MoneyNews Analysis
By Andrew Wilkinson

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1. Internet Telephony Gains Traction
2. Growth in Cable Companies

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 1. Internet Telephony Gains Traction

It's no secret that local phone providers (known as the Baby Bells) have been losing marketshare in recent years.

That trend is unlikely to reverse as the popularity of cellphones and voice-over-Internet protocol (VOIP) grows.

According to Boston research firm The Yankee Group, Internet calling attracted more than a million households in 2004. That's in stark contrast to the 131,000 users in 2003.

Leading the growth in VOIP services is Vonage Holdings Corp, which remains a private company to this point. In the first half of 2005, the firm more than doubled its subscriber base, which now includes 800,000 households.

Vonage offers unlimited Internet telephone access for a token fixed monthly fee. However, users need broadband access on their PC to use the service. The savings are still huge compared to traditional local and long-distance services, which continue to charge for calls by the second.

This week, Vonage announced that it would team up with wireless broadband provider TowerStream Corporation to sell voice and high-speed Internet services to corporate customers.

If your business is in New York, Los Angeles, Chicago, San Francisco or Boston, you might want to take a look at the service, which was launched just recently.

The move allows Vonage access to TowerStream's 1,000 corporate clients, including banks, retail companies and colleges.

TowerStream provides WiMAX technology, which delivers high-speed Internet access using antennas that send and receive signals as far as 30 miles away.

Now that's just plain smart business.

2. Growth in Cable Companies

With the demise of the fixed telephone line, local and long-distance phone companies are quickly having to find ways to reinvent themselves.

The traditional Baby Bells are struggling to add Internet users to the fold as households migrate to other means of communication.

First, high-speed Internet service #0150 or broadband #0150 is opening up lower-cost Internet-based communications methods. The leader of the pack here would be the aforementioned voice-over-Internet protocol, or VOIP.

Second, phone companies are being pressured by cable companies such as Time Warner and Cablevision Systems Corp., which are muscling in on the act by bundling cable and telephone services together at a fixed low rate.

(More MoneyNews Analysis on the War Between Phone and Cable -- Go Here.)

Both companies are attracting tens of thousands of land-line subscribers with offers of unlimited service for about $40 per month.

The strange thing here is that the phone companies should blame satellite television providers – and not the cable companies -- for starting an escalating war. Satellite providers have been steadily stealing market share from cable operators, leaving cable with a hole they must fill in order to keep growing.

The response from large phone providers such as Verizon and SBC is to launch TV services.

While the Internet market has proved successful for cable companies, the telephone market might prove even more fertile and ease investor fears over the concerns of the video side of their business.

According to equity analysts at Sanford C. Bernstein, the residential phone market is estimated to be at $60 billion. That's $10 billion larger than the entire pay-TV market. Cable companies could tap into 30% of this market, according to analysts.

For cable operator Comcast, the news could be good.

Since they already provide video via broadband technology, the addition of Internet telephony is simply gravy.

According to Chieftain Capital Management Inc. #0150 which owns Comcast stock -- over five years, the addition of phone services could add $1 billion to earnings before interest, tax, depreciation and amortization (EBITDA).

The profit margin from Internet technology could be more than 50% since it simply builds on their existing broadband infrastructure.

The shapeless business strategy surrounding cable TV, satellite and phone services is one to keep an eye on for the future.

The relative performance of broadband and telephone companies tells the story completely. Broadband companies continue to deliver far superior returns to shareholders than telecom companies.

	12 months	24 months	36 months
Broadband Companies	19%	80%	143%
Telecom Companies	8%	24%	28%

Editor's Notes:

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