IP Convergence: Beyond VoIP, Beyond Cost Savings

Today’s reports about SunRocket ceasing operations should serve as a wake-up call to policy makers.  After two plus decades of effort, policy makers are anxious to declare victory and call the telecommunications market “competitive”.  Unfortunately, reality keeps intruding on their vision as the Sunrocket situation demonstrates.

The fact that the number two provider of VoIP services in the country would just cease operations without any liquidation or bankruptcy suggests there just wasn’t much salvage value to the operation.   So when incumbent operators point to VoIP as the great competitive threat, policy makers should keep SunRocket in mind.  

“Competition” will remain as fleeting as SunRocket for several reasons.  First, as Vonage continues to demonstrate, marketing costs are almost insurmountable for new entrants seeking to serve the mass consumer market.  This is why cable companies are the greatest hope for residential competition.  Their marketing costs are significantly less due to their existing customer relationships, billing infrastructure, and low-cost access to commercial air time on their own systems.  

Second, as the FCC’s response to Verizon’s petition to improve access to multiple dwelling units shows, even the largest carriers need the government’s help in overcoming monopoly power.  But as the city of Philadelphia’s deal with Earthlink shows, breaking the monopoly on rights of way can greatly facilitate competition.  Unfortunately, most municipalities continue to make access to rights of way difficult and landlords and building owners continue to leverage their monopoly to the detriment of competitive carriers.  But this is an area again where cable companies have an advantage over other competitors because of their unbiquitous access to rights of way through the franchise process.

Third, until the FCC addresses the three core problems plaguing the industry – inter-carrier compensation, universal service, and special access regulation – competitors will remain handicapped in their ability to effectively compete.  Under today’s regulations, as much as 70% of a competitor’s revenues go right out the door in the form of last mile access.  Another 10% goes to the FCC for universal service.   So, competitors today must be able to attain profitability on as little as 20% of their revenues.  Not too many companies can do that.

Fourth, the notion that VoIP as offered by cable companies will provide the competitive alternative to incumbent operators is superficially appealing, but closer examination shows that the competition is limited at best.  Atlantic ACM is predicting cable companies will have 23 million VoIP subscribers by 2012.  While that number is large, relative to AT&T and Verizon, it’s pretty small.  Verizon has some 130 million access lines, 60.7 million wireless subscribers, over 7 million broadband customers including over 1 million FiOS customers, and over $20 billion in revenue from its business unit, the former MCI.  AT&T has similarly staggering numbers. 

So the fact that all cable companies combined will have 23 million VoIP subscribers in five years is pretty unimpressive.  Moreover, with no presence in the business market, no wireless service of their own, and no Internet backbone, cable companies are only targeting a narrow segment of the overall telecommunications market and clearly lack the economies of scope and scale that AT&T and Verrizon enjoy.  In the long run, that favors AT&T and Verizon.

Unfortunately, the SunRocket situation is going to lead not to a re-examination of core telecommunications policy, but instead more regulation of VoIP providers.  I suspect the FCC is going to impose an additional layer of compliance regulation on VoIP providers to address market exit.  Of course, the FCC still won’t address market entry requirements for VoIP providers. 

And that is the sad truth about  telecommunications policy in the United States.  There is no political base for pro-competition policies.  In the 1980s and 1990s, business customers were able to convince lawmakers that the local telephony market had to be opened up.  Twenty years later, policy makers think they have succeeded and are now focused on the mass consumer market.  VoIP and cable companies were the answer, but as SunRocket demonstrates, it may not be a lasting answer.