Giants that control broadband lines waking up to VoIP's potential

02:40 PM MST on Sunday, September 19, 2004

By VIKAS BAJAJ
The Dallas Morning News

Some upstarts are once again tweaking the nation's local-phone and cable companies using the behemoths' own lines. And if history is any indication, the grumbling giants are going to get even.

A raft of companies is trying to provide an alternative phone service to American consumers using the much-heralded voice over Internet protocol, or VoIP, technology. They are attracting attention and praise by luring away thousands of users with cut-rate long-distance and innovative features.

But the dominant local-phone and cable providers have an ace in the hole in the coming VoIP battle: They own the lines that carry broadband, a requirement for Internet telephony. "It's hard to expect cable and phone companies to sit idly by while someone else uses their network against them," said Kevin Werbach, an assistant professor at the University of Pennsylvania's Wharton School.

VoIP transmits calls more efficiently than traditional systems, which create direct connections between phones.

VoIP systems break up conversations into packets of data, much like e-mail, and send them on multiple paths. Internet telephony is also free from traditional regulations, and it has versatile software features that let users choose area codes and numerous call forwarding options.

Until recently, the technology was used mainly by big businesses, but Vonage Holdings Corp., AT&T Corp. and others have brought it to homes. They are starting to face competition from big local-phone and cable companies that are matching or beating their prices.

Independent VoIP providers say they are not worried because their services have more features. Some of them, however, are concerned that companies such as SBC Communications Inc. and Comcast Corp. may sabotage their services by exerting their control over broadband networks.

Local-phone and cable companies say VoIP is a natural extension of their current franchise and dismiss worries about unfair competition as conspiracy theories.

The battle between the independents and the entrenched is shaping up to be intense.

New York cable company Cablevision System Corp.'s broadband and unlimited phone offer weighs in at $85 a month with taxes. That's almost $10 less than AT&T's CallVantage VoIP when that service is purchased with a cable modem.

Cablevision has signed up 115,000 customers in less than a year for its Optimum Voice service, which is available to 4.4 million customers, mostly on New York's Long Island. By comparison, Vonage took 2 ½ years to amass 250,000 customers nationwide.

Verizon Communications Inc.'s new VoIP service, VoiceWing, available in the Northeast at $90 a month, is also competitive with the independent providers, and the company says pricing will only get more aggressive.

"Whatever they can do, we can do," said Verizon spokesman Eric Rabe.

Vonage concedes that Verizon and Cablevision may have some advantages, but it said it has features that will be hard to mimic. On Thursday, for instance, Vonage offered customers in the United States the ability to subscribe to Mexico City phone numbers, which people in Mexico could call without paying international rates.

"Our 2 ½-year head start will allow us to offer more value in our product offering," said Lou Holder, executive vice president of product development.

AT&T spokesman Kerry Hibbs said price "is a concern, but we will try to get around that by offering the best service."

Competitive pricing

But the companies appear to have little wiggle room.

Vonage and AT&T charge $30 and $35 a month plus tax respectively. But consumers pay much more because they also have to buy broadband lines, which come with conditions.

SBC's digital subscriber line customers must also buy the company's phone service, adding $21 to the cost of a $32 DSL line. Comcast tacks on a $10 fee if customers don't buy its cable TV service, raising the cost to $57. Prices include taxes and fees.

"That, as an economic model, makes it impossible for anyone to compete," said Dr. Werbach.

Phone and cable officials say they can sell their products as they see fit.

"When you buy a newspaper, you get a discount if you buy it for a year vs. buying it every day," said Brian Dietz, a spokesman for the National Cable and Telecommunications Association.

Some critics believe that bundling discounts and broadband conditions prove that local-phone and cable companies will aggressively defend their turfs. Former monopolies may next degrade the quality of rivals' Internet phone service by exercising their control over broadband networks, they say.

Nuvio Corp., a Kansas City, Mo., VoIP company, said broadband providers could hinder its services with a few simple commands to Internet routers that direct traffic to DSL or cable modem users. It has asked the Federal Communications Commission to bar such activities.

"The electricity companies put the pipes down, but do they say, 'We want to determine what toaster or television is used?' " said Jason Talley, Nuvio's president and chief executive.

Jumping the gun?

An SBC executive said critics are asking for regulations before problems have arisen because they fear they won't survive once the local-phone and cable giants offer VoIP services.

"Because we appear to be ready to follow those market leaders, we are seeing people stand up and saying, 'Oh, wait a minute, regulate them,' " said Dorothy Atwood, SBC's senior vice president for federal regulatory strategy.

In a speech early this year, FCC Chairman Michael Powell asked broadband providers to voluntarily pledge not to impede third-party service providers.

Some experts said local-phone and cable companies might not mistreat other providers because they have so many other advantages.

They have years-long relationships with millions of customers, who have proved reluctant to switch providers. Former local-phone monopolies still control more than 80 percent of their business, and 70 percent of the nation's households with televisions subscribe to cable.

Plus, together the two provide the vast majority of residential broadband lines.

"They have tremendous strength to provision a whole new line of services while continuing to try to keep the customer," said Jessica Zufolo, a senior director at Medley Global Advisors in Washington.

Even their rivals acknowledged those advantages. AT&T, for instance, wants to advise and help cable companies start and run Internet telephone services.

One industry veteran said VoIP is exciting, but phone companies still need access to the wires that connect to homes and businesses to be successful.

"Everyone is going to be using it," said Royce Holland, the former chief executive of Allegiance Telecom. "But ... it doesn't replace the last mile."