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?

Marguerite Reardon Former senior reporter
Marguerite Reardon started as a CNET News reporter in 2004, covering cellphone services, broadband, citywide Wi-Fi, the Net neutrality debate and the consolidation of the phone companies.
Marguerite Reardon
9 min read
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

2004, cable operators offered VoIP service to 16.9 million homes, or 15 percent of all U.S. households, according to a recent report from research analyst firm Sanford Bernstein.

"The cable companies are only in the second inning of their VoIP rollouts," Sanford Bernstein's Halpern said. "And there's no evidence they won't continue to aggressively deploy it."

No cables, no wires
Cell phone companies also offer alternatives for consumers. Initially, wireless operators ate into the long-distance market by offering flat-rate calling packages of local and long-distance calling. But soon many customers cut the cord with

VoIP takes off

By 2005, Sanford Bernstein analysts predict, 41 percent of U.S. households--46.2 million homes--will have access to VoIP services. This is in addition to the 19 million households with access to cable phone service using traditional circuit-switched technology. By 2010, cable VoIP services will be available to 75 percent of homes, the analyst firm predicts.

Customers are taking advantage of the opportunity. At the end of 2004, roughly 35 percent of people who could get VoIP already had, Sanford Bernstein reports. One year after launching VoIP to its entire service area, Cablevision signed 6.1 percent of its customers. In its earliest VoIP markets, Time Warner achieved better than 10 percent penetration in the first 18 months.

their local phone providers and started using their cell phones instead. The trend has been particularly high among younger consumers, who have had cell phones through high school and college.

"I call this group the 'young and the wireless,'" Halpern said. "When these kids get out of college, they don't even think about signing up for a new phone line. They just use their cell phones."

And as the big wireless companies consolidate, smaller players are popping up to fill in where standard service options leave off. Companies with popular brand names, such as ESPN, Disney, Virgin and Wal-Mart, are getting into the cell phone business as mobile virtual network operators.

Popular brand names draw customers. So does a lack of long-term contracts with heavy penalties for early termination. Some niche marketers target groups the traditional cell phone companies have long ignored--teenagers, bad-credit hipsters and ethnic minorities.

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 mobile virtual network operator. In August there were about 22 mobile virtual network operators operating in the United States, according to Max Smetannikov, vice president of business development of Global Advertising Strategies, a telecommunications market consultancy. Since then, that number has risen to 56.

"There are more and more MVNOs popping up every day," Smetannikov said. "The large wireless carriers can't service every niche market. It's a great opportunity for smaller resellers, who can go after certain demographics."

Pure VoIP
Wireless carriers and cable operators aren't the only competition out there. A slew of new entrants are using other companies' infrastructures to deliver voice services. Vonage, followed by 8x8, Skype and others offer software that brings their brands of VoIP to users' existing broadband service.

VoIP's jamming

Internet telephony subscriber numbers are growing in the face of telecommunications industry consolidation.

December 2003: 75,000
December 2004: 390,000
March 2005: 500,000+
March 2004: 11,000
September 2004: 26,000
December 2004: 40,000
December 2004: 53,000
March 2005: 1 million

Sources: SEC, companies

Just like the cable companies, many networkless operators rely on VoIP technology to provide their services. All that is required is a broadband connection and an adapter that translates digital packets from a broadband connection into a voice conversation on a standard phone. Today, the market is flooded with offerings. AT&T even started offering its own VoIP service. It decided last summer to stop marketing its traditional local phone service to customers.

Web giants such as America Online and Yahoo are also trying to squeeze their way into voice services. Earlier this month, Time Warner's AOL division unveiled plans to offer its own VoIP service. Its service is similar to Vonage's--requiring a broadband connection and special equipment that lets a regular phone accept and initiate VoIP calls. The company did not disclose its price, but it said it would be "competitive" with Vonage's $25 a month.

Just a few days earlier, Yahoo acknowledged its interest in tying voice calling into its vast array of Web services. While the company did not offer any details, Yahoo and competitors Google and Microsoft are looking into many of the independent VoIP services. During the Voice on the Net conference in San Jose, Calif., a team of Google executives met with several VoIP companies to ponder the search giant's possibilities in this business.

Virtual competition
Not all of that competition counts, consumer groups maintain. The offerings of wireless companies, wireless resellers, cable operators and independent VoIP companies don?t stack up against the Bells. The local-phone kings still own the residential telephone market and have their major wireless stakes.

Advocates also argue that unless customers are already using broadband, VoIP is not cost-effective. A traditional phone line can cost as little as $20 per month in some regions, but a VoIP service with the added cost of the broadband connection will typically cost more than three times as much. And because every Baby Bell with the exception of Qwest Communications International requires customers to also pay for a traditional telephone line when they subscribe to DSL, an independent VoIP offering is not really a choice at all.

"VoIP is great for those who can afford a broadband connection or cable television," said DeGraff of the Consumers Union. "But a lot of people in America can't."

But analysts are convinced that new technology will eventually step up to fill whatever void has been left by the mergers of the traditional phone companies. Prices will eventually stabilize, and access will be ubiquitous.

"Competition from new technologies is absolutely on its way," Halpern said. "It may not be available everywhere yet, but it's coming."

"If you look at the penetration numbers of VoIP and wireless carriers, you can see that customers already view these technologies as competitive services," Smetannikov said. "This is exactly the competitive strategy that the FCC has promoted under Michael Powell for the past four years."