Telecom Turmoil (includes Net2Phone)
Internet Phone Services Are Undercutting The Telecom Giants And Creating New Rivals
May 10, 2004
By Steve Rosenbush
Alan Bell, a professional number cruncher, thought he was paying too much for phone service. So last year he dropped Sprint Corp. and turned to Vonage Holdings Corp. for its Internet phone service, which sends voice calls over the same networks that transport Net data. Now his auditing firm, ARB Consulting Inc. in Plant City, Fla., gets unlimited domestic phone service and a dedicated fax line for $ 55 a month, about 75% less than what he paid before.
He also enjoys new features, such as the ability to check records of calls on the Web. ''It does the same thing that a regular phone does, and more. Why not save the money?'' Bell says.
More and more people are asking that question. Tens of thousands a month are turning to Vonage, Net2Phone, i2 Telecom International, and other upstarts for telephone service based on Net technology. The service, dubbed Voice over Internet Protocol, or VOIP, is expected to surge next year as broadband providers like Comcast, Time Warner, and AT&T roll it out en masse. ''We are crossing over into a new era. In three years, telecom companies won't look anything like they do today,'' says analyst Farooq Hussain of researcher Network Conceptions LLC.
The Internet is quickly refashioning telecom in its image. Revenues in the $ 120 billion traditional phone business are declining several percentage points a year, and capital investment in basic gear has all but dried up. Yet revenue from telecom services based on Net technology is expected to hit $ 6.7 billion in 2007, up from $ 281 million last year, according to researcher IDC.
''We Were Wrong'' The truly revolutionary promise of the technology is that it could break the grip that local phone companies have on their customers. Until now, the Bells have been able to decide the conditions under which rivals could connect to their networks. The result is that the Bells control about 80% of the U.S. local phone market.
But with Net technology, rivals can bypass the Bells because Net phone service can simply be plugged into any broadband connection. Already under pressure from wireless, the Bells may lose an additional 20% to 30% of their market over the next few years. That will drive down margins and will spark consolidation.
Incumbents hope to co-opt the technology to limit the damage. Verizon Communications Inc. is investing billions in new technologies so that it can offer its own low-cost Net phone and other services beginning this spring. ''The VOIP market is bigger than we would have guessed. We were wrong,'' admits Stuart Elby, Verizon's vice-president for network architecture.
Consumers will be the winners. Vonage offers unlimited service for $ 35 a month. That's about 33% cheaper than the $ 50 to $ 55 Verizon charges for a similar service over its traditional network.
Internet telephony is unleashing a wave of new features, too. ReadyTech-Go, a staffing agency for the health-care industry, switched to a Net phone system six months ago. Instead of a separate phone line, workers simply plug a headset into laptops loaded with phone software. As they travel around the country, co-workers can reach one another using the same extension, as if they were down the hall. The application costs about $ 125 per user, cheaper than many phones.
Net technology also is helping drive down the cost of international phone traffic. Net2Phone's rate to China is only 5 cents a minute, half that of a regular calling plan. Some forms of IP phone service are even free. Skype, a software program that can be downloaded from the Web, lets people make free calls to other people who use the same program. Net technology now accounts for about 13% of cross-border international phone traffic, compared with 1% five years ago, according to TeleGeography Research Corp.
Expect the phone giants to fight back hard now that they've been awakened to the risks of Vonage and other Net upstarts. Still, regardless of who wins the battle, customers can look forward to one sure thing: phone service that's cheaper and loaded with new features.
Telecom
Hunters
Vonage, Net2Phone, and other upstarts.
Hunted
Telecom giants from Verizon and France Telecom to AT&T and NTT.
At Stake
Leadership of the $300 billion U.S. phone market and the $750 billion international market.
Outlook
Phone calls with Net technology, which are about 33% cheaper than regular phone service, are expected to hit $6.7 billion in U.S. revenues in 2007, up from $281 million last year. Even more significant, Net technology will make it easier and cheaper for a host of small outfits to compete with the big phone companies. |
