VOIP and the telephone competition matrix
As we've pointed out before, the big telephone companies have tried to contain a series of recent disruptions. First there was competition between the Baby Bells and companies like AT&T, Sprint, and MCI for both long distance and local services. Then there was the onslaught of cell phone providers. Now an even bigger competitor looms -- voice over Internet protocol (VOIP). It's what we term a new wrinkle in the competition matrix.
This technology has been around for eight years, but it has finally matured just as we see a major growth in high-speed Internet connections. As the Wall Street Journal reports ("Battered Telecoms Face New Challenge: Internet Calling", (10/9/03), the telcos biggest nightmare is just beginning:
Now many of the kinks have been worked out, and demand is booming for the service. Sales of Internet phone systems to businesses are expected to more than double this year, even as most capital spending on telecom equipment remains stagnant. And the service is winning lots of fans in the residential market, as cable companies offer Internet calling over their own networks and a host of tiny start-ups offer low-cost, or even no-cost, plans.
Currently the report suggests, VOIP-only accounts for 2% of phone volume, but that is about to change rapidly. Telephone (Verizon, SBC, AT&T) and cable giants (Time-Warner, Cablevision, Comcast) are getting into the fray through pilot programs . But they are facing a host of start-ups that can piggyback VOIP software onto existing Internet systems. The big players are starting to sweat. The growing number of major customers that have started installing the technology are seeing impressive returns, and home users, with high speed Internet access exploding, are getting very interested
The threat is major, even if the rate of change is uncertain. But early indications are that the political muscle of entrenched oligopolies, the ability to get a seat at the table, in the phone and cable industries have an advantage: their ability to shape laws and regulations through lobbying and lawsuits. As the WSJ article notes:
Another question is how regulatory agencies ultimately will deal with VOIP. The Federal Communications Commission makes important distinctions between voice and data traffic over phone lines. Under FCC rules, for instance, data is exempt from the access fees that local phone companies charge for moving voice traffic over their wires. So, can companies offering VOIP calls, which treat voice as just another form of data, route that traffic over local phone lines without paying access fees? The FCC has yet to rule on that issue. The stakes are huge: U.S. phone companies pay roughly $25 billion in such fees each year to send traffic over other companies' networks.
This strategy is already been forcing smaller VOIP companies to declare themselves as telephone companies, subjects to the same rules and tariffs as other telephone companies. Recent rulings in Virginia and California point in that direction, and it will be interesting to see which way the professedly free-competition oriented FCC pushes in this matter. The phone companies, already pressed, face major disruption from a changed competition matrix; will they have the power to survive this new threat hat can bypass much of their expensive infrastructure.
