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VoIP: Dangling Broadband From The Phone Stick

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Dangling Broadband From The Phone Stick

March 19, 2005

By Matt Richtel

SAN FRANCISCO, March 18 - To gauge the potential consumer impact of the consolidation sweeping the telephone industry, look no further than the silver-toned plastic phone gathering dust on the desk in Justin Martikovic's studio apartment.

Mr. Martikovic, 30, a junior architect who relies on a cellphone for his normal calling, says he never uses the desk phone - but he pays $360 a year to keep it hooked up.

"I have to pay for a service I'm never using," he said.

He has no choice. His telephone company, SBC Communications, will not sell him high-speed Internet access unless he buys the phone service, too. That puts him in the same bind as many people around the country who want high-speed, or broadband, Internet access but no longer need a conventional telephone. Right now, their phone companies tend to have a "take it or leave it" attitude.

Consumers "are not forced to go with SBC," said Michael Coe, a company spokesman. "If they just want a broadband connection, I'd recommend they look around for people who can provide just a broadband connection."

The nation's other two largest phone companies, Verizon Communications and BellSouth, have similar policies: broadband service is available only as a bundle with phone service.

That means, even as high-speed Internet service has become one of the most quickly adopted technologies of the computer era, there are few options for the tens of millions of Americans trying to upgrade their dial-up connections.

Some lawmakers and consumer advocates say the issue should be on the agenda as the government considers the market impact of two proposed big telecommunications deals: SBC's planned $16 billion acquisition of AT&T, and Verizon's $6.75 billion offer for MCI, which is being challenged by a rival offer from Qwest Communications.

For many consumers, the main alternative to broadband from the phone company is the local cable company. But cable broadband prices tend to be higher - as much as $60 a month for access, compared typically with $40 or less for phone company broadband. And the cable companies prefer to sell the service as a package with television that can easily exceed $100 a month.

That is assuming cable is even available, which it is not in Mr. Martikovic's apartment in the Nob Hill section of San Francisco - or in 10 percent of the nation's households, for that matter.

Mr. Martikovic says that he has resigned himself to paying SBC $30 a month for a phone bill and $30 for Internet, in addition to $100 for a mobile phone from Sprint. "I bet half of my friends are in this exact same situation," he said.

The question of broadband's availability is almost certain to become part of the policy debate as the Justice Department and the Federal Communications Commission rule on an eventual acquisition of MCI and whether SBC can buy AT&T. And two weeks ago, the House Energy and Commerce Committee held a hearing to discuss the consolidating market power of the phone companies.

Consumer advocacy groups, including Consumers Union, say they plan to ask the F.C.C. to address the lack of "ŕ la carte" broadband when the agency reviews the proposed takeovers.

Despite the market bottlenecks, broadband is increasingly in demand for its ability to let users zip e-mail back and forth with big photo or music files attached; or to play online games; or to quickly open Web pages loaded with video and audio extras. Of the nation's 74.5 million Internet households, an estimated 39 percent now have broadband - up from 36 percent of Internet households at the end of 2003.

So popular is the service, and so few the alternatives for most consumers, that the three biggest regional Bell companies - SBC, Verizon and BellSouth - have been able to expand their share of the Internet broadband market even while declining to sell the service separately.

The cable companies are still in the lead, having moved more nimbly than the phone companies in the early days of broadband back in 2000. But the phone industry's broadband share is now 37 percent, up from 32.7 percent at the end of 2003, and it continues to grow.

While critics say the phone companies are simply squeezing millions of extra dollars from consumers and making it harder for people to move to cheaper Internet telephony in place of conventional phone service, the three big Bells argue that selling stand-alone broadband is not a simple proposition.

In the case of Verizon, the nation's largest phone provider and the dominant one in the Northeast and Middle Atlantic states, the company says that it has based its technology and billing systems on delivering service to individual phone numbers.

Verizon has said it is working to develop a stand-alone broadband offering that could be available as soon as the end of the year.

"It's just very complex," said Michael D. Poling, Verizon's vice president for broadband operations and processes for Verizon. "It's changing the guts of the systems and processes we've built for five years."

But the smallest of the Bells, Qwest, which operates primarily in the Rocky Mountain states and is struggling to grow, has been willing to offer ŕ la carte broadband for more than a year.

One satisfied Qwest customer is Chad Jorgenson, 25, a part-time student in Boise, Idaho, and an intern at a computer chip maker. By cutting off his traditional phone service, he said, he had been able to reduce his monthly bill to $47.92, from $71.40. (That bill could be lower still, but he opted for a particularly high speed of service.)

Richard C. Notebaert, the company's chief executive, said Qwest spent just three days and $134,000 to get regulatory approval to offer the service, now a year old. The company now has around 25,000 stand-alone broadband customers.

"We've had no technical problems; we've had no billing problems," he said. "If the consumer wants it, why are you stiffing them?"

In defending their marketing practices, the other Bell companies argue that they are sinking billions of dollars into building Internet-based networks that will eventually replace their conventional telephone technology even as they are struggling to cope with the erosion of their local telephone business. Last year, the phone companies lost 5.4 million residential phone lines as more subscribers chose to rely mainly on wireless service and abandoned second lines that had been used for dial-up computer modems.

Another threat to the phone company revenues will be Internet-based phone service in which calls are transmitted over high-speed Internet lines, as digital packets, much the way e-mail is transmitted. Once customers have broadband Internet access, they are not limited to their local Bell company to be the provider of Internet phone service.

A relatively new Internet phone company, Vonage, now has 550,000 customers who use its services over phone or cable broadband access lines.

And so while Internet telephony is a business the Bells have all said they plan to embrace, some critics say the biggest Bells are using their current market power to slow its development.

The issue might soon come before regulators and Congress. Representative Edward J. Markey, Democrat from Massachusetts, said he would like to see the Bells' reconsolidated power discussed as part of a pending rewriting of the increasingly outdated Telecommunications Act of 1996.

The F.C.C. is already considering a related issue as it seeks to settle a dispute between BellSouth and four states it serves - Florida, Kentucky, Louisiana and Georgia. Those states have told BellSouth that it must continue to sell broadband to an existing customer even if that customer leaves BellSouth to get local phone service from one of the few competitors that have survived the telecommunications shakeout.

BellSouth is fighting the requirements, in part on the ground that one of its competitive advantages is that it enables consumers to buy phone and broadband in one place.

"Our marketing strategy is that we offer a complete package of our services," said Joe Chandler, a spokesman for BellSouth. Because the company has made the investments in broadband network technology, he said, it should reap the rewards.

"If our competitors want to offer broadband," he added, "they should make the same investments."

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HIGH SPEED INTERNET REQUIRED. †VALID FOR NEW LINES ONLY. RATES EXCLUDE INTERNET SERVICE, SURCHARGES, FEES AND TAXES. DEVICE MAY BE REFURBISHED. If you subscribe to plans with monthly minutes allotments, all call minutes placed from both from your home and registered ExtensionsTM phones will count toward your monthly minutes allotment. ExtensionsTM calls made from mobiles use airtime and may incur surcharges, depending on your mobile plan. Alarms, TTY and other systems may not be compatible. Vonage 911 service operates differently than traditional 911. See for details.

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