I sometimes get asked “when will the big telcos really move into VoIP?” My answer has been, and remains, that service providers have a very good grasp of where they make their money. And to the extent that VoIP represents less revenue per user than legacy voice, as well as less gross margin (new capital and networks have to be built to support VoIP, where legacy voice investments are largely paid for, or close to it), service providers will simply do what they can to arrest a slow erosion of traditional voice lines, up to a point.

 

The point at which service providers make a determined push into VoIP is the point at which a crossover is nearing. And that crossover is the place where gross revenue from legacy voice is about what a service provider thinks it can make by getting really aggressive in VoIP, considering all the other costs of doing business.

 

Revenue neutrality (switching to VoIP does not add or detract from current revenues) is one element of the analysis, but not the only important input. The analysis will include the cost of maintaining a separate legacy voice network when broadband access facilities and other next-generation network elements have been put into place.

 

Once a fiber access network is in place, Ethernet-to-the-home is in place and soft switch facilities are in place, it just makes sense—at some point—to flip the switch and decommission the old time division multiplex network.

 

And it appears SureWest Communications (News - Alert), an independent telephone and broadband provider operating in the Sacramento and Kansas City markets, has concluded that point is close. While it isn’t decommissioning its legacy voice network yet, the company clearly believes it has reached the point in its broadband conversion where it now makes sense to begin selling VoIP (digital voice) services with lower prices than legacy voice products.

 

In its third quarter of 2007, for example, the number of broadband-based revenue-generating units was nearing the number of legacy access lines in service. That doesn’t directly equate to “broadband lines,” but for the sake of argument assume SureWest had about 70,000 broadband lines in service and 117,000 narrowband lines.

 

SureWest Communications Third Quarter 2007 Metrics

 

The issue is that SureWest is approaching the crossover point. Where it had concluded it was better off selling legacy voice and watching customers gradually bleed off, it now has concluded that it must now begin selling digital voice more actively, even if it means some average revenue per user (ARPU) slippage. The counterbalance is that bundled product sales based on broadband packages will more than compensate for the loss of some ARPU on the old voice product.

 

There is a tendency to think incumbent telephone company line loss is a strictly linear process, as it has seemed to be for the past five to seven years or so. It isn’t. At some point the incumbents aggressively will begin to sell digital voice and the erosion process will slow, and then essentially halt. When that happens is a quantitative exercise. Service providers will simply wait for a point when the gains outweigh the losses, or someplace close to that point.

 

When they move, they will move with great force. Not many contestants in the communications business can stand by and watch another competitor create a market, and then step in to claim a leading share. Large telcos have done so in wireless and broadband access. They will do it in VoIP. It is just a matter of time.

 

 

Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.