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AT&T Move To Net-Based Calls Rattles Industry


Vonage In Print News

AT&T Move To Net-Based Calls Rattles Industry

December 12, 2003

By Jeff May

It's the end of the telecommunications world as we know it.

Qwest Communications, cable operator Time Warner and AT&T all embraced major pushes into Internet-based phone service for consumers this week, a trend that has troubling implications for old-line business models in the phone industry.


The biggest announcement came yesterday from AT&T, which said it plans to roll out a consumer offer using the new technology in 100 markets next year. The Bedminster-based company has three ongoing trials of the service, known formally as voice over Internet Protocol, or VOIP. The largest is in New Jersey, which makes it likely the state will be home to one of the first commercial launches, company officials said.

AT&T is also expanding the Internet-based phone service it already offers business customers.

Qwest, AT&T and Time Warner Cable are following a path blazed by Edison-based Vonage, Newark- based Net2Phone and Cablevision Systems, among others, all of which provide voice services over high-speed Internet connections.

Internet-based technology ships voice calls the same way that other data, from video clips to Web sites such as Amazon.com, are sent. Because Internet traffic is virtually unregulated, it allows companies such as Vonage to avoid the access fees local phone companies such as Verizon charge to complete a call.

At $11 billion last year, the fees are AT&T's largest expense.

"We understand what it is we're doing here," AT&T Chief Executive David Dorman said at a Credit Suisse First Boston investment forum. "It's an opportunity for us to change the game."

For AT&T, the new technology turns its main weakness -- the lack of a direct link to consumers -- into a strength. But it could be a calamity for the regional Bell companies, which already are losing local lines because of the growing use of cell phones, e-mail and instant messaging.

Without regulatory changes, companies such as AT&T can ride the networks of local phone companies -- or cable operators, for that matter -- for virtually free.

To be sure, there is no guarantee AT&T or the other companies will successfully market the new service. And analysts point out only 20 percent of households, or 23 million homes, have the necessary high-speed Internet hookups.

"The hardest thing to do is to change your business model," said David Isenberg, an independent consultant and former AT&T researcher who predicts Internet- based phone service will kill off conventional phone companies. "To say that just because AT&T has been good at the old kind of telephony, they'll be able to be good at the new telephony -- that's a big leap. I'm optimistic; I'd love for them to make it. But it's a huge leap."

Isenberg predicts phone companies will split into two groups: those that provide network connections and those that provide services, including voice calls, that run over them. AT&T has a foot in both camps -- the company runs the largest Internet backbone network in the world -- and that is a problem, he said.

To be successful, AT&T has to commit to one strategy, but hasn't, as Isenberg argued recently in an essay called "Dave Dorman's Multiple Personality Disorder."

Whether it is successful or not, AT&T's entry into Internet-based voice service instantly gives credibility to the new technology. The telecommunications company has 40 million residential customers, so shifting even a fraction of them would make it the heavyweight in a field where Vonage is the market leader with 75,000 customers.

Vonage, for its part, said it was not worried about the competition.

"There's a lot of room for a lot of players," said Brooke Schulz, who called AT&T's move an "exciting" step for the industry.

AT&T did not disclose any pricing information about its new service, but company officials said it would be in the same range as current offerings. Cablevision, for example, sells its unlimited calling plan for $34.95 a month.

It will be far cheaper to sell. Vonage has said it costs the company a penny a minute to provide its voice service, but AT&T's costs will be lower because it will use its own data network, UBS analyst John Hodulik said in a note to clients. Still, AT&T will have to slap a low price on its product to draw enough customers, which could trigger price wars.

"In sum, we see Voip as another deflationary factor in domestic telecom, one that will have a transforming influence on the industry over the next five to ten years," Hodulik wrote.

At the Credit Suisse conference, Dorman talked about some of the features AT&T plans to offer. Customers will be able to manage their calls through a Web-based screen that will allow them to retrieve phone call logs from the past six months. They will be able to block incoming calls from selected numbers, and can add up to eight other people on a call. "It's something my 14-year-old daughter finds really cool," Dorman said.

AT&T said it plans to target the new service to telecommuters, teens and technophiles.



 
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†AK and HI residents pay $29.95 shipping. ††Limited time offer. Valid for residents of the United States (&DC), 18 years or older, who open new accounts. Offer good while supplies last and only on new account activations. One kit per account/household. Offer cannot be combined with any other discounts, promotions or plans and is not applicable to past purchases. Good while supplies last. Allow up to 2 weeks for shipping. Other restrictions may apply.

1Unlimited calling and other services for all residential plans are based on normal residential, personal, non-commercial use. A combination of factors is used to determine abnormal use, including but not limited to: the number of unique numbers called, calls forwarded, minutes used and other factors. Subject to our Reasonable Use Policy and Terms of Service.

2Shipping and activation fees waived with 1-year agreement. An Early Termination Fee (with periodic pro-rated reductions) applies if service is terminated before the end of the first 12 months. Additional restrictions may apply. See Terms of Service for details.

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 www.vonage.com/911 for details.

** Certain call types excluded.

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