Over the past few years, competitive telcos around the country have acquired millions of local residential phone customers and supported them on Bell facilities available at a discount through the UNE-P rules. But after a federal appeals court this spring threw out those rules, competitive local phone companies ranging from small, privately-held carriers to AT&T Corp. and Sprint have recently retreated from the residential market. However, VoIP is positioned to get a nice boost.
“AT&T’s getting out of residential was an inevitable result of the FCC’s policies,” says CompTel/ASCENT CEO H. Russell Frisby Jr. “The FCC has walked away from intramodel competition.”
Frisby and the association’s members fret that there will be no competition in the consumer market as a result of the dissolution of existing UNE-P pricing, which gave competitive telcos affordable access to numerous pieces of the Bell networks including switches, local loops and other equipment necessary to provide local phone service to homes and small businesses. But Frisby adds that some of the group’s members are turning to VoIP, saying, “that’s their only hope.”
In addition to fighting at the FCC and courts for access to incumbent networks and other competitor rights, Frisby says CompTel/ASCENT is also now keenly focused on educating its membership on alternative business strategies such as VoIP.
“We’re going to have a special program on the show floor called VoIP Showcase including member companies that offer VoIP products and services,” says Frisby, referring to the program planned for this month’s CompTel/ASCENT Fall 2004 Convention & Expo. (For a complete Q&A with Frisby, turn to page 18.)
AT&T could be one of those involved. The telephone company today provides Internet-based phone services to consumer customers in 100 markets.
Although some CLECs like AT&T are moving toward VoIP as they move away from traditional residential voice services, there are new VoIP-only competitors that see the UNE-P-based CLEC move out of residential voice as a new opportunity to get a foot in the door with residential customers.
“People are literally just exiting the [residential voice] business en masse and are moving to this relatively unproven technology en masse,” says Rob Wunder, vice president of marketing at VoIP service provider Sipmedia, a one-year-old company offering Internet-based local phone services in 45 states.
“Today is a tremendous turning point in the industry,” says Wunder, who says there’s an exodus of CLECs from residential voice. “There’s an extraordinary opportunity similar to the time in 1984 when the Bell system broke up because finally we have a legitimate path directly to the customer,” he adds.
Still, if the residential customers that leave CLECs don’t sign up with companies like Sipmedia, they could revert back to the RBOCs, Wunder says. But Sipmedia hopes independent sales agents that sell its services will opt to push its VoIP offering rather than those of the RBOCs, says Wunder, adding that over time incumbents tend to cut agent commissions.
That could be a tough sell, given that the Bells have launched major win-back programs that include deeply discounted consumer packages and in some cases even incentive checks and gift cards for those customers that come back into the fold.
The RBOC issue takes us back to the competition question: Despite the fact that newcomers like Sipmedia are offering residential VoIP; some CLECs are moving to offer VoIP; and various other forces like cellular operators and cable TV companies supply voice services, will the elimination of the initial UNE-P rules significantly affect the presence of competition in the local telephone arena?
Braden Cox, technology counsel with the Competitive Enterprise Institute, thinks not. “I think competition between different technologies exists today and will only become more fierce in the future,” says Cox.
His mention of competition between different technologies refers to the argument frequently made by incumbent telcos that cellular voice services, VoIP and cableco voice services provide the market with the benefits of “intermodal competition.”
Randy Kinkaid, BellSouth’s senior director of consumer base marketing, says wireless, cable telephony and Internet phone service all represent “formidable competitive alternatives to our customer base.” It is his position there are more options now than when Congress wrote the ’96 Telecom Act.
But some question the extent that intermodal competition exists today.
AT&T Chairman and CEO Dave Dorman warns that although his company is a player in it, the VoIP market, which relies on broadband connections to carry service, is “inherently limited by the current broadband penetration levels and therefore not a real substitute for traditional phone service in the mass markets until broadband penetration grows.” According to the Pew Internet & American Life Project, 48 million adult Americans had broadband connections at home as of March 1. Of course, just a fraction of those used VoIP over those connections.
In another effort to reject the presence of significant intermodal competition, CompTel/ASCENT authored a paper noting that VoIP is still in its infancy, with only about 200,000 lines in service as of Dec. 22, 2003, and that telephone services offered by cable companies amounted to just 3 million lines vs. the nation’s 183 million copper phone lines during the same time period, making it just a “niche player in voice.” Meanwhile, cell phones, according to the association, are not a true replacement for circuit-switched wireline voice services given the “dropped calls, dead zones without signals, and static-plagued calls that make conversation nearly impossible keep most Americans from replacing their landline with a cell phone.” The paper sites Jupiter Research data showing fewer than 6 percent of consumers use a wireless phone as their only phone. Meanwhile, In-Stat/MDR, a Scottsdale, Ariz., research firm, in its own report says that 14.4 percent of U.S. consumers use a wireless phone as their primary phone.
Of course, in many cases, the wireless competition is just RBOCs competing with themselves in a sense. BellSouth and SBC own Cingular Wireless, the second biggest wireless carrier; and Verizon along with Vodafone Group owns Verizon Wireless, the No. 1 mobile operator. If Cingular acquires AT&T Wireless, then BellSouth, SBC and Verizon combined will serve 87 million wireless customers, representing more than half of the 167 million U.S. subscribers.
Still, it should be noted that intermodal competition appears to be on the rise.
Although cable telephony and Internet-based phone service today represent just small fraction of the competition in the residential phone market — cable telephony represented 2 percent of switched access lines last year — these competitors clearly are making inroads.
For example, one out of every five homes Cox Communications Inc. passes takes phone service where it is available, the company said in its second-quarter earnings. Cox said 58 percent of customers who took phone service in the second quarter also purchased video and high-speed Internet services.
In Portland, Maine, meanwhile, approximately 40 percent of Time Warner Cable’s high-speed Internet customers also purchase digital phone service, according to the company.
The equity research division of global financial services firm UBS estimates in a report that cable telephone customers (for Internet phone service and traditional circuit-switched service) will reach 11.1 million at the end of 2010.
And VoIP startup Vonage Holdings Corp. — the biggest Internet phone provider thus far — announced this summer activating 200,000 lines on its network, doubling its subscriber base in less than six months.
With the wholesale phone rates projected to rise next year as a result of new UNE-P regulations and the fact that the presidential election will have passed, Fitch Ratings says in a report the Bells could see some immediate improvements in cash flow. However, other competitive factors will continue to pressure the incumbent local phone companies, according to Fitch.
Verizon, the biggest local phone company, lost 519,000 residential lines in the second quarter. “Over the long-term, VoIP and wireless services will continue to exert significant pricing and substitute-service pressure on local exchange service, leading to lower prices and margin compression,” the report says.
Whatever the situation is on intermodal competition front, Mike Weaver, managing director with Fitch Ratings, believes changes in UNE-P rules will result in fewer competitors in the residential phone market.
AT&T’s recent disclosure of its plans to retreat from the traditional residential phone market after a federal appeals court threw out wholesale phone rules was considered by many in the competitive carrier arena as a warning that competition is flagging. “We urge regulators and the [Bush] administration to view AT&T’s decision as a wakeup call as to the adverse consequences of premature deregulation,” says Peter Karoczkai, chairman of the Promoting Active Competition Everywhere (PACE) Coalition, a group representing telecom providers competing with the biggest local phone companies.
AT&T had offered phone services based on UNE-P since 2002, and listed nearly 4.7 million local residential phone customers at the end of the second quarter.
Competitors in the residential and business markets listed 26.9 million switched access lines at the end of last year, or 16.3 percent of the market, and 15.2 million competitive lines were provided under the UNE-P, according to FCC data.
“We believe the potential exists for a significant windfall for the RBOCs, especially SBC, should AT&T follow through with its announced exit of the consumer business,” analysts for financial services firm Raymond James say in a report. “AT&T represents an estimated one-third of SBC’s UNE-P lines.”
As mentioned previously, Sprint also has actively stopped marketing a number of residential local and long-distance calling plans in 36 states and the District of Columbia known as Sprint Complete Sense and offered under UNE-P. The company listed 336,000 Sprint Complete Sense customers at the end of the first quarter, the most recent figure disclosed, according to spokesman Travis Sowders.
Some analysts also believe MCI will scale back from the traditional residential phone market. MCI was not available for comment.
Smaller CLECs that have relied on UNE-P rules may also be pulling back from the residential market.
Derek Gietzen, co-founder, president and CEO of privately held Vycera Communications, a telco targeting the Hispanic market in California and Texas, says he has received calls from three telecommunications providers expressing an interest in selling their residential customer bases due to the anticipated changes in the federal rules. He says one company has 2,000 customers. “They just didn’t have the size to really deal with what is going on,” Gietzen says, referring to changes in federal rules.
