Telecoms Embrace Internet Calling, But Is It Trouble?

You know an industry is in trouble when its success hinges on something that hasn’t been invented yet.

By DENNIS K. BERMAN
Staff Reporter of THE WALL STREET JOURNAL http://www.wsj.com

A mythical lode of software applications — called "the next Napsters" — is expected to save the world’s biggest telecommunications companies from ruin. Whether the likes of AT&T and Qwest Communications International can come up with them will be one of the great business stories of the next decade. In the meantime, their plight shows the industry’s sorry state of innovation.

The technology they’re wrestling with is VOIP, or Voice Over Internet Protocol. It is used to send voice calls using the same processes as e-mail, and works by essentially turning your phone into a little computer. Most important, it’s dirt cheap compared with how the vast majority of phone calls are made today.

After years of false starts, most of the dominant cable-TV companies and a few pesky upstarts have begun selling the Net phone service. Traditional telecom heavyweights, such as AT&T and Qwest, have quickly joined in. These biggies are never shy about wrapping themselves in a capital-P kind of progress, and have lauded VOIP as the most significant advancement in decades, and one that makes "good sense" for consumers and the telecom companies alike.

So what does the telecom industry get for all this good sense? Not much by way of flexibility to use its prime marketing tool: lower prices. VOIP already is typically being sold as an all-you-can-eat package, obliterating the now-meaningless, but highly profitable, distinction between local and long-distance calls.

Some cable companies already sell comprehensive calling plans for just under $50 a month. A few unproven start-ups are taking prices even lower, to $40. The big local phone companies are building or buying cheap Net-calling networks to launch attacks on one another’s turf.

It’s not entirely bad news for the industry: Net-based calling is already lowering traditional phone companies’ capital costs, and will continue to do so. And a rack of VOIP equipment is about the size of a microwave. Just one of those can replace floors’ worth of old-school telecom switches, which are about the size of an industrial refrigerator. It will be decades, however, before the upgrades are complete.

All these forces are pushing the big telecom companies to do something at which they’re pretty crummy: innovate.

With cable companies adding phone service, the Baby Bells are trying to strike back with their own video offerings. These will come via marketing agreements with satellite-TV companies, or 15-year projects that involve laying billions of dollars worth of fiber optics directly to customers’ living rooms. Even these moves, however, get the phone companies only to parity with cable, which will have widely available Net-calling capabilities as early as next year.

Here’s where telecom executives start to talk lovingly about the next Napsters — software and products that would make their service truly different from the next guy’s. Competing, they say, will mean being a lot less like a utility and much more like a whip-smart software company.

Think Apple, not ConEd.

I wish they could tell me what those services will be. Believe me, I’ve asked. But the truth is that they don’t have much beyond lip-service paid to "multimedia," "security" and "the next Napster." This stems from the fact that they’re all buying the same equipment and know-how from a tiny group of suppliers, such as Lucent and Nortel.

Research and development at the phone companies has been widely gutted amid cost-cutting, making innovation more of a collective experience than an individual one. If BellSouth rolls out a new call-forwarding feature, SBC is not likely to be far behind.

Wireless companies Nextel and Verizon Wireless are good models for what the land-line phone companies will have to become. Using proprietary technology that enables walkie-talkie features on cellphones, Nextel was for years able to exploit its technological uniqueness to win over high-revenue business customers. Verizon Wireless has been successfully able to charge higher rates for what customers say is better reliability. Thirteen years ago, AT&T spearheaded the move into what it thought was the future of the telecom business with a watershed deal for computer and cash-register company NCR. The idea was that AT&T’s phone lines and NCR’s computers would create something different.

"The companies that add the most value as they handle transactions electronically from end-to-end — collecting, networking, processing and delivering information — will be the leaders in the global information market of the 21st century," said AT&T’s then-CEO, Robert Allen.

The NCR deal turned out to be a low moment in the history of corporate acquisitions, as it led to huge losses instead of the promised land of a telecom-computer convergence. Still, Mr. Allen’s statement was prescient. The challenge is the same for today’s telecom industry. Unfortunately, hope and dumb luck do not make for good business strategy.

• Send comments to [email protected]. Lee Gomes is on vacation.

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