Long distance on life support

Experts say long-distance business is dying, and incumbent telephone companies that once depended on it for large portions of their revenues are having to reinvent themselves as a result.

“Look no farther than the advertisements for Babytel or Vonage,” says Iain Grant, managing director

of telecommunications consulting firm SeaBoard Group in Montreal. “Long distance is free.” While carriers are still making money from long-distance traffic, he says, those earnings are declining.

And Bill Rainey, president of Vonage Canada, a unit of Edison, N.J.-based Vonage Holdings Corp., predicts the distinction between local and long-distance calls will disappear. With voice over Internet Protocol (VoIP) services like Vonage’s, Rainey says, “there is no long distance – every call in theory is a local call.” Vonage currently offers several rate plans, including one with unlimited calling throughout North America for $34.95 per month.

Ted Chislett, president of Toronto-based Primus Telecommunications Canada Inc., another VoIP service provider, says VoIP is having a major impact on the long-distance bills of businesses, which are either using VoIP service or routing calls among distant locations over their own wide-area networks and thus avoiding long-distance charges.

“Long distance has been declining over the last number of years, and it will continue to decline,” Chislett says.

While downplaying the impact of VoIP providers, Telus Corp. spokeswoman Allison Vale says cable companies are having some success in winning business away from Telus by leveraging their relationships with existing customers.

Grant adds that incumbent carriers are now also facing pressure on the revenues they earn from local service. Though competition in local services has been slow to appear in Canada, the entrance of independent VoIP operators and more recently moves by cable television operators to offer VoIP services over their own networks are beginning to offer significant threats to the incumbent telcos.

The incumbents are pursuing several strategies to defend themselves, analysts say.

Grant says Jean Monty, former chief executive officer of Bell Canada parent BCE Inc., tried to address the issue through a convergence strategy, investing in related businesses such as the Bell Globemedia venture that controls the CTV television network and The Globe and Mail. “The market decided that Monty was wrong and brought in (current BCE chief executive) Michael Sabia to get Bell Canada back to its knitting,” Grant says.

Now, Bell, Telus and other carriers are developing new services for consumers and business customers to compensate for the declining long-distance revenue stream and the growing threat to their local phone businesses. For instance, says Grant, Bell is offering system integration and hosting services to business, and MTS Allstream Inc. is also offering hosting.

Bell Canada declined to comment for this story, citing the impending end of its fiscal quarter.

Vale says Telus has been adapting to long-distance competition since the early 1990s, moving into new lines of business and developing new products such as Internet access and home networking to offset declining long-distance revenues. Data, IP and wireless services are Telus’s biggest growth areas, she says.

Internet access has become an important business for the major incumbent carriers. “They get us onto the Internet so we can all use these wonderful services” such as VoIP, Rainey says. Grant points to Bell’s partnership with Microsoft Corp.’s MSN to offer additional online content and services as another example of the telcos branching out in new directions. Aliant Inc. launched an IP-based television service in the Halifax area in June, and spokeswoman Kelly Gallant said the company offers an assortment of “Value Packages” or bundles of Internet, phone, cellular and television services.

Grant adds that Jean Monty’s convergence vision may not be dead. “I don’t think necessarily that Monty was wrong,” he says. “I think he may have paid too much and bought the wrong things.”

Carrie MacGillivray, an analyst at the Kanata, Ont., office of Boston-based telecommunications research firm Yankee Group, says incumbent carriers are using service bundles to discourage their customers from switching to VoIP services or other rivals. Customers get a range of services – such as local, mobile and long-distance phone service, Internet access and satellite television – for a single monthly price. “It makes it a much tougher decision for a customer to break that. When I think of changing my Internet, changing my television, changing my wireless, it becomes a tougher decision,” MacGillivray says.

“Voice over IP is going to have an impact,” says MacGillivray, “but they’ve got a lot of customers tied up right now in a lot of bundles and there’s more stickiness than I think we understand.”

But by giving customers several services for less than they would have paid had they bought them separately, the bundles also affect revenues. “The revenue in future is going to come from applications and content,” MacGillivray says.

Grant says the pressure facing the incumbent carriers is visible in Bell’s reduction of staff and the labour problems at Telus. “We see the frustration all the way through that whole food chain,” he says. But while the life of a telco executive is harder today than in the days when, as Grant puts it, “forecasting for the telephone companies was mostly a matter of following housing starts,” even their rivals expect the incumbents to pull through.

“They’re very creative and have a lot of money to invest in new services,” says Rainey. “We all morph and we change.”

Comment: info@itbusiness.ca

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