TeleGeography Report Gives Examples of Friendly Fire in the VoIP Price Wars

TMCnet Associate Editor

Ever cut off your nose despite your face?

In a sense, that is what major communications companies like Verizon are worried about when it comes to VoIP.

Yes, indeed, VoIP is starting to rapidly drain away profits from traditional phone service (and it is pretty easy to measure its impact if you’re just counting the drop-off in access lines). Users all across the U.S. are abandoning their traditional PSTN-based service and are switching to VoIP plans offered by their cable MSOs - or even their existing phone company. In some cases, phone companies such as Verizon are causing their own undoing by offering broadband packages which include VoIP for a low price. Basically, they end up “cannibalizing” their traditional phone service by sending customers in droves over to the cheaper (and less profitable) IP-based service.

In addition, they must compete with VoIP start ups, many of which are employing the “let’s not make any money for two years” approach. As such, even the big guys like Verizon are forced to slash the cost of their premium VoIP service plans. The company recently announced that it has cut the price of its VoiceWing VoIP service from $34.95 to $24.95 per month – bringing it down to almost the same level as Vonage (News - Alert). This price is far below the VoIP offerings of the major cable companies, which average around $40 per month.

Although it might seem like a desperate move on Verizon’s part, it could end up being a wise one if it stems the flow of customers migrating to rival VoIP service providers.

A new report from TeleGeography shows that the number of U.S. households using VoIP has doubled during the past year from 2.7 million to 5.4 million. Of these, 2.8 million have defected to cable MSOs’ VoIP services and have cancelled their local phone lines altogether.

According to the report, Verizon had lost more than 8 percent of its residential phone subscribers to VoIP by the end of 2005. And the research shows that the number of customers jumping to VoIP will only accelerate over the next year.

Based on the survey results, TeleGeography projects that by year-end 2010, VoIP will have attracted over 21 million subscribers - nearly one in five of all U.S. households.

These numbers could spell disaster for traditional phone companies. According to TeleGeography, subscriber migration to VoIP will translate to $13.9 billion in lost long-distance revenues over the course of the next five years, and $17.4 billion in lost local phone service revenues.

But if ILECs can woo some of the cable defectors back to the fold (or at least discourage customers from canceling their local phone or DSL line in favor of cable broadband and VoIP), dramatic moves such as Verizon's price cut may well pay off.

To learn more about TeleGeography’s “U.S. VoIP Research Service,” visit

http://www.telegeography.com/products/us_voip/

.

------

Patrick Barnard is Associate Editor for TMCnet and a columnist covering the telecom industry. To see more of his articles, please visit Patrick Barnard’s columnist page