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Technology Stocks : Earnings: Networkers & Communications
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To: 2MAR$ who started this subject1/23/2004 2:03:48 AM
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Bells Chime In With Voice-Over-Net Hype

By Scott Moritz
Senior Writer
11/20/2003 02:06 PM EST
Click here for more stories by Scott Moritz

Suddenly, this month, it seems the Bells have finally discovered the revolutionary power of voice-over-the-Net.
In a rare concerted move that threatens to dramatically remake the industry landscape, big phone players BellSouth (BLS:NYSE - commentary - research), Verizon (VZ:NYSE - commentary - research), Qwest (Q:NYSE - commentary - research) and SBC (SBC:NYSE - commentary - research) have unleashed a bone-jarring salvo of press releases heralding their plans to enter the 6-year-old business of voice-over-Internet protocol, or VoIP.

Yes, this staggering strategic shift was largely contained to some small and medium-sized business offerings by BellSouth and SBC and, in Qwest's case, a "select group of customers in Minnesota." Still, to growth-hungry investors, it was validation of a theme they've been keen on for a good part of the year.

Despite the hoopla, some industry observers cautioned that, while no doubt the Net will one day be the converged pathway for all communications traffic, most of these recent announcements are, alas, little more than positioning statements.

"There's not much real action behind these announcements," says analyst Sam Greenholtz with Telecom Pragmatics, a strategy and consulting shop. The Bells "have to show they are in the market or have plans to be in the market with services."

Ever since the advent of the Internet, there has been a common assumption that new, cheaper technologies will help callers bypass the old-line phone networks and effectively hollow out the Bells' core business.

That scenario creeps closer to reality as cable companies such as Cox (COX:NYSE - commentary - research) and Cablevision (CVC:NYSE - commentary - research) roll out Internet calling services to their TV customers. Meanwhile, upstart VoIP outfits such as Vonage have signed up thousands of users to its $35-per-month unlimited calling plans.

Perhaps even more unsettling for the Bells is the rise of outfits like Skype, which offer basic phone software that users can download to make free so-called peer-to-peer calls over the Net. Given the short but brilliant success of music swapper Napster, futurists aren't exactly underestimating the growth potential of calls that require no phone company.

Bells Chime In With Voice-Over-Net Hype
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But typically, VoIP reliability and sound quality don't match that of conventional phone calls. And there are still-unsolved issues surrounding mandatory call-tracing capabilities and 911 service. Even so, industry watchers point out that the wireless industry rode to great success, despite its tremendous shortcomings.

Three years of strong competition and a weak economy have forced the Bells to cut staff and contain costs. In this penny-pinching era, the beleaguered Bells have slashed spending on ambitious network upgrades and funneled much of their cash toward debt payments.

"Capital spending has fallen below historical norms," says Greenholtz. Average spending in the industry has been between 15% and 18% of revenue. During the late '90s, that figure rose to the 20% range. Since then, capex has dropped to about 11%, says Greenholtz.

Subsequently, any talk about VoIP among executives at the Bells has been merely that: talk, says Greenholtz.

The good news for suppliers, though, is that spending has to increase at some point. The telcos will one day shift from maintenance spending to expansion and modernization work. Qwest signaled just such a move Wednesday when the Denver local phone giant picked Lucent (LU:NYSE - commentary - research) to upgrade its switches toward IP.

The Lucent deal didn't specify a cost but did call for a three-year timeframe, which is in line with analysts' predictions for VoIP progress. It also highlights the likely beneficiaries of the trend, namely Lucent and Nortel (NT:NYSE - commentary - research).

"We do expect carriers to deploy VOIP gear, but we expect a deliberate, evolutionary approach that will likely favor incumbent providers," CIBC World Markets analyst Steve Kamman wrote in a research note Thursday. "We do not expect a wholesale 'rip-and-replace' transition."

But don't expect the Bells' bombastic press releases to reflect any such caution.
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