilties (cable companies do not) So If you have your T1 modem and routers hooked up to backup power you should be able to have those working as well in the event of a power outage.

Kieran Mullen
Posted by kieranmullen (1070 comments )
Link Flag

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