By Faultline

Analysis Verizon, the largest local telecommunications provider in the US, has torn up the US telephone rule-book and is offering a US-wide Voice over IP (VoIP) service for $39.95 a month, with discounts available if customers use other Verizon services.

The service is called VoiceWing and the move is seen as the beginning of a colossal US-wide land grab for customers between the big four local telcos, Verizon, SBC, Bellsouth and Qwest and is also targeted at fighting off the triple play threat from the big US cable firms.

It will also find itself going up against AT&T’s CallVantage VoIP scheme which is almost identical.

A few weeks ago Cablevision caused consternation and share price upsets when it announced a $90 package for cable TV, high speed internet and VoIP telephony. But this deal only targets the four million customers which are passed by cable owned by Cablevision.

This Verizon deal is a chance to build business from anyone in the country that owns a broadband line, something close to 28 million and rising, with only 2.3 million of those already customers of Verizon.

But this deal, and those likely to be offered in return by the other three local telcos, is a very different one from the Cablevision offering, and represents a genuine change of heart in Verizon’s approach to its future.

Land grab

Cablevision has 2.9 million basic cable customers and gets around $55 from each one of them for cable services (basic cable average revenue per user or ARPU). It also gets a further $29.95 from most of its one million high speed data customers and so far has only managed to attract 25,000 VoIP customers at roughly $34.95 a month each. Although analysts widely cite the Cablevision overall ARPU as $80, adding up these three numbers at current prices (what they would pay if they signed up today) it comes out closer to $48 a head across the four million homes inside its cable range.

So for Cablevision the pricing can only lead to an upward swing in its ARPU.

For Verizon this is a dramatic re-pricing (potentially downwards) of its services, that overnight makes its business dramatically more competitive, and the ultimate effect will be to eliminate traditional phone lines and replace them with broadband lines everywhere, in short order.

Verizon currently sells a bundle of unlimited US dialing called its Freedom service for $59.95. That makes the new list price for VoIP $20 a month cheaper. However Verizon is offering a six month discount of $5 and a further $5 discount if customers use a DSL line from Verizon. That brings the pricing to $29.95 for unlimited calling across the US, plus special discounted international calling rates, which, coincidentally is the same price at that part of the Cablevision bundle.

In effect Verizon has found a way to match the Cablevision price within a month of the Cablevision deal being announced. The difference is that Verizon is almost halving its old pricing.

But the US phone giant has not been content to leave the deal there and now has a chance to open up a landgrab in other markets outside its own covered regions.

This immediately drags every other cable company and US telco into the fight whether they like it or not.

The cable companies have never been likely to go after phone service outside the scope of their cabled regions because of their comparative weakness in phone services. It is bad enough trying to get consumers to see them as a phone company in their own region, never mind outside it. But for Verizon, the biggest of the phone companies, and AT&T, it is less of an issue.

Back in December Qwest began the task of offering VoIP with a first phase to customers in Minneapolis-St. Paul, Minnesota. Qwest said at the time that it was the first major telecommunications provider to offer VoIP services to residential customers.

The move was followed in April by a promise that it would not charge independent VoIP companies more than carriage charges (no access charges) when the VoIP traffic emerges into its PSTN telephone network.

Qwest is thought to be on the verge of offering a similar US-wide VoIP phone service, and both SBC and Bellsouth cannot be far behind with SBC stating that it clearly plans to offer such a service, while Bellsouth seems to be concentrating on pushing long distance unlimited calls to around $15 a month, instead. But both will have to respond the moment they see any kind of incursion into their territory.

Data freedom

So far VoIP services have suffered bad PR, with a history of poor quality and reliability issues and worries that when there is a powe routage, the phone stops working. That hangs a heavy question mark over getting rid of a traditionally connected telephone line, which is needed for calling the emergency services, especially when power is down.

But increasingly customers have either a second line, which they use for most services, and that can be VoIP, or they rely on their mobile phones for emergency calls, as long as mobile coverage is sufficient.

One of the beauties (and dangers) of VoIP is that the customer can split the signal and route it within the home however they want, to multiple phones and into PCs. But at the same time they become responsible for moving phones around and sorting out internal cabling.

As the networked home becomes more of a reality, this type of data freedom is an asset and IP operated services are likely to become standard anyway.

So alongside ARPU, a new statistic is going to become fundamental to the valuation and analysis of telcos, the number of accounts that it holds „outside its network,“ with Verizon getting this number off the ground first.

The Verizon VoiceWing service comes with a number of VoIP advantages already built into it, and being a data service, this is likely to become a new platform for independents to offer software based services controlled by PCs

VoiceWing allows customers to choose a phone number from any Verizon territory in 33 states and call management facilities from any computer with Internet access regardless of where it is. The service also offers enhanced call-forwarding and call logs that itemize all calling activity and there is a three month sign up period in order to qualify for the six months discount.

Mass drive

VoiceWing offers voice mail, caller ID and call waiting, Click-to- Dial, PC based Address Book, speed dial, call scheduling, and a neat trick called Alternate Telephone Number, whereby anyone calling your home frequently can call you on an alternate number which is number local to them, and drop into the Internet at a gateway near them and have the call routed to your home. So savings are passed onto Family and Friends.

VoiceWing users will plug their phones into a book-sized adapter and connect that to any broadband Internet connection, not just the one they have in their home. When traveling, they can attach it to any conventional phone with a broadband connection, much the same as the BT IP telephony service launched last week in the UK.

VoiceWing has a one-time set-up fee of $39.95, and a one-time shipping and handling charge for shipping the adapter.

The fact that VoiceWing is provided by Verizon Long Distance, sees it very much as a replacement to long distance dialing for some. Verizon has 16.6 million long distance customers but each of them would need a DSL line to qualify, and that could mean a mass drive towards DSL, which would help it overtake SBC as the top telco and Comcast as the number one broadband supplier in the country.

Given that DSL at $29.95 plus the VoIP at the same price, this would mean that a Verizon customer could achieve unlimited US calling plus high speed internet for $59.90 a month, the same price that Cablevision is citing for those two elements in its triple play pricing.

But that will just leave the fact that Verizon doesn’t offer TV service delivery to complete the triple play at a price in line with Cablevision. Or does it?

Verizon already sells an unlimited phone package with DirecTV bundled into it for $98, and with the savings through offering the phone calls via VoIP it can add DSL and drive this price, to something under $100 a month.

While that might not be quite the pricing of Cablevision, the deal can be offered to any domestic customer who has any of the 140 million telephone access lines that are offered by Verizon, not just the four million lines where Cablevision operates.

But how successful will DirecTV be against Cablevision or Comcast? Well SBC has just published its quarterly figures this week, where it showed that it installed 100,000 out of its existing total 121,000 Dish Network customers that compete with DirecTV, in the last quarter alone.

A similar success, pro-rata for Verizon as its own DirecTV deal picks up speed, might see it add something over half a million triple play customers each year. As many cable people have pointed out to us this doesn’t give much money to the telco out of the TV bundle, but it does have the effect of nullifying the triple play of the cable companies, and allows companies like Verizon to keep their existing customers.

This week, SBC impressed the US stock market with the fact that it had grown its business for the first time in a quarter for about three years. Previously a two-four per cent shrinkage was seen as inevitable by SBC, Verizon and Bellsouth in their wireline businesses, as they struggled under low interconnection rate rules and price increase caps that have been imposed by the FCC, as well as erosion from the cable TV firms.

Question of timing

But by focusing on rolling out fiber optic cable, high speed internet line additions, long distance growth and those DirecTV sales, SBC managed two per cent growth. Verizon has managed to just grow in each of the last four quarters, but has rested heavily on its Verizon Wireless revenues. It reports next week and we’ll likely see a similar pattern to SBC.

Verizon’s timing for launching the new service may well be a spoiler for results that may not be that impressive, but also its timing is critical in terms of the FCC and its potential for response.

Any controls that the FCC tried to impose now on VoIP services could be held at bay by legal action until a new administration is in office in the US. The presidential elections give it an initial six months to operate in this sector, while lobbying for VoIP services to remain unregulated for at least three years. Even if an unsympathetic administration came to power, the FCC doesn’t necessarily change, and it would likely take a further 12 months to agree and push through any FCC intervention on VoIP.

This means that Verizon is bound to have an 18 month run at this, during which time it can perfect its Satellite TV triple play, extend its reach into non-Verizon territories and negate the effect of the Cablevision price advantage.

As if to underline this shift to a new pricing paradigm, and coincidentally announced on the same day as the VoIP VoiceWing service, Verizon also said it wants to push through a phone rate increase of 75% in the Washington area with the Washington Utilities and Transportation Commission from $13 to $22.80 for residential customers and from $29.70 to $39.50 for business customers.

In April, Verizon filed its first general rate proceeding in 22 years while reporting a shortfall in covering phone costs of $239.5 million a year. Effectively it is saying that it needs to raise telephone prices or it has to lose money. This decision will affect 850,000 of its lines, less than one per cent of phone business. But if Verizon pushes this across the board in other areas, it could be signifying that the age of the PSTN is ended, and that the dawning of a new IP era is about to begin.