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AT&T buy shows how far voice calling has fallen

Phone giants unite to face a Net-driven future, with their basic service likely to end up a giveaway.

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

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

The traditional 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 VoIP, or voice over Internet Protocol, technology.


What's new:
Imagine that phone service is free, just something tossed in with your broadband services.

Bottom line:
The SBC-AT&T merger is another sign that voice calling is declining, and even the biggest providers have to make some changes.

Full coverage of the acquisition

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

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

Small mammals outwit dinosaurs
The shift in strategy comes none too soon. The Bells have already been facing competition from upstarts taking advantage of cheaper IP technology.

Three years after launching, Vonage is the largest VoIP provider. for a flat fee, the company lets users make phone calls over the Internet using their existing broadband connections. Skype, which offers free software for Internet calling, has signed up 28 million users--and counting.

Cable companies are planning to roll out their own Internet phone services. Time Warner Cable and Cablevision have begun selling voice calling over the Internet, and Comcast plans to join the crowd later this year. The old-model phone providers can't keep up.

"In an IP world, voice is easy and cheap," said Scott Cleland, chair and chief executive officer of the Precursor Group, an independent research company. "The traditional telecom companies are an anachronism."

Yeah, MCI, he's talkin' to you
Cleland said AT&T is only the first casualty in the changing telecommunications climate. He said he expects MCI, another traditional long-distance phone carrier, to follow a similar path toward acquisition. Sprint, which has a strong wireless business, may also be an acquisition target.

The consolidation will likely not end there, he added. Since IP shifts the value from inside the network, where switches once controlled services, to the edge, where a handset or PC controls the service, it's easier for competitors to offer advanced services over networks they don't own.

"In the IP world, you don't have to own the facilities to do business," Cleland said. "Look at how Internet companies like eBay and Amazon operate...We see the decline happening rapidly on the long-distance side to AT&T and MCI. But it will eventually happen to the Baby Bells, albeit much more slowly."

Some analysts say that, though the phone giants' current business models might have to change to accommodate new services, there's no reason to start writing eulogies.

"I wouldn't give up on the local phone companies just yet," said Eli Noam, director of the Columbia Institute for Tele-Information. "They own one of the two major pipes into people's homes. But the days of a communications company only selling wireline voice is over. If they turn into bit transporters and offer more valuable services on top of those connections, they can grow strong."