Microsoft Charges Net

Tech titans hammer away at Internet calling, serving up a challenge to the big telcos.

Author:: Scott Moritz
Publish date:: Aug 31, 2005 2:22 PM EDT

The growing buzz around Net calling isn't a welcome sound to big telcos.

Microsoft

(MSFT) - Get Report

became the latest tech heavyweight to embrace voice over Internet protocol (VoIP) calling with its

acquisition of

Teleo

, a closely held software developer. The move, unveiled late Tuesday, follows

Google's

(GOOG) - Get Report

introduction a week ago of Google Talk, an instant-messenger calling service.

Microsoft says it plans to integrate Teleo's VoIP and "click-to-call" application into its MSN online consumer service. Though Microsoft didn't disclose how it would feature the new Net calling service, it seems likely it will follow Google's steps and offer some form of free calls between users who have installed the software.

"Not everyone will be getting their phone service from the phone company," says Standard & Poor's analyst Todd Rosenbluth, who released a report Wednesday reiterating a negative outlook for the old-line telecom sector.

Rosenbluth says Bells like

Verizon

(VZ) - Get Report

SBC Communications

(SBC)

BellSouth

(BLS)

and

Qwest Communications

(Q)

have already taken it on the chin as customers started taking their calling business over to wireless.

Now, however, the situation is only made worse by the incursion of what he calls the deep-pocketed Internet giants and the cable companies like

Comcast

(CMCSA) - Get Report

Time Warner

(TWX)

and

Cablevision

(CVC)

into traditional phone turf.

With voice essentially a free IM feature for PC users, the biggest squeeze is likely to be felt at smaller VoIP challengers like closely held

Vonage

and

Skype

, say analysts.

Both companies attracted thousands of users in a short period of time, quickly capturing the industry's imagination. But the eye-popping growth hasn't translated into a compelling business model, nor has it catapulted the VoIP leaders into an acquisition by a bigger phone shop.

Meanwhile, Verizon and

AT&T

(T) - Get Report

have started their own Net calling services to counter the challenge.

But the competitive pressure has become a cloud over telecom, says Rosenbluth.

"It is forcing the regional Bells to be more aggressive in pricing and capital spending," says Rosenbluth. "But they have to adjust to the changing environment. They can't continue to try to serve customers the same way any more."

Verizon and SBC have plans to offer TV, phone and Internet service over newly expanded fiber optic networks. Rosenbluth applauds the move. He rates Verizon a buy based on its tangible fiber optic efforts and promise to offer video in some areas by year-end. SBC gets a neutral from Rosenbluth for its foot-dragging on fiber. He has a sell rating on BellSouth and Qwest because of what he calls their "competitive disadvantage."

Shares of Verizon hit a new one-year low this week and were trading up 8 cents at $32.43. SBC was up 5 cents to $23.86. BellSouth was down a dime to $23.08, and Qwest was up 3 cents to $3.79 in early afternoon trading Wednesday.