SBC Communications' plan to buy AT&T illustrates how far the traditional phone business has slipped -- and how much it needs to change.
The prospects of the crumbling circuit-switched phone business have fallen so low that AT&T, which once controlled all phone calls across the country, sold itself for a mere US$16 billion. The once-impervious phone giants that controlled the nation's telephone networks are being humbled by Internet technology -- and the cable television giants and scrappy Net calling start-ups that embrace it. With high-profile Internet-based services driving the market, basic voice calling could become an afterthought.
"Voice service will eventually be low-cost enough that it could be free," said Brad Wilson, a telecommunications analyst with Legg Mason. "It could be a giveaway they bundle with other, advanced products."
The traditional phone company has seen that it can't keep up with cheaper, more versatile Internet technology, so now it's making the painful switch. Industry executives concede that selling voice calls over a vast network of circuit switches has become too costly to make sense in the long run.
Analysts say the only way for today's phone companies to survive is to adapt to a changing business reality. AT&T took their advice, abandoning its consumer local telephone business earlier this year to focus on promoting its CallVantage service, using VoIP, or voice over Internet Protocol, technology.
"They can't just be an old-fashioned regulatory-protected monopoly anymore," said Albert Lin, an analyst at American Technology Research.
Keepin' up with the Joneses
AT&T is not alone in transitioning to IP. Phone companies of all shapes and sizes, including the Baby Bells -- SBC, Verizon Communications, Qwest Communications International and BellSouth -- are investing billions of dollars to move from their decaying circuit-switched network to the Internet. Though SBC and AT&T say that consolidating their networks will save as much as US$15 billion in costs over the next decade, they add that the greater benefit will be weaning customers from the old phone networks to IP.
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