Is VoIP the ILECs’ Saving Grace?

The fact that access lines are falling sharply over the next decade probably isn’t news to our readers, but it’s nonetheless rather depressing to study the details of our forecast. On a more positive note, however, we do believe that ILECs and CLECs will do well with Voice Over IP offerings in the next decade. The caveat, however, is that the strongest growth is expected to be driven by penetration gains made by Verizon and AT&T with their FiOS and U-verse networks. So while the overall outlook is for telco VoIP connections to help offset access line losses, it’s not entirely clear that the trend will trickle down to the majority of RLECs. Of course RLECs haven’t suffered the 10%-12% yearly access line declines over the past two years that Verizon and AT&T have, so perhaps it’s only fair…

As I’ve said previously, voice service is becoming an add-on, secondary in importance to broadband service, and for many consumers, most likely coming in behind video services as well. Increasingly cable operators have leveraged their broadband cable offerings and included relatively inexpensive VoIP voice service in their bundles. And while it seems wireless substitution remains the dominant trend in shifting voice service market shares, cable providers continued to add voice connections in the second quarter of this year, even as they lost video subscribers to competitors.

Based on our anaysis of public companies and FCC and industry associations data, we believe there were about 26m VoIP subscribers riding on cable connections at the end of 2010, and just more than 2.5m ILEC/CLEC VoIP customers, for a total of 28.5m U.S. VoIP subscribers. At that time we estimate the vast majority of the ILEC VoIP customers were attributable to FiOS and U-verse, with the remainder coming from Vonage customers using a DSL connection and/or SureWest, which has aggressively been encouraging its traditional voice customers to switch to its VoIP service.

Looking ahead, we think that cable VoIP connections will continue to grow slowly for the next two to three years before wireless substitution begins to eat into those connections. ILEC VoIP growth is expected to be strong, driven by strong demand for FiOS and U-verse. We expect their penetration levels for voice service to rise rapidly  among passed homes, although neither company is now planning to build out as many homes as each had originally planned.

We also expect ILEC VoIP services to be popular among businesses, which the ILECs are increasingly targeting. Conversely, cable VoIP service has historically been a predominantly residential service. Our estimates indicate that about 15%-16% of lost residential access lines in 2010 and 2011 are choosing an ILEC VoIP service instead; in the longer run we expect that upwards of 80% of lost residential lines will be switching to VoIP. By this point (2019-2020) we believe wireless substitution may have maxed out as all homes where coverage is solid have already made the switch.

We’ll get more into the details of our wireless voice and wireless data as well as wireless-only home predictions in the next installment.