VoIP enters the ascendancy

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

The prospects of the crumbling circuit-switched US phone business have fallen so low that AT&T, which once controlled all phone calls across the country, sold itself for a mere $16bn. 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," says Brad Wilson, a telecommunications analyst with Legg Mason. "It could be a giveaway they bundle with other, advanced products."

The traditional US 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 voice-over-IP (VoIP) technology.

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

Keeping up with the Joneses
AT&T is not alone in transitioning to IP. US 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 $15bn 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 telcos to pipe more services into peoples' home, such as voice, multi-channel video, high-definition television, faster broadband Internet access and various wireless features over a single low-cost network. The move will keep the telcos 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 telcos 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 email comment. "SBC is always evaluating the market and will always be competitive."