Bells' Hell: VOIP? --UBS take on cable telephony:
RBOCs face a big threat from cable operators offering voice-over-IP services, says UBS
09 | 12 | 03
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U.S. Bells facing the threat of VOIP services from cable operators must start preparing for VOIP now or wave goodbye to their voice businesses, according to the latest research from UBS AG (see Cable's Voice Getting Louder).
”VOIP has the potential to do to wireline carriers what file sharing is doing to the recording industry,” John Hodulik, telecom services analyst at UBS, told press and analysts on a conference call today.
He notes that peer-to-peer file sharing services from the likes of KaZaA and Grokster has cost the music business $7 billion in sales so far because that industry has been unable to evolve its business model to keep pace with the technology.
”A very similar thing is happening in telecom as it relates to VOIP,” Hodulik says.
UBS is tracking the VOIP market in Japan to anticipate how this technology might shape up in the States. The firm reports that Japanese consumers save 90 percent off incumbent rates on their calling charges. Plus VOIP calls between users of the same service are free. “Customers are getting something for nothing, the same as file-sharing, which is extremely compelling,” Hodulik says.
Uptake of VOIP in Japan has been driven by the success of cheap, fast broadband. In Japan, consumer broadband prices per Mbit/s are about 35 times cheaper than the U.S. As a result the number of ADSL subscribers in Japan now stands at about 8 million, while cable operators there have 1.6 million cable modem customers. In the U.S. about 18 million households have high-speed data subscriptions, but the U.S. population is more than twice that of Japan.
Will VOIP take off this side of the Pacific, too?
UBS reckons adoption will be slower in the United States for several reasons, but will eventually dramatically alter the economics and competitive dynamics of telephony over the next decade.
”We are starting to see tests from cable providers in a number of markets, and you can see the effects on the Bells' financials right now,” says Hodulik. “The top-line effects won’t be seen for another 12 months, but lower down on the income sheet it’s visible… Lower prices for DSL and satellite partnerships show the Bells' attempts to head off the effects of VOIP.” (See Bells Embrace the Dishes, Time Warner Finally Takes VOIP Plunge, Report: Coax Still Rules Broadband, and Volo VOIPs Up Cable.)
UBS anticipates the Bells will get more aggressive with DSL pricing to protect their customers. "SBC Communications says it is willing to cut pricing for as long as it takes to win market share," says Hodulik. Eventually, he believes, customers will make high-speed data decisions based on their ability to get cheap telephony (see Why Verizon Cut DSL Rates, Nortel Plugs Cox Into VOIP).
Hodulik notes that the lack of a significant edge provider, with branding, such as Yahoo Broadband in Japan, has a negative impact in the U.S. “Vonage Holdings Corp. has 50,000 customers, but with a stronger balance it could grow much faster… AT&T is experimenting but could get more aggressive. There’s no real competitive force." In addition, pricing for traditional telephony is much lower in the States than in Japan -- which makes it less compelling to switch to VOIP.
Joe Hill, analyst with Eagle Asset Management, points out a couple more factors that could stall the U.S. VOIP market.
“The biggest threat could be the government… which might eventually treat VOIP as a telecom service, making regulations more onerous,” he says. Right now VOIP service providers are not required to contribute to the Universal Service Fund and are free from various other regulations that bind traditional telephone services. And secondly, quality of service (QOS) problems still linger with VOIP, for example emergency services calls cannot be guaranteed over these networks.
In general, Hodiluk says the quality is very high. “At the very least, it’s the same level as a mobile phone call, and usually you can’t discriminate between a regular voice call and VOIP call."
The upshot: UBS believes that cable telephony is the largest risk to the Bells' fundamentals over the next five years and expects to see line losses begin to accelerate in 18 months. |
