As giant telcos retreat from the conventional consumer phone business, the Internet calling wave is rolling in.

On Thursday, AT&T ( T) joined struggling long-distance rival MCI ( MCIP) in de-emphasizing the fast-eroding consumer business. Hard hit by falling prices, the companies intend to focus on the more lucrative business segment.

But just as the long-distance companies are ending their conventional consumer marketing push, the nation's biggest local phone service provider, Verizon ( VZ), is stepping into the breach. The New York telco on Thursday unveiled a national voice-over-Internet-protocol, or VoIP, calling plan that promises unlimited calling priced about $20 below standard monthly phone service.

Ma Bell's decision to turn its back on the very market it created a century ago is certainly of historical significance. But industry watchers say the move away from conventional consumer phone service was inevitable.

"They were going down this road anyway," says Forrester Research analyst Lisa Pierce. "Concentrating on business services plays to AT&T's strength."

On Thursday, AT&T slipped 20 cents to $14.12.

Challenges

Last month, in the wake of a sweeping pricing rule setback, MCI, the nation's No. 2 long-distance phone company, began shutting down its small-business sales unit and made plans to back away from the traditional consumer market.

Meanwhile, even as AT&T said Thursday that it would stop spending money on consumer services, the struggling giant outlined plans to continue sales of VoIP services, both to businesses and to consumers.

Both AT&T and MCI hope to reallocate resources in an effort to better focus on sales to large businesses and government agencies, where they are the top two players.

The dramatic moves underscore the competitive challenges each company faces amid cut-throat pricing and shifting trends in communications technology. The long-distance telcos, already battling severe price pressure in their core business services market, have found it increasingly difficult to contend with the bundling of phone, Internet and even wireless services by the Bells to win customers.

While it comes as little surprise that AT&T wants to spend less money on a declining business, one concern is that it may jeopardize its existing consumer business, which generates about $8 billion a year in revenue.

On a conference call with analysts Thursday, AT&T executives said the company would continue to serve its residential customers and not make any decisions about exiting the business until it had more clarification on pricing rules. The executives also said that they are considering options including a spinoff or sale of the business.

"It's safe to say that we believe all those kinds of things are on the table to be evaluated," said AT&T CEO Dave Dorman.

Higher Sights

AT&T's shift to VoIP may also help the company upgrade its customer base.

"AT&T has a lot of users at the lower end of the spending scale," says Forrester's Pierce. Switching to VoIP helps the company "get rid of the less profitable customers and theoretically gives them a chance at getting back some of the high-end users they have lost."

VoIP services, while vulnerable to power outages and not fully compliant with federal wiretapping and tracing laws, nonetheless offer the prospect of great flexibility and lower costs by using the ubiquity of the Internet to bypass the phone networks and the attendant access charges.

The industry's move to cheaper VoIP service will unavoidably undercut conventional phone revenue levels. But analysts and investors are convinced that the broadband connections used for Net calling will open the door to an array of additional services.

"Going the broadband route gets around a lot of regulatory issues and it gives the telcos the ability to upsell customers on a lot of advanced services, like unified messaging and interactive gaming for example," says Pierce.

MCI said in April that it plans to offer a consumer VoIP plan this year, but a company representative said there was nothing immediately on the horizon.

Verizon said Thursday that it will offer VoIP service to broadband customers in parts of 33 states. The New York local phone giant says it will charge about $40 a month for the service, which will be available to cable modem users as well as digital subscriber line, or DSL, customers.

The move is seen as an answer to the much ballyhooed efforts of the cable companies to enter the phone business.