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Why Google Voice Spells Trouble for AT&T and Verizon

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Telecom giants such as AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) have long had a gameplan for weathering the decline of their traditional local phone revenues at the hands of voice-over-IP and wireless technologies. But with each passing month, it looks more and more as if that gameplan has some huge holes to it.

A foolproof defense strategy ...
In a nutshell, the telcos' strategy had two parts: Invest heavily in the wireless services for which many consumers would be abandoning their landline phones, and begin offering a "triple play" package of voice-over-IP, Internet, and TV services to better compete against both independent voice-over-IP firms such as Vonage (NYSE: VG  ) , and (more importantly) cable providers encroaching on their turf.

Until recently, this looked like a solid plan. Wireless revenues for the major carriers had been steadily growing, thanks to a combination of subscriber growth, increasing demand for data services, and a healthy pricing environment. Demand for monthly voice-over-IP plans was easily outpacing that for per-minute plans -- even if much of the early subscriber growth went to cable giants such as Comcast (Nasdaq: CMCSA  ) and Time Warner Cable (NYSE: TWX  ) rather than the telcos.

... that's now coming under fire
But in the last year or so, the telco gameplan has begun to crack. While demand for data services continues to climb, wireless subscriber growth has fallen considerably as the U.S. wireless market nears its saturation point. And this, in turn, has stoked a brutal price war, with Verizon and AT&T choosing to follow Sprint's (NYSE: S  ) lead in offering reasonably priced unlimited voice plans.

Meanwhile, the spread of voice-over-IP apps that can provide dirt-cheap phone calls is set to make a bad situation worse for the telcos. 3G data services have improved enough in speed and reliability that Internet-based phone calls placed via services such as Skype are acting as a credible alternative for cost-conscious users who don't want to add minutes by upgrading to a more expensive service plan.

From the standpoint of the telcos, Google Voice is now shaping up to be an even bigger headache than Skype. Having already gotten under the skin of wireless carriers by offering free text messaging and other ancillary services, Google has now raised the stakes by offering free phone calls within the U.S. and Canada using a phone application now built into Gmail. For the time being, Google (Nasdaq: GOOG  ) is only offering this feature via PC web browsers, possibly out of a fear of alienating the carriers whom it's relying on to promote its Android operating system. But even if free calling remains a PC-only feature, it could still cause serious problems for wireless carriers -- both by reducing the number of wireless minutes their subscribers use, and by cutting down on the need for a landline connection.

According to a recent report from Citi analyst Jason Bazinet, the percentage of American households relying only on a wireless connection has soared from 15.2% as of March 2007 to 29.7% as of June 2010. And with the pace of landline cancellations having actually picked up in recent quarters, I think it's safe to assume that the nonstop bleeding seen by the likes of AT&T and Verizon in their local voice revenue bases will continue for quite some time.

And now, thanks to an emerging price war and the spread of dirt cheap voice-over-IP services, I don't think the telcos can count on their wireless divisions for salvation from the gradual demise of their landline monopolies.

Fool contributor Eric Jhonsa has no position in any of the companies mentioned. Google and Sprint Nextel are Motley Fool Inside Value recommendations. Google is a Motley Fool Rule Breakers pick. The Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (14)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 09, 2010, at 10:56 PM, EquityBull wrote:

    ATT and Verizon may not get the higher minute plans but ultimately they own the networks/towers that users will have to purchase costly data plans for their phones to use those free skype or google calling minutes. So they either get them on the more lucrative data or on the cell minutes but one way or the other they get you.

  • Report this Comment On September 12, 2010, at 4:35 PM, fanbelted wrote:

    This is a total non-article. The wireless carriers currently have nothing to worry about, because there is nothing out there that could conceivably endanger their ability to charge you an arm and a leg for the privilege of making a phone call over a mobile device. Skype is mentioned. But Skype only counts for people who don't know the truth. Verizon has crippled Skype on their network to the point that it is completely useless. Skype on Android will not run if it detects that WiFi is turned on, preventing you from making free calls over WiFi. And if you use it to dial a USA phone number, it will catch that and route your call over the voice network, burning up your precious airtime minutes! The only time it lets you make a phone call over the 3G data network is when you are calling a non-USA number. So basically, the main use of Skype, to make free calls in the USA, is eliminated. Verizon then has the balls to say that it "does not need WiFi to work". How about saying that "it needs to burn through your airtime minutes in order to work", which is closer to the truth. Verizon also screams from its ads that "Skype is now available on their network". They've basically neutered Skype, made it their pet, and are using it as a marketing tool.

    This article also mentions Google Talk, and then goes on to say that it is only available on the desktop PC. So like I said, this is a non-article and the wireless providers have nothing to be worried about. Consumer beware!

  • Report this Comment On September 16, 2010, at 4:15 AM, Landzhang wrote:

    Operators can charge the call legs even it is free to users. Here Google provides the termination fee.

    As long as the call is going through operators network, operators have nothing to worry about. However, if users use goolgle number from their web browst directly for VoIP then operators will be bypassed. It is the problem for operators.

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