Telecom's Downward Spiral
I may be wrong but it seems increasingly apparent that the telecommunications industry is poised to go through another painful and destructive evolution. All the hype about Internet telephony - otherwise known as VOIP - has conveniently obscured the fact that prices for local and long-distance telephone service are crumbling at an alarming rate. For whatever reason, VOIP has been seen as the telecom sector's panacea but it could be its Waterloo. While equipment makers such as Cisco Systems and Nortel Networks reap the benefits in the short-term, VOIP could be a disaster for carriers. Look at the high-profile price war between AT&T and Vonage. You lower your prices, then I'll lower mine. Pretty soon, everyone is playing chicken to see how low competitors are willing to go.
At the end of the day, consumers could be paying next to nothing for telephone service while carriers will be left wondering where all their revenue went. If things keep going in the same direction, major carriers in North America such as SBC, Bell Canada, Telus and Verizon could be reduced to nothing more than “big pipe” providers to Internet telephony providers. While the carriers will see their high-speed Internet businesses thrive, their core voice units could shrink dramatically. Of course, the carriers will probably tell you they will do well by offering value-added IP services to residential and corporate customers. But how much money will they make from these services? Probably less than they envision.
Earlier this week, the National Post ran a story about how mutual fund manager Richard Howson had sold his BCE Inc. shares due to concerns that VOIP will have a major impact on Bell's domestic telephone business. While Howson boughtTelus shares because of its strong wireless profile, it has to be troubling when a large investor decides to shy away from a large carrier because of VOIP's growth.
Perhaps the biggest threat to the telecom industry could be the growing army of Internet telephony cheerleaders (analysts, conference organizers, equipment vendors, etc.) who would have everyone believe VOIP will bring telecom back to its glory days. I would argue it will be great for consumers, who will have easier access to dozens of IP services, but terrible for carriers.
October 16th, 2004 at 3:06 am
Hi Mark,
I've been reading your blog recently, and decided to jump in.
The problems in telecom are going to get alot worse. The FCC has just approved BPL (Broadband over Power Lines) for commercialization. The power companies have connectivity into every house in North America - and are planning to offer phone service on top of the internet access.
SBC and Verizon are countering the attack by announcing fiber to the home, which will be impossible to implement due to capital costs.
However, I also believe there are several things that will prevent VOIP from reaching critical mass.
1. Internet voice quality will remain inferior to POTS, and will be expensive to provision and maintain.
2. North America will become a local calling area, eliminating the cost benefits of VOIP and further eroding the telecom market.
3. Home phone use is moving to wireless with the next generation of young people.
Maybe the days of the POTS line are numbered much like telex was replaced by FAX. I'm just not sure VOIP as a technology is the driver of change this time, as much as consumer demand.
My guess is we will see convergence in the form of consolidation, and both cable and telephone services become a commodity.
With rumors of Walmart and Disney wanting to become virtual wireless providers like Virgin Mobile, perhaps in the future we will be given telephone and entertainment services as part of a membership package to to other services. A company benefit perhaps? Run by the insurance and financial services industry?
Enjoy your blog.
Mark Rowed