Or is it? Service providers fight back  "The incumbents are very powerful, but it’s game over… They’re going to have to find other ways to make their money."– Sheldon Renan, business analyst, Vision + Strategy  The incumbent local exchange carriers (ILECs) are in for some tough times – as tough as may be for businesses that win billions of dollars of revenue every year. Still, those fat wallets can’t protect their hides forever. Bell Canada, MTS Allstream Inc., Telus Corp. – they all face some serious challenges, and it won’t be easy for these stalwarts of network services to keep pulling in the dough. That’s the impression one gets from ILEC presentations given to investors, customers and peers at events such as VON Canada, a communications technology conference held in Toronto last month. The carriers certainly have some big battles to fight these days. Here are the main fields of engagement: Competition: Cablecos like Rogers Communications Inc. and Shaw Com-munications Inc. have entered the phone space. Carrier-agnostic VoIP providers such as Vonage Holdings Corp. are chasing residential telco customers. Internet por-tal operators like Yahoo Inc. and Microsoft Corp.’s MSN tie computer-based communications services (Instant Messaging, VoIP) into their online undertakings. All of the above eat into ILEC profits. Bell lost more than 300,000 land lines in 2005, said Kan Inaba, Bell’s director, broadband and mobile communications. Customer attitudes: All-you-can-eat long-distance packages herald the end of per-minute billing. Online games with built-in voice capabilities cause youngsters to think voice is just an add-on to Xbox. Some wonder if network access will wend its way down to the ultimate price: $0. "If you’re a company that runs a network, you have a bit of a problem," said Alec Saunders, CEO of software provider Iotum Corp. Government issues: The Telecom-munications Policy Review Panel charged with scrutinizing ILEC regulations suggested it’s time for the government to give incumbents more freedom. But not everyone agrees it’s the best thing to do (see "TPRP Pleases Some, Annoys Others" on page 2). Meanwhile the ‘Net neutrality debate (see "Everyone Wants ‘Net Neutrality" on page 11) makes service providers out to be greed-headed Goliaths, although they say it’s merely a matter of survival. What’s an incumbent to do? Get creative. Strike back. What follows should give you a sense of their strategies. Creative StrategiesOne of the biggest challenges that ILECs face has to do with VoIP. Carrier-agnostic service providers (read: providers that don’t own networks) threaten the incumbents’ residential customer base, although there remains some question as to just how successful the Vonages of the world are these days – some people say the agnostics are faltering as the early-move hype of their advent wanes.  Ron Close, a Bell president, said his company is taking no chances with its approach to the VoIP market. Bell isn’t just meeting the agnostics head on; it’s using its main asset, the network, to stand out. Bell has two versions of consumer VoIP: Bell Digital Voice (BDV) and Bell Digital Voice Lite (BDVL). Typical of the agnostic offerings, BDVL requires that the end user subscribes to a high-speed Internet service and installs an analogue telephone adapter (ATA) at the home. The user might also have to configure his LAN to play nice with the VoIP service. BDV, on the other hand, requires no customer-based ATA. ATA functions are built into the network, residing in Bell’s central offices, Close said. BDV requires no high-speed Internet connection at the user’s site and no LAN configuration work. Although BDVL is the lower-priced option ($34 per month versus $40 per month), BDV is attracting more attention, Close said. Customers seem to like that BDV requires no changes at the house. Bell’s sales staffers manage to unload BDV subscriptions 15% of the time, Close said. BDVL sales close just 1% to 2% of the time. BDVL is also less popular within Bell itself. With ATAs and high-speed Internet service provisioning, BDVL costs nearly three times more to install than BDV does. "Network-based ATA functionality is more cost-effective for us," Close said. BDV is only available in some Ontario and Quebec cities, but Bell plans to roll it out central office by central office until the service can be had everywhere in those provinces, Close said. His company sees BDV as its honey-pot product, designed to keep "vulnerable" customers from buzzing off to other service providers.  "Incumbents have to take deliberate, calculated actions," Close said, explaining that it’s no good for Bell to stand still and hope customers stick around. Strike BackAnother carrier, Winnipeg’s MTS All-stream, took action when it noticed an impending threat from cablecos. As it seemed Shaw might enter the Manitoba phone market, MTS prepared a counterattack, building a network to support digital TV service in 2001. "Our strategy was to prepare early," said Kelvin Shepherd, president of consumer markets.   But it wasn’t easy. Shepherd’s firm faced a tough competitor in Shaw, which served 90% of Manitoba’s TV subscribers. And MTS’ TV prospects worried Bay Street. "The investment community was very skeptical," Shepherd said. Investors were concerned that MTS would spend too much money to enter the TV arena, where profits were not guaranteed. It took some time to persuade investors that his firm was on the right track, Shepherd said. But even now, other service providers have trouble impressing stock jockeys with their TV dreams. "It’s still an extremely tough business case for any telco to make." Meanwhile, content providers were worried that MTS’ TV play – based on IP – spelled a security and digital-rights-management nightmare. "They see ‘IP’ and think ‘Internet’ and ‘Kazaa,’" Shepherd said. But MTS eventually convinced the skeptics that its IPTV system was at least as secure as traditional TV systems. Despite the challenges, MTS now counts more than 50,000 TV subscribers. The provider owns 20% of the Manitoba market, Shepherd said. Each customer represents $45 of new revenue per month. And 70% of new TV customers also sign up for high-speed Internet service. "The key to the whole approach is bundling," Shepherd said. "Increasingly, the opportunity to sell one-off services is diminishing." MTS is looking forward to convincing TV subscribers to take not only high-speed Internet services but also local and long-distance phone services, home alarm systems and various other offerings – an entire communications platter to keep customers dining at the MTS table. What’s Next? The incumbents may well be doing their utmost to maintain their leads, but is it enough? Alec Saunders of Iotum said that thanks to competition, new services and new customer attitudes, North American incumbents lose 10,000 wireline customers every day. Nearly $5 billion of revenue will disappear from their baskets over the next few years. "You have to find new ways to monetize," he advised ILECs in the VON Canada crowd.  Saunders said the future is "Voice 2.0," wherein voice services commingle with other services. Consider CRM software provider Salesforce, which integrates Skype, the peer-to-peer (P2P) Internet phone application, with its AppExchange application-sharing service. Consider also Microsoft’s Xbox game console, which lets network-connected participants talk to each other as they play. "Does anybody doubt that Microsoft is one of the biggest voice over IP providers on the planet right now?" Saunders observed. Carriers must find ways to support these kinds of services. Saunders seemed to think the answer lies in identity and presence management. Iotum happens to sell a system meant to address those elements – the Relevance Engine is a kind of digital secretary that recognizes who’s calling its owner and what the owner likely wants it to do with the call (send to voice mail, send to cell phone because the call is urgent, et cetera). But other VON Canada speakers put their faith in one of the latest big deals in network architecture: the IP Multimedia Subsystem (IMS). IMS is supposed to let service providers manage their separate networks and services as one entity. It’s designed to cut down on the number of individual service "silos" that network operators deal with today, and it’s meant to give carriers the wherewithal to combine services more easily. According to Camilla Dahlen, president of billing software provider Highdeal Inc., IMS spells a big change in the way carriers go about their business. Service providers will worry less about network resource management, and more about customer-focused applications. In the end, she envisions a scalable but controllable system that lets parents cap the hours their kids are allowed to use their cell phones, for instance, and wherein people interact according to their personal interests. "We’re going to see a lot more community-of-interest, lifestyle offers," she said. But some people think IMS is the first brick in a walled garden: carriers will have such granular control over network access that only some people – those of us willing to pay a bit extra – will be able to view select content and services, while everyone else is left out. This fear recalls concerns of a growing digital divide between electronic haves and have-nots. "I’m a little bit suspicious of IMS," said Saunders from Iotum, pointing to the walled-garden concern. But no one really knows what effect IMS will have. "I might be wrong," he conceded. What’s More… IMS might be the answer to the ILEC’s current problems. It might not. TV endeavours like that of MTS Allstream might offset the wireline revenue dip. They might not. No one can say with much certainty that Bell’s BVD will set the carrier apart from its competitors for very long. Primus Telecommunications Inc. now offers a similar VoIP service with network-based ATA functionality. And although Close from Bell insisted that Internet-based VoIP perhaps best serves people when it’s built into existing applications such as the Salesforce-Skype integration, his colleague, Inaba, pointed out that tech giants like Microsoft, which provides VoIP via various channels, cannot be ignored. "There are a lot of bigger players out there we have to watch out for," he said.  Sheldon Renan is a business analyst at Vision + Strategy, an Encino CA-based consultancy. He works with Wibiki, a company that involves computer users in a free ubiquitous Wi-Fi network (visit www.wibiki.com for more). As he noted (see our opening quote), ILECs must change their ways. But it seems to us that they also can’t afford to ignore their primary lines of business: network access sales and service provisioning. It won’t be easy to do that and, at the same time, address new needs such as advanced communications apps.  While carriers walk a thin line between what came before and whatever comes next, perhaps they’ll rely on those fat wallets in their back pockets as padding should they fall down in this mission.