VoIP disrupting telco dominance

While the Canadian telecom industry is expected to see profits rise significantly this year, analysts say this situation is not likely to last.

Profits in this sector are expected to reach $4.3 billion in 2007, compared to last year’s record $3.7 million. Thereafter, however, growth is expected to be limited to an average of 4.4 per cent annually until 2011, a recent report by The Conference Board of Canada (CBOC) said.

It says low service prices and the erosion of traditional wireline markets will slow industry earnings over the next five years.

Ottawa-based CBOC is a not-for-profit organization dedicated to researching and analyzing economic trends, as well as organizational performance and public policy issues.

The report titled Canadian Industrial Outlook: Canada’s Telecommunication — Spring 2007 notes that voice over Internet Protocol (VoIP)-based services have had a “disruptive” effect on the industry. “Steady VoIP adoption has eaten away at the wired market — the last bastion of dominance held by incumbent carriers,” said Michael Burt, senior economist at the Conference Board of Canada.

While a high Canadian dollar value has kept production costs down, Burt said, this gain has been offset by increasing wages and “significant downward pressures on pricing” due to fierce competition.

The industry managed to keep profits growing largely due to “effective cost management”, Burt said.

But weak price appreciation and a shrinking market for traditional wired services “will limit industry profits between 2007 and 2011,” he added.

While agreeing with the Conference Board’s findings, another Canadian analyst said incumbent carriers would now have do some delicate balancing act to stay on top of the game. “Traditional telecom firms have known for years that technologies such as VoIP would have a disruptive effect,” said Tony Olvet, vice-president, communication practice, IDC Canada Ltd., in Toronto.

“Now, the incumbents need to achieve a delicate balance between the uptake of new technology and maintaining traditional services for existing customers.”

The IDC analyst foresees “an aggressive move towards IP telephony, cable services and wireless services”.

“The play for telcos,” Olvet said, “is to offer integrated services that seamlessly connect IP, cable and wireless technologies.” Olvet said Rogers Communications Inc. seems to one of the front-runners “because it has the best of both worlds in terms of cable and wireless markets.”

Another telecom analyst does not believe that VoIP and wireless services will completely replace wired line services in the immediate future.

“Landline services will not disappear that quickly,” said Roberta Fox, principal of Fox Group Telecom Consulting in Mount Albert, Ont.

She concedes, however, that IP telephony has been very attractive to both consumer and business users.

For instance, a number of the Fox Group’s clients have taken advantage of installing IP connections between branch offices to reduce long distance charges on in-company calls. Fox said a similar strategy is being employed by banks and government agencies to enable data transfer and video conferencing between branch offices and remote locations. “Increasingly, we will see companies offering bundled services that offer high-speed connectivity layered over with VoIP,” she said. Telcos, she said, would continue to struggle with regulations, market pressures and new technology.

She said the very cost management measures that enabled most of the firms to maintain profits from 2004 to 2006 also involved painful headcount reductions.

“The telcos got rid of thousands of people between 2004 and 2006, the period when their profits went up,” she said.

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