AT&T spends $11B per year on local access. With VOIP, they can reduce that at least in half - access is paid at both ends of a call, and their VOIP customer will be one end or the other - and beyond as both ends become VOIP. As long as the broadband pipe is deregulated as an information service (no access fees) but constrained to allow third-party VOIP to flow over the DSL or cable modem service, AT&T can achieve much faster and cheaper what they once spent $99B on (and sold for $50B) when they bought cable assets - bypassing the local phone companies to reach the customer. Their VOIP service is the first step towards a potentially massive restructuring of the phone industry.
VOIP could succeed where Congress and the FCC failed: create a truly competitive phone industry.
The goal of the 1996 Telecom Deregulation Act was to promote competition, and it did spur a gold-rush of new phone companies. The dot-com boom of 1999-2000 is completely misnamed - the lion's share of lost investment went to new phone companies. But the '96 Act missed its mark, particularly with respect to the emergence of new facilities-based competitors, the Holy Grail of the FCC - the third pipe. We are left with two primary pipes for the last bottleneck, the last mile - copper and coax. Duopolies do not a competitive market make. Cable fibered-up not because of the threat of telcos, but because of satellite. Telcos did not fiber up, and instead rushed into DSL, not so much due to new upstarts like @Home or Covad, but due to the threat of AT&T re-entering the local business via cable. Once the boom went bust, the new threats dissipated, and the telcos focused on what they do best - managing regulation!
We now have two largely deregulated monopolies rather than a competitive market, and the telcos are patiently working for even less constraint under the promise of finally fibering up. They are even building demonstration fiber systems to showcase their new intent. Our institutional memory was foreshortened in dog years of the dawning of the Internet Age, and perhaps we all have long forgotten that the telcos did the same thing just before the '96 Act: they made promises to fiber-up, they pursued demonstration buildouts, and they even formed content services (Tele-TV, Americast) with much fanfare. The effort to build new broadband networks and the promise to compete out of territory evaporated when the Act passed. Only Ameritech kept going for a while, until even that effort faded.
Now VOIP will begin what the Act failed to do. Just as Blockbuster makes a chunk of its profits off late fees, the local telcos make a chunk (a large chunk) of their profits off access charges. The introduction of VOIP at scale will massively reduce their profitability, maybe as much as 40%. Their DSL broadband services will not make up the difference, and they will also see a rapid dropping of second lines since VOIP can provide multiple lines without stringing more copper. The local telcos will be forced to respond. If, a big big big if, they fail to cajole the FCC or Courts or Congress to reintroduce the access fee for VOIP, or otherwise handicap it in this race, they will need to respond in kind. Already they are beginning the process of introducing VOIP services of their own. Qwest, which is run by Dick Notebaert, who ran Ameritech when it bravely continued to build new broadband networks for a while after the 1996 Act, has recognized the inevitability of VOIP and embraced it by encouraging third-party VOIP on Qwest DSL pipes. The next step is for the local telcos to break ranks and begin competing out of territory with their VOIP services.
VOIP will also build the third pipe. VOIP provides the economic impetus for the buildout of fixed wireless broadband. There is a stirring in the fixed wireless world, as providers begin gearing up for VOIP over new standard wireless protocols, either WiFi or WiMax. A new wireless wonderland is beginning to emerge as outdoor WiFi Clouds cover the metro cores of major cities, and as carriers build fixed wireless broadband in rural areas and at the outer edge of the DSL footprint. These wireless systems will then converge from the center and the edge to cover the suburban rings around major cities. Craig McCaw, who consolidated up many of the initial cellular systems in the '80s and sold them to AT&T, is now quickly scooping up broadband wireless businesses around the country to pursue this new blue sky opportunity. The wireless third pipe will create the insurance policy to maintain competitive pressure on cable and DSL providers to keep their broadband services open.
VOIP will also go wireless. Wireless broadband will get a second impetus from the introduction of dual-mode WiFi cell phones. Initially targeted for enterprise - use the WiFi phone as a follow-me cordless phone inside, use it as a cell phone outside - it will rapidly spill over into the consumer marketplace. Motorola is sampling these phones now; other handset makers are rushing them to market. Cisco is pushing hard for using VOIP in the enterprise with these WiFi phones. While designed for indoor office use, these dual-mode phones could also be used at home and in hotspots, and eventually outside within the WiFi Cloud coverage of the new wireless broadband networks.
VOIP is only the opening act. VOIP is not the system, it is an application on broadband. It opens the door for other applications to follow. The distinction between the voice side and the data side will blur. Broadband video bypassing cable may be the next VOIP.
Dual-mode cellphones also blur the distinction between wireless and wireline networks. The wireless carriers today are building their own walled gardens on 2.5G and 3G systems. Wireless application companies must work through a treacherous, slow and expensive path to gain carrier support, and even then have a difficult time synchronizing a new service globally across multiple carriers with varying walled gardens. Our foreshortened institutional memory certainly must recall the fate of Prodigy and Compuserve - earlier walled gardens that fell rapidly to the World Wide Web. The multiple Prodigies of the wireless carriers will give way to a Wireless World Wide Web that will follow the path blazed by wireless VOIP.
AT&T has announced more than a wireline VOIP service - they have also announced a new MVNO wireless service where they will resell wireless carrier minutes. They become a wireless carrier again without having to pay for the spectrum or the network. Necessity is the mother of invention. Their backs against the wall, they have begun reinventing themselves. Kevin Werbach, one of the leader thinkers on VOIP and its potential impact on the telecom industry, has noted that AT&T, the leading phone company of the 20th Century, might lead in the New Millennium as well.