Phone, cable providers eclipse 'pure-play' firms

Voice over Internet Protocol is taking off in a big way among U.S. residential customers, with 5.2 million households already hooked up and another 27.4 million expected to join them within five years, a new report from eMarketer shows.

But the VoIP revolution has taken on a new twist, the report says: Instead of “pure-play” VoIP providers such as Vonage and Skype, which until recently led the market, now cable companies and traditional telephone companies are dominating.

While Vonage at the end of March still had the most VoIP subscribers of any single provider with more than 1.5 million, collectively cable providers had an estimated 2.84 million, and telephone companies had about 285,000.

With mobile phones already cutting into the land-line market, eMarketer senior analyst Ben Macklin says VoIP is becoming an important battlefield in the war over the $190 billion U.S. fixed-line telephony market.

“Those companies that control the broadband connection,” he says, “are likely to come out on top.”

And big players have an edge: By 2010, eMarketer predicts, pure VoIP vendors such as Vonage will have only one-quarter of the market, while cable and phone companies will control the rest.

In Rhode Island, Cox Communications – which has been so successful with its cable-based phone service here that Verizon’s state market share is the smallest in the nation for an incumbent carrier at 60 percent – is gradually converting its network to VoIP.

At the end of 2005, Cox had about 510,000 residential VoIP subscribers nationwide, the eMarketer report says – just under half of Time Warner’s 1.1 million, but far more than Comcast’s 202,000. Cox spokeswoman Leigh Ann Woisard said the VoIP service is only offered “on a limited basis” in Rhode Island now, but will be rolled out later this year.

Verizon, which launched its VoiceWing broadband phone service in 2004, had an estimated 120,000 subscribers nationwide as of December, the eMarketer report says.

In Rhode Island, Verizon spokeswoman Lillian M. McGee said VoiceWing is offered with 16 telephone exchanges, from 868 in Newport to 229 in Woonsocket. Verizon doesn’t report VoIP subscriber numbers, however, she said.

Any look at VoIP trends has to start by defining the concept – and the changing market has somewhat blurred the lines.

The essence of VoIP is that calls are digitized and the signal chopped up into information packets that are sent over the Internet or a private data network, to be reassembled at the other end.

Cable phone service, such as what Cox has provided for years, digitizes the phone signal and transmits it over the same lines used for Internet and TV service. But it’s not an IP-based system. Cox has been using IP technology on a small scale, however, since December 2003, when it deployed VoIP service in Roanoke, Va.

Last year, Cox and its primary vendor, Nortel Networks, announced plans to upgrade Cox’s telephone circuit switches to allow them to support traditional telephony as well as VoIP (since IP telephony is generally less expensive, Cox could modernize and cut costs with one move).

Locally and nationally, the potential impact of Cox going full-bore could be huge: The Atlanta-based company claims more than 6.7 million subscribers nationwide, including Rhode Island’s 300,000 cable customers – many of them also phone and/or Internet subscribers.

Currently, about one-eighth of households with broadband Internet service have VoIP, eMarketer estimates, and by 2007 it should be one-quarter. By 2010, eMarketer’s Macklin predicts, 38.5 percent of broadband users will have VoIP.

And Rhode Island already has lots of broadband users: As of June 30, 2005, the Federal Communications Commission reported this month, there were 186,743 high-speed Internet lines in the state (defined as more than 200kbps).

But how appealing will Cox and Verizon’s VoIP offerings be to consumers?

It all comes down to price, Macklin says. “Consumers are not in the least interested in the technology of VoIP but rather the potential cost savings it can provide them,” he wrote.

“In the short term,” he added, “price will be the primary driver for the VoIP industry. Those that survive the fierce price competition are likely to be companies able to offer advanced voice features and other service bundles.”

So how do Cox and Verizon stack up on that front?

At $29.95 per month for unlimited service, including long distance, or $19.99 for 500 minutes, Verizon’s VoiceWing is slightly pricier than Vonage, which charges $24.99 and $14.99, respectively, but much cheaper than traditional Verizon service.

Cox, on the other hand, hasn’t made a distinction yet between Cox Digital Telephone and VoIP, Woisard said: “It costs the same as our circuit-switched phone service” – starting at $11.99 for a “basic line” or $39.95 and up for an “unlimited connection,” with discounted cable-Internet-phone bundles available.

The full eMarketer report is available for $695 at www.emarketer.com.