Merger, shmerger, where's my ESPN phone?

As traditional phone operators jockey for dominance, new technology helps make up for lost competition.

Even though U.S. carriers are consolidating forces, tech advances such as broadband telephony should keep the price of a local phone call down, industry veterans said Monday.

It speaks volumes that phone giant SBC can bid on AT&T and so far there have been few predictions of high prices ahead for consumers. After all, basic economic theory holds that when there's lots of competition, prices ultimately come down. With fewer businesses competing, prices tend to go up.

But commentators and industry insiders dissecting SBC's $16 billion bid for AT&T say the latest technology is giving rise to a new breed of phone operator: one that doesn't have to have its own network. That's injecting much more competition into the local phone market than ever before.

"It's not that hard to be a telephone company anymore," said a source at Comcast. "The trick is staying in business."

Most networkless operators rely on voice over Internet Protocol (VoIP), which is a low-cost technology that lets a broadband line double as a phone line. The VoIP market was seeded by the likes of Vonage, which only requires that customers have an existing broadband connection. Dozens of new U.S. phone operators base their service on VoIP, including major cable companies that bundle a VoIP service in with their broadband plans.

At the same time, companies with popular brand names are getting into the cell phone business as mobile virtual network operators. These arrangements allow a diverse group of companies, from 7-Eleven to ESPN, to become wireless providers without having their own network. These operators are helping fill the void created by the purchase by Cingular Wireless of AT&T Wireless, by Sprint's upcoming merger with Nextel Communications and by a wave of consolidation among smaller cell phone operators.

The basic premise of reselling calling minutes bought from major carriers is an old one. But it took breakthroughs in billing and database management for it to become relatively inexpensive to launch and operate as a virtual cell phone operator. There are at least 10 new cell phone operators launching in the next few months, A.T. Kearney analysts said.

The only real quibble industry insiders had on Monday was about how stable a small percentage of the new competition is.

Cable companies probably have the best chance, since they own their own networks. And VoIP operator Vonage, with 400,000 customers, is a very respectable foe, even though it doesn't own a network. The successes in the cell phone business by the Virgin megabrand--its Virgin Mobile USA has more than 2 million subscribers--is proving the same point on the wireless side of the phone industry.

In the mid-1980s, government regulations provided a competitive boost for those unable to invest tens of billions of dollars in building a new network. Rules that were phased out in 2003 guaranteed an operator access to a local phone network at relatively cheap prices. The sunset of those rules, as evidenced by AT&T's shrinking dominance, has had a dramatic impact on the companies that relied on them.

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