Phone, cable companies to battle in 2007

By Bruce Meyerson

updated 10:26 p.m. ET Dec. 15, 2006

NEW YORK - Vonage tanked after its IPO. It's not entirely clear anymore why eBay paid $2.6 billion for Skype. And the long-awaited rollout of advanced TV services based on Internet technologies has resembled the drip of a faucet.

It wasn't a banner year for some of the biggest names in Internet Protocol, the technical standard that makes the Web hum. But the technology itself continued to blossom, with newer innovations picking away at every corner of the telecommunications business, from voice to video to wireless.

No doubt the main event for 2007 will be the impending smack-down between the traditional phone and cable TV industries. The regional Bell companies, after losing millions of customers to rival phone services from cable providers in 2006, are just starting to ramp up their risky push into TV.

Verizon Communications Inc. expects its FiOS TV service will be available to 1 million homes by January. AT&T Inc. finally appears to be pushing past technological holdups with U-verse, maintaining the IP-based service will be offered in parts of 15 markets by the close of December.

The competitive response couldn't come a minute too soon, as cable companies have had a field day in the phone business thus far. Just over 6 million homes will have switched to cable phone service by the end of 2006, a gain of 2.5 million for the year, the industry research company TeleGeography estimates.

In advance of the TV push, Verizon and AT&T have battled back with DSL Internet connections priced as low as $15 a month, hopeful of keeping and winning households that can be sold FiOS or U-verse later. The effort has borne some fruit: Although a rapid overall decline in residential phone lines continues, the percentage of remaining homes with phone and DSL service is growing fast, and the Bells are now signing up more first-time broadband users than their cable rivals.

As the giants of phone and cable do battle, however, both sides will find themselves flicking away at technological termites that threaten to hollow their victories by offering new ways to communicate and deliver content, always for less and sometimes for free.

Daily it seems, there's another renegade company launching some form of calling or video that bypasses the normal mode of consumption, usually by exploiting IP, a network language that reduces all forms of communication into simple building blocks of data, one indistinguishable from the next.

In the past month alone, a half dozen small companies have introduced applications and services to enable cell phone users to make cheaper wireless calls, many exploiting different elements of Voice over IP, or VoIP, the technology also being used by the cable companies and Vonage Holdings Corp.

Some of the new services, with names like Talkster, Efonica's Mobilink, Jajah and iSkoot, mimic aspects of a long-distance calling card — providing cheaper rates by first connecting with a local phone number — while blending in new capabilities drawn from the world of instant messaging and Skype. Other startups such as Raketu are providing mobile VoIP calling by exploiting a phone's Internet connection rather than the regular voice channel.

By adding online buddy lists to the mobile mix, these services can enable a cell user to see whether friends are available before trying to call them, avoiding a waste of time and precious plan minutes. They also can enable quick-click dialing from one listing containing a friend's various phone numbers, Skype account or IM identity.

It's entirely possible, maybe probable, that all these newcomers will fail to catch on with enough people to ever resemble a real business.

To date, there's only been one Skype, which boasts 8 million simultaneous users at peak hours. And while Skype has only grown in popularity since being acquired last year by eBay Inc. for a stunning $2.6 billion, it's not clear that success will ever produce pots of gold.

Yet collectively, Skype and all the would-be Skypes keep nibbling away at the core business model of the telecom industry, which treats a phone call and its length as something far more valuable than mere packets of data traversing a giant computer network.

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