July 23, 2004 8:10 AM PDT

High-speed hopes for AT&T

AT&T's slow road back into the residential phone market will be tied to broadband's march across the United States.

As the number of high-speed homes rises, so does the chance that Ma Bell will once again choose to throw its considerable weight fully behind CallVantage, a broadband phone service now considered AT&T's ticket back to the residential phone market.

On Thursday, AT&T announced its decision to stop pursuing new residential customers for traditional local and long-distance service. So 125 years after creating the phone industry, Ma Bell will no longer be a viable competitor in the residential market. Instead, the company will focus almost exclusively on its business customers, which already generate 75 percent of its revenue.

Some would consider CallVantage a perfect solution to AT&T's problems, which arose because it can no longer lease traditional landlines from competitors at cheap, government-set rates. As a result, selling old-fashioned phone service will become too expensive a prospect for any company that doesn't have its own residential phone network, the carrier said Thursday. The four regional Baby Bells are expected to increase, by about $10, how much they charge the likes of AT&T, MCI and Sprint to lease a phone line.

By contrast, CallVantage relies on voice over Internet Protocol (VoIP) technology to travel over an AT&T-owned IP network--North America's largest. But there's a catch: CallVantage needs a broadband connection, making the potential market only as large as broadband's boundary. To date, one in four U.S. homes has broadband. While this is a relatively healthy number, it is not high enough to justify the investment to sustain a "substitute provisional phone service in mass market," AT&T Chief Executive David Dorman said Thursday.

So for now, Ma Bell won't turn to CallVantage to replace its 4 million traditional residential customers who are expected to defect to other carriers. In a somewhat confusing move, however, AT&T is also cutting back on CallVantage mass-marketing campaigns and instead will use a "more measured approach to acquiring customers," Dorman said.

"VoIP clearly remains critical," Dorman told the financial community. "We have to take a measured approach to acquiring (CallVantage) customers."

An AT&T representative said Dorman's comments do not signal the demise of CallVantage. Instead, the representative said, it signifies CallVantage's anointment as AT&T's ticket back into the residential market at a future date, when broadband has saturated the country.

In the short term, however, "it does sound like they are slowing CallVantage down," said Patrick Mahoney, an analyst at The Yankee Group.

AT&T's position on CallVantage will surely shake up the emerging Net phone landscape, which, at two years old, is crowded and cut-throat. Each competitor uses VoIP technology to digitize phone calls and send them over the Internet or a closed IP-based network. The result is cheaper local phone rates, by as much as 80 percent, because the calls avoid the heavily taxed and regulated traditional phone network.

Many insiders had believed that it was only a matter of time before AT&T and cable operators overtake Vonage as the No. 1 provider of VoIP in the country and, at the same time, legitimize the Internet telephony industry with their respected brand names.

But now some are calling that scenario into question and proposing that AT&T may no longer be among the elite VoIP providers. That group currently includes cable companies and Vonage, and will soon add Verizon Communications, the nation's largest phone company, which launched its own VoIP service on Thursday.

 

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