This story appeared on Network World at

http://www.networkworld.com/columnists/2005/120505bradner.html

'Net Insider

Pity the poor telephone company?

By Scott Bradner, Network World, 12/05/05

From a distance it looks like a good time to be a traditional phone company in the United States. The FCC has given these companies an open license to exploit their dominant market positions. The U.S. House and Senate are running down a path to empower them to destroy the Internet. The International Telecommunication Union's standards division is defining technology that will let phone companies block "free" use of "their" networks by interlopers such as Google and Vonage. Billions of dollars are being spent on takeovers and being poured into deploying new video services. But maybe things are not as rosy as they seem.

I'm writing this just as SBC's $16 billion takeover of AT&T has been consummated, and as Verizon's $8.5 billion buyout of MCI is getting the last of the state approvals. That is a lot of money being spent to buy up failing long-distance companies just as the whole concept of long-distance is in its dying days.

If Congress continues on the path it is on, we will soon get a new telecom regime that will let the big telcos and cable companies block third-party use of the Internet connections that their customers buy from them, all in the name of protecting their networks and helping law enforcement. Unless something drastic happens, this will destroy the Internet, at least for most residential and small-business users. But since most residential users think the Internet is just the Web, most of them will not notice unless they have subscribed to non-carrier VoIP services. Small-business owners are likely to notice quite well their reduced options for alternate phone service.

At the same time, the technology that enables the phone companies to offer extensive video services is well-enough developed for them to start widespread deployment and thus have a hook into tens of billions of dollars of cable TV revenue. Sounds like a great time to be a phone company. But things may not be quite as great as they appear.

More and more, residential users are dumping their landline phones in favor of cell phones. Once the cell-phone E911 service becomes generally deployed, many more customers will follow them. The In-Stat research group reports that close to 10% of the U.S. population already uses a cell phone as their primary line, and that over half are willing to consider the option. There goes the cream of the residential phone business - unless you happen to have a wireless division. And even when that is the case, there is a lot of competition, so the profits will be a lot less.

Businesses are moving in droves to VoIP, with ZDNet Research reporting that 75% of them have tried it out and 75% of those who adopted it like what they got. And there is no requirement that a business get its VoIP from the carrier that provides its Internet connectivity or even from a carrier at all.

Then there is the video dream. Verizon is spending billions of dollars to bring fiber to the home so that it can offer what residential users already have from cable TV and satellite companies - hundreds of channels with little on them and video-on-demand. The New York Times reports that content owners want more from you phone companies than they get from your competitors, and your competitors can always reduce their fees to match anything you can do.

Maybe it's not a great time to be a phone company after all.

Disclaimer: It's (almost) always a great time for Harvard to be Harvard, but the above muse is my own.

Bradner is a consultant with Harvard University's University Information Systems. He can be reached at sob@sobcomcom.