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S&P Cautions Bells on VOIP

A broad warning issued last week by credit rating service Standard & Poor’s has cast a lingering dark cloud over regional Bell companies (RBOCs). It's also raised new questions about VOIP regulation.

S&P says RBOCs stand to lose about $5 billion in annual revenues if regulators make voice-over-IP providers exempt from federal and state access fees. RBOCs currently rely on carrier access fees for about 22 percent of their total operating revenues, or about $20 billion.

In its estimate, S&P assumed RBOCs will lose about 15 percent of residential access lines with average monthly bills of $24 each to cable companies, independent carriers, and long-haul carriers that offer VOIP service. Loss of local lines would account for about four-fifths of the $5 billion shortfall, and loss of access fees would make up the rest.

The overall loss could be mitigated by VOIP providers’ recurring payments to RBOCs for local connectivity services such as ISDN primary rate interface or toll-free 800 service. On the other hand, the loss could soar beyond $5 billion if VOIP providers use leased facilities to terminate large volumes of long-distance calls.

The issue hinges partly on whether the Federal Communications Commission (FCC), states, and courts require VOIP carriers to pay access fees to RBOCs for VOIP traffic transmitted over, or terminated on, the RBOCs’ networks.

Current regulation of VOIP service is murky at best. VOIP providers like Vonage Holdings Corp. and AT&T Corp. (NYSE: T) have claimed that they are information services and should not be treated as telecommunication services, which are required to pay access fees. Some state regulators, such as the Minnesota Public Service Commission, have challenged those claims. But in October, a U.S. District Court overruled Minnesota’s decision to regulate Vonage as a telecom carrier.

The FCC is reviewing VOIP regulation but has no deadline for a definitive decision. Whatever it decides, the threat of VOIP to the RBOCs may be unavoidable. “Regardless of what happens with regulation, I think you’ll see the competition [from VOIP providers] move forward,” says Catherine Cosentino, the credit analyst at S& P who wrote the report.

S&P currently has a credit watch on all three investment-grade RBOCs: SBC Communications Inc. (NYSE: SBC), BellSouth Corp. (NYSE: BLS), and Verizon Communications Inc. (NYSE: VZ). But Cosentino stresses that the threat from VOIP providers is only one of several reasons for the rating service’s concern. Substitution of cell phones for wire lines also puts RBOCs’ revenues at risk, as does the loss of retail lines to unbundled network element platform (UNE-P) competitors.

Some RBOCs, such as Verizon, have been battling S&P's negative view. When S&P put Verizon on credit-watch negative, Verizon fought back with a strongly worded press release (see Verizon Scuffles With S&P and Verizon Hits Back at S&P).

But VOIP is poised to grow quickly, especially as cable companies roll out the service. Last year, Cablevision Systems Corp. (NYSE: CVC) rolled out VOIP service and had 29,000 subscribers by Dec. 31, 2003. Cox Communications Inc. (NYSE: COX), Time Warner Cable, and Comcast Corp. (Nasdaq: CMCSA, CMCSK) have introduced similar offerings.

In response, some RBOCs have started deploying VOIP service themselves. Qwest Communications International Inc. (NYSE: Q) provides the service to consumers in Minnesota, and SBC offers VOIP to business customers as part of an Internet services package.

VOIP systems can be as much as 50 percent less expensive for RBOCs to maintain than circuit-switched systems. Nevertheless, RBOCs may still have to cut prices for VOIP services to compete with CLECs, which have lower overall cost structures.

— Justin Hibbard, Senior Editor, Light Reading

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lastmile 12/5/2012 | 2:02:49 AM
re: S&P Cautions Bells on VOIP If VOIP was only for propeller heads S&P would
never have taken the initiative to caution the Bells with a projected revenue loss of Billions of $'s.
'technonerd'-please don't tell us that PSTN/POTS has a bright future because it is so reliable.
dave77777 12/5/2012 | 2:02:47 AM
re: S&P Cautions Bells on VOIP You're talking about a twenty-first century technology against a nineneenth-century technology. Sure, the gov't could regulate VoIP out of existence, but history proves pretty conclusively that those who don't embrace technology are are doomed to fall behind those who do. Fearing the threat to their samurai class, the Japanese regulated guns out of existence by passing a gun license law, then simply not issuing any more licenses. Worked great for about 200 years, till American warships showed demanding trade concessions - and backing up their demands with six-inch cannons. Similarly, an internal political conflict led to the demise of the Chinese shipbuilding industry, which is why Columbus ended up discovering America before them.
stephenpcooke 12/5/2012 | 2:02:46 AM
re: S&P Cautions Bells on VOIP Justin,

VOIP systems can be as much as 50 percent less expensive for RBOCs to maintain than circuit-switched systems.

I don't understand how the 50% maintenance cost savings work out considering some of the analysis on the Skype thread (ie: the business model seems to be VERY different regarding DoS attacks). To combat DoS attacks, there may be regular anti-virus-type upgrades, etc. that have never been done on an RBOC-level before. Given the uncertain regulatory environment as well, I may be wrong but this number doesn't seem to add up.
dljvjbsl 12/5/2012 | 2:02:40 AM
re: S&P Cautions Bells on VOIP One of the classic reasons for the claimed lower maintenance cost for VoIP is the sharing of maintenance between voice and data systems.

Hypothetically, if a telephone company currently has separate TDM and packet networks in operation, then the elimination of the TDM network would eliminate its maintenance cost. There could be considerable savings in manpower due to the economies of scale in the data network. It could absorb the voice network but maintain the same maintenance staff.

I do not know if the above scenario is accurate but I have heard it talked about.
jgh 12/5/2012 | 2:02:39 AM
re: S&P Cautions Bells on VOIP Every college kid has a cell phone. They do not need a land line when they rent or buy a home. All they require is a cable modem or DSL for high speed connectivity. They may opt for a VoIP service, but will probably use their cell phone as their connection to the outside world. By 2010, Verizon and the other baby bells will be generating more revenue from their cellular services than their traditional land line voice offerings and that includes business revenues.
TJGodel 12/5/2012 | 2:02:39 AM
re: S&P Cautions Bells on VOIP in say 10 years. The concept of "long distance" is going away, because a number of CLEC and RBOCs have flat monthly calling plans for anywhere in the U.S. Prices for international calling are falling to pennies a minute in developed countries. VOIP is free over Skype. It seems to me that within 10 years plain voice calls will be free. Providers will make money on enhanced audio, video and data services. RBOCs should get moving as fast as possible rolling out enhanced broadband services in major urban areas technology is rapidly over running their POTS network. Even Intel is getting in the act with wireless technology for cheap deployment of cellar services which will only mean more competition for the RBOCs. S&P is right to be cautious.
sgan201 12/5/2012 | 2:02:38 AM
re: S&P Cautions Bells on VOIP Hi,
In case that people have not learn from history, please remember this is NOT the first time that a great hype had been played about if you converged both voice and data into a single network and you will save maintenance cost. The most recent time that it was tried, it was ATM.. And, we know what happen to that promise.. And, before that, it was ISDN.. And, before that it was Sonet.. And, WDM is pushed in that role too.. In the end, we never converge. We end up with multiple networks.

Dreamer

stephenpcooke 12/5/2012 | 2:02:37 AM
re: S&P Cautions Bells on VOIP The only problem with 'free' voice is that it would be a prime target for opex reductions (as it would be bringing in no revenue). As part of a package it may appear to be free but isn't really (ie: the other parts of the package are overpriced to cover the 'free' part). I can't see the laws of economics changing that much in 10 years or so, I may be wrong.
dljvjbsl 12/5/2012 | 2:02:24 AM
re: S&P Cautions Bells on VOIP If any telephone company attempted to use its market power to defeat the universality of network access, then that would be the last decision that its management team would ever make. Can one seriously imagine that something with this effect on the economy would be allowed? The political reaction to this would be extreme at the least. It would the equivalent of the telephone company rammiing its own head into a wood shredder.

It would also be trivially easy to defeat technically.

So this idea has only a few things wrong with it:

a) it would be suicide for any company and management that attempts it

b) it would not work anyway

Aside from these quibbles, one could say that this is an entirely ludicrous idea.
stephenpcooke 12/5/2012 | 2:02:24 AM
re: S&P Cautions Bells on VOIP Lets assume for now that S&P is only looking at the money side of things. What the article says is that the cable companies are about to take a big bite of RBOC revenue. Because the cable companies are already installed in the last mile (generally the biggest barrier to entry for any communications company) the RBOCs are VERY worried. I guess I am confused as to why the RBOCs would voluntarily install IP gateways (to the PSTN) in this instance (ie: it enables cable company competition in phone service).

Given that the CLECs were/are all shysters (according to technonerd), and there were a bunch of them with not insufficient lobbying power, are the cable companies allowed to, by law (or are the RBOCs forced to...), co-locate gateways with the RBOCs' class 5's?

As several people have described in the Skype thread, the SIP gateways can be programmed to disallow non-'trusted' connection attempts. Technonerd, do you know of any legislation that currently exists or is planning to be enacted that would prevent RBOCs from disallowing connection attempts from cable customers to the PSTN?
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