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Net phone providers losing battle of the bundle

AT&T exit from home telephone business highlights Net phone companies' struggle to compete against bundles.

AT&T's planned exit from the home telephone business provides an important lesson for the Net phone industry: They must bundle or face problems competing.

AT&T on Thursday said it would no longer solicit new local phone customers, because an unfriendly regulatory environment has made it too expensive to do so. While the company will maintain service to its local phone customers, it expects those numbers to dwindle over time.

Most Net phone providers are for now one-trick ponies, selling only cheaper unlimited local and long-distance calls over a broadband connection.

But businesses say that's not the way to sell telephone service anymore. About 40 percent of U.S. households are buying phone service as part of a bundle of heavily discounted broadband and television, AT&T Chief Executive David Dorman told the financial community this week.

"The market has been transformed to one of bundles," Dorman said.

Losing the battle of the bundle is what's forcing AT&T out of the local phone business.

Most telephone and cable providers, including Verizon Communications and Comcast, are able to bundle their Net phone services with other offerings, mainly because they own their own networks.

But voice over Internet Protocol (VoIP) providers like Vonage, 8x8, Skype and others that don't own their own facilities are caught "without anything to really bundle with," said Sarah Hofstetter, senior vice president at Net2Phone, a broadband telephone service provider that works predominantly with cable operators.

The nation's elite local phone companies, collectively known as the Bells, are set to increase their rates due to a recent federal court ruling that struck down competition rules. The rules set the rates that the Bells could charge to lease their local phone lines to competitors. That's made it too difficult to discount local service enough to include it in an AT&T bundle, Dorman said.

"There's simply too much risk and uncertainty for AT&T to base its future on reluctant participants and a regulatory environment that's in flux," Dorman said.