Phone options expand despite telecom mergers

Do VoIP, wireless and cable broadband offer enough competition in a market where traditional phone providers are merging left and right?

As one giant telecom acquisition follows another, consumer groups are crying foul, but new technologies and players are giving people more ways to make phone calls.

The debate follows two major proposed mergers in the telecommunications industry--SBC Communications' bid for AT&T, and Verizon Communications' deal with MCI. The nation's two largest local phone companies would swallow the two biggest long-distance and enterprise-telecom players.


What's new:
Despite a massive wave of consolidation in the telecom industry right now, fresh technologies and a new breed of operators are providing more choices for voice consumers.

Bottom line:
Critics warn that new technology is too expensive and not widely available to provide true competition, but telecom experts say they are being shortsighted because broadband deployments continue to grow at a fast rate.

More on telecom mergers

To consumer advocacy groups such as the Consumer Federation of America and the Consumers Union, the publisher of Consumer Reports, the proposed mergers are a step back to the time when Ma Bell monopolized the market. The major local-phone providers--the Baby Bells--and those supporting the mergers say competition is not a problem. Cable companies are bringing phone service to their broadband data connections via voice over Internet Protocol. Many early adopters are also embracing VoIP through independent providers such as Vonage and Skype. But these options aren't always cheap.

"If these mergers are allowed to occur, we're forcing consumers to pay a lot of money to get the same level of competition they were getting under the 1996 Telecom Act," said Kenneth DeGraff, a policy advocate for the Consumers Union.

However, some consumers are not paying for broadband connections and VoIP to replace regular home phone lines--they're just relying on their cellular phones. The cellular market is also shrinking--Cingular Wireless bought AT&T Wireless and Sprint is buying Nextel Communications. But analysts point out that virtual cell operators like Virgin Mobile and Metro PCS are popping up to offer additional choices that rely on the major provider's networks.

"Before deregulation in 1996, consumers had one option," said Tavis McCourt, a telecommunications analyst with investment firm Morgan Keegan. "Nine years later, thanks to wireless, cable companies and voice over IP providers, you can easily count at least 10 competitors in almost every major market. I really think that any concerns people have over the big mergers regarding competition in the consumer market is overblown."

Is that real competition, though? Consumer groups argue that the four Bells still control the majority of the residential telephone market. Three Bells are also top wireless players: SBC and BellSouth co-own top cell provider Cingular, and Verizon Communications owns a stake in No. 2 mobile operator Verizon Wireless. And broadband and VoIP options? Consumer groups say those aren't a realistic alternative, because broadband connections still are not available in every community.

Playing monopoly
The old-time Bells remain monopolies in the strictest sense: They alone own the copper lines that bring traditional telephone service into consumer homes. This is an enormous concern under traditional market consolidation benchmarks, since would-be phone rivals must presumably rent the Bells' lines or build their own competing wireline network at prohibitive costs.

But some experts say those benchmarks are hopelessly out of date, thanks to the rise of new phone technologies that dodge the copper networks. Consumer groups have argued against this thinking.

At stake are formulas for determining acceptable levels of competition not only in recent phone mergers, but the rapidly evolving broadband market. Reliance on new technology as a safeguard against monopoly abuse reached new heights at the Federal Communications Commission under recently departed chairman Michael Powell, who argued that releasing the Bells from some monopoly restrictions would spur increased competition with cable companies, among others.

"Even though MCI and AT&T have both stopped marketing their residential local phone services, today they are still the two main competitors to the Baby Bells in most markets," DeGraff said.

"But that's a very shortsighted perspective," counters Jeff Halpern, a senior telecommunications analyst for Sanford Bernstein. "The cable companies and VoIP providers have every probability of winning more market share than AT&T and MCI were ever able to win in the consumer voice market. And they will do it from a much better cost structure."

Cable hooks up VoIP
So far, the biggest competition for the Baby Bells has come from the cable TV companies. Cable providers' high-speed Internet offerings have cut into the Bells' data business. In 2001, the Bells started to see declines in the number of voice subscribers for the first time in their history. The number of active lines fell from 187 million in 2000 to 172 million in 2002--a decline of about 8 percent, according to a report from the Federal Communications Commission published last May.

Cox Communications was the first U.S. cable company to launch a telephone service over its cable connection. At the time--1997--few believed it could ever seriously compete in the local phone market.

The cable giants' phone strategy relies on VoIP. That low-cost technology lets a broadband connection double as a phone line by carrying calls partly or entirely over the Internet. While Cox and Comcast Communications currently offer traditional circuit-switched phone service in some markets, many are turning to VoIP phone services because they're cheaper.

It?s still early for VoIP, but the cable companies are aggressively deploying and marketing the new services. At the end of

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