November 09, 2005
Wednesday

DENVER - Internet-based phone service is growing up in a hurry.

Telcos, ISPs - even cable-TV companies - have entered the race to provide voice-over-Internet protocol (VoIP), giving consumers more choices even as the technology continues to evolve.

Denver's Qwest Communications, which this year launched its own Internet-based phone service to stanch customer migration, already is competing with several companies offering VoIP.

And the space will soon get more crowded. Comcast is in the middle of its nationwide rollout of its Comcast Digital Voice service. Comcast already serves about 40 percent of Qwest's market - including Portland, Ore., Seattle, Salt Lake City, St. Paul, Minn., and Denver - with its cable-TV and high-speed Internet, said Donna Jaegers, an analyst with Janco Partners.

Qwest's total phone lines in its 14-state region are down 4.8 percent in the past year. Further competition from Comcast's new service could potentially spoil hopes by Qwest to break even next year.

"If Comcast gets really aggressive in Qwest's footprint, it could cost Qwest 4 or 5 cents a share next year," Jaegers said.

In the markets where Comcast Digital Voice has debuted, the company offers the Internet phone service for $39.95 to subscribers who already receive high-speed Internet and cable service. Customers who subscribe to one of those services pay $44.95 a month, and those who want only Digital Voice pay $54.95 a month.

With a $39.95 price tag, Comcast likely will win over primarily existing cable or high-speed Internet customers who want the convenience of several services bundled onto one bill, Jaegers said.

Cox Communications' discounted phone service helped knock Qwest from its dominant position in the Omaha market, said Brian Washburn, an analyst with Current Analysis, and Cox has eroded Qwest's market share in Phoenix as well.

Comcast is one of the last major cable operators to introduce Internet-based phone service, in part because of time needed to digest its purchase of AT&T Broadband and because it wanted to make sure its service was as much of a "lifeline" - capable of making calls during power outages and not dropping calls - as possible, Washburn said.

"It has a lot of the look and feel of traditional landline service," Washburn said.

Internet-based phone services aren't regulated, and they don't have many of the regulatory fees and taxes that are levied on traditional phone services. But customers should be aware that comes at the cost of not having any federal or state regulators to complain to if their Internet-based phone service isn't working properly, said Jim Greenwood, director of the Colorado Office of Consumer Counsel, a utility watchdog.

"There's no one to call other than your customer service rep - if you can get through to them," Greenwood said. "Customers should make sure they read their contracts before signing up."

Comcast Digital Voice is part of the cable company's almost decade-long, $39 billion investment in upgrades to transform itself into a provider of Internet, video and phone services to customers all on the same bill. The "triple threat" play is an effort to make Comcast subscribers less likely to defect to satellite providers like Colorado-based EchoStar Communications and telephone companies, which are just getting into the video market.

Comcast has already introduced the service in 21 markets nationwide, with a total of 12 million homes, and says it will reach all of its markets with a potential 40 million homes by the end of next year.

Comcast has set a goal of 250,000 phone customers by the end of this year. By comparison, Time Warner in August reported 614,000 digital phone subscribers and Cablevision Systems Corp. has more than 478,000.

Telephone companies are moving in turn onto cable's turf. Three of the Baby Bells - Verizon, SBC Communications and, to a lesser degree, BellSouth Corp. - are working on plans to debut Internet protocol television, or IPTV, which carries television over the same fiber-optic lines that transmit voice and broadband Internet service.

Verizon last month introduced its service in Keller, Texas, and has plans to introduce the service in 15 states. SBC Communications, which has a marketing agreement with EchoStar's Dish Network that allows it to include the satellite-TV service as part of one bill, plans a limited rollout of its IPTV service next year.

Comcast and other cable companies are moving into the telephone business in an effort to lock in customer loyalty. Last week, Comcast and three other cable companies announced an alliance to offer their own cell-phone services through Sprint Nextel Corp., creating a "quadruple play" of voice, video, Internet and wireless products. The service would pursue combinations of wireless and landline technology, such as a shared voice mail or transferring among phones as a subscriber walks into their home.

The rationale behind bundling is that the more services a customer receives from a company, the less likely they'll switch over to a rival because of the convenience and discounted price.

Cable companies have already beat the phone companies out of the gate. By the end of 2007, 12 percent of residential cable subscribers are forecast to take phone service, up from 5 percent at the end of this year, according to Convergence. By comparison, only 2 percent of Baby Bell subscribers will also order video services by the end of 2007.

"The cable companies over the past decade have spent $100 billion to deliver" on their vision of a 500-channels universe that could provide high-speed Internet and phone service, Eiley said. "The phone companies only got residential broadband religion a few years ago and have been playing catch-up."

With Internet-based phone service, analog voice signals are converted into digital signals, transported in data packets over the Internet or a private fiber-optic line and reassembled into sound at the other end. By comparison, traditional phone conversations travel on dedicated circuits.

Internet-based telephone subscribers in the United States are projected to grow to 12 million homes by the end of 2010 from about 3 million at the end of this year, according to Forrester Research.

The growth of VoIP services has been slowed in part by consumers' concerns about voice quality, power outages and lack of 911 emergency services.

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