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Tangled up over DSL - The VoIP Factor

Vonage In Print News

Tangled up over DSL

May 24, 2005

By John C. Roper


Voice over Internet Protocol, or VoIP, is emerging as a viable threat to traditional residential phone service. It's essentially phone service over the Internet, and broadband is required. Voip facts:

•About 1 million subscribers use residential Voip in the United States.
• By the end of 2009, the number is expected to hit 27 million.
Vonage is the Voip market leader with 634,000 subscribers.
•This year, SBC Communications, Comcast Corp. and Qwest Communications plan to launch residential Voip service.
(Source: IDC, Vonage)

A growing number of U.S. consumers are cutting the cord on traditional home telephone service, choosing instead to exclusively use cell phones.

But many of these consumers have found ditching their land-line phone service, and its accompanying cost, isn't possible if they want speedy DSL, or digital subscriber line, Internet service in their homes.

Providers such as SBC Communications require customers to buy residential phone service to have access to their broadband lines, a tactic consumer advocacy groups say is unfair.

That's beginning to change. Qwest is already selling DSL service without the land-line phone requirement. And Houston's major phone provider, SBC, is exploring the same service, dubbed by industry insiders as naked DSL.

Market forces, in part, are spurring carriers to change.

For one, the potential explosion in cell phone-only use could send larger numbers of consumers who want high-speed Internet access — or broadband service, as it's broadly called — to phone companies' competitors, the cable companies. Cable operators also offer a broadband service, but over cable lines.

Cell phone boom

Cell phone use has boomed in recent years: Nearly 64 percent of U.S. households now have both cell phone and traditional phone service, according to Linda Barrabee, an analyst with the Yankee Group in Boston. Of those households, 40 percent expect their cell phones to one day completely replace their land lines.

At the end of 2004, more than 6 percent of individual wireless users had jettisoned traditional phone service, Barrabee said.

And there's also another growing group of consumers out there who don't want traditional land lines: Users of an increasingly popular alternative called Voice over Internet Protocol, or VoIP. Voip requires a broadband network, such as DSL or cable provides.

About 1 million residential subscribers use Voip in the United States. Research firm IDC predicts that will hit 3 million by year's end and 27 million by 2009.

Competition to increase

Vonage, with 634,000 subscribers, is the current Voip market leader, but SBC, Comcast and Qwest are expected to launch Voip services this year. Time Warner has offered a Voip service in Houston since June of last year.

Analysts say it will be a slow road, but stand-alone DSL eventually will be readily available to consumers.

"If we go out five to 10 years, naked DSL will be a common commodity," said Jeff Kagan, an independent telecommunications analyst in Washington, D.C. "But in the early years, all the companies will be wrestling with the competitive issues."

Kagan said the recent crush of large mergers in the telecommunications industry has made this a "messy, awkward change period" for carriers that are trying to figure out how to market a "triple play" of video, voice and data services. Kagan believes eventually DSL competition will be based on transmission speeds.

For SBC, offering naked DSL goes against the grain of its triple play "bundling" strategy, which is to sell packages of voice, video and data services at discounted prices. The strategy is at the heart of complaints by consumer groups, who say it hurts competition by creating market domination.

But competitive pressures from Qwest, the first to announce naked DSL service, and Verizon, which announced recently it would eventually provide it, are forcing SBC to grudgingly test the waters.

SBC says it will begin testing naked DSL in several undisclosed markets but doesn't expect it to become a big business.

"We haven't seen a significant market demand for it, and our customers show us increasingly they are interested in bundled services," said Andy Shaw, a spokesman at the SBC's San Antonio headquarters.

Still, SBC will proceed with market trials.

Beyond exploring the stand-alone service, one of the issues SBC will test is whether to bundle cell phone service with DSL. SBC owns 60 percent of Cingular Wireless and will pick up the wireless arm of AT&T when its planned merger with AT&T Corp. closes.

Offering stand-alone DSL has somewhat quieted consumer groups, who have fought the recent proposed mega-mergers of SBC-AT&T and Verizon-MCI, saying such unions create fewer choices for consumers.

"It's a step in the right direction," said John Perkins, president of the National Association of State Utility Consumer Advocates. "But a very minor step."

Other limits feared

Perkins and other consumer advocates remain concerned carriers will place other restrictions on their DSL services, making it what he calls "partially clothed." Those restrictions could include prohibiting phone numbers from being transferred to Voip service or bundling DSL subscriptions to other offerings such as cell phone service.

Overall, they are disappointed the Federal Communications Commission in March chose not to force carriers to market stand-alone DSL. The FCC has historically taken a hands-off approach to Internet-related issues, fearing too many regulations could squelch technological advances.

Voip leader Vonage, which is adding 15,000 new customers weekly, sees naked DSL as a boost. Its service operates on both cable and DSL lines.

"Naked DSL would make Internet phone service a much more attractive proposition for more subscribers," said Chris Murray, vice president of government affairs for Vonage.

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