Hanging up for good on ma bell

New growth in the VoIP market dials up the pressure on traditional telecoms.

Getty Images

Last week I made a very small purchase that not only impressed me as a small-business owner and homeowner, but also changed the way I think as an investor in the telecom sector.

I figured it was time get a proper business phone line for my home office. I knew that going with a voice-over-Internet-protocol (VoIP) provider would save me some money, but I had no idea just how cheap VoIP had become.

I got my phone line at a website called This small Montreal-based company offers bargain-basement prices, and a feature set beyond anything offered by traditional phone companies. I can add a caller-ID filter that sends telemarketers to an error message, for example, or instruct my line to recognize incoming calls from my cellphone and give me a dial tone, letting me route wireless long-distance calls through my VoIP number to save money.

There are more VoIP providers than ever in the marketplace. The most well known pure-play company is Vonage, but there are also 8×8, MagicJack and plenty of very small providers that advertise less. Most cable companies offer VoIP service too, but they tend to charge a lot more. And there’s Google Voice and Skype, if you don’t mind using your PC to make calls.

Good for the pocketbook, but I’m most intrigued as an investor. For the past decade, I’ve been watching VoIP technology improve and capture market share over traditional lines. Costs have been dropping, and new entrants are passing these savings onto customers. It’s still tough for VoIP companies to make money because margins are thin, and they need to keep marketing costs in check. But given recent improvements in cost, plus the ever-better ease of installation and quality of service, I think they’re set to take even more revenue from the legacy telecoms.

According to the research firm Heavy Reading, VoIP already accounts for 33.5% of phone lines in North America. But this figure is expected to more than double by 2015 to 68.2%.

That’s partly because VoIP has become so easy to use. Years ago, you had to be a geek to understand this stuff, and have a server in your basement. Now it’s all hosted elsewhere; the average Joe only deals with a web interface. Broadband networks, too, have also become faster and better able to deliver voice traffic with less delay, better echo cancellation and fewer lost data packets. My retired parents use MagicJack, but not because of anything their tech analyst son said. Nope—their retired friends offered up the recommendation. If my parents and their friends are making the switch, it’s a bad sign for phone companies.

Telecom giant BCE generates 19% of total revenue from wireline phone service. They’ve been losing voice customers for years, and cutting operating costs to compensate on profitability. Inevitably, they’ll have to face the music. People won’t keep paying the roughly $50 per month that Bell Canada charges for phone service.

What about Rogers (owners of Canadian Business)? Technically, they’re a VoIP provider, and they’ve been one of the winners in this transition. Since launching Rogers Home Phone, they have signed up over one million customers. This accounts for 14% of the Rogers cable business, but only 7% of overall revenue (including the wireless, cable and media business units). And Rogers should feel less pain as customers transition to VoIP, given their lower exposure to the landline voice market.

I believe over several years the same trend will repeat itself in the wireless voice market. It will mark the end of a long transition. We grew up paying only for voice—data didn’t exist. Then we started paying for both voice and data. In the end, we’ll be paying primarily for data.

Being exposed to companies that earn much of their revenue and profit from voice is a bad idea. Their dividend yields might seem attractive. Don’t be fooled.

Chris Umiastowski is a blogger, consultant and former TD Securities tech analyst.