Baby Bells Feel VoIP’s Sting

The health of traditional telephone carriers such as Bell South and SBC is beginning to suffer as a result of the rise of Voip. And analysts believe the long-term ratings outlook for the Baby Bells is questionable.

VoIP is starting to affect the health of traditional phone companies.

Standard & Poor's Ratings, New York, has lowered long-term ratings on Regional Bell Operating Companies BellSouth Corp. and SBC Communications Inc., as well as on jointly owned Cingular Wireless LLC, due in part to “prospective line losses” from VoIP providers, including the major cable companies.

“Within the last few months, the traction that these [VoIP] services have been getting has been significant, though the overall numbers are still small,” says Jon Arnold, VoIP program leader for Frost & Sullivan, Palo Alto, CA. “A number of major companies – AT&T, Primus and Cablevision – have entered the market in a big way, joining the upstart companies like Vonage, VoicePulse, BroadVoice, Voiceglo and others.”

The long-term corporate credit ratings on all three companies were lowered to 'A' from 'A+'. The 'A-1' short-term ratings on BellSouth and SBC were affirmed, according to Standard Poor’s. The long-term ratings outlook is negative.

The RBOCs have experienced ongoing losses of total switched access lines over the past few years in the range of 3 percent to 4 percent annually, while retail lines have declined by about 6 percent to 9.5 percent, according to S&P. While much of the loss to date is blamed on the rule requiring unbundled network elements allowing consumers to pick different services from different companies, these losses are expected to slow.

However, this competition “will be replaced by the acceleration of facilities-based competition by the cable companies, as they will more widely offer residential telephone service using economical VoIP technology beginning next year,” according to Standard & Poor's. “This form of competition is potentially more detrimental to the RBOCs because it does not provide the RBOCs with any resale revenues.”

Independent analyst Jeff Kagan, Atlanta, Ga., says the telecom industry will continue to change over the next five to 10 years, forcing the traditional carriers to adapt. So they’re going to have to look to shift to VoIP offerings.

Kagan believes, however, that traditional carriers have a distinct advantage against the newer firms in providing VoIP in that they already have the customers. It’s easier, he says, to get a current customer to switch to or add a new service than to find a new customer, which is the challenge for the newer companies.