Examining the state of competition at the IP Possibilities conference hosted by the NTCA and OPASTCO in Minneapolis today, it was clear that no one is afraid of Vonage anymore.

This is not to say that rural telcos are not looking over their collective shoulder at emerging competitors; it’s just that they’re more worried about Yahoo! and Google. And they have not forgotten about the cable companies.

Bill Blessing, senior vice president of strategy at Embarq, said ILECs large and small must embrace concepts such as Web 2.0 and learn to compete on an accelerated cycle of product introduction, which is not to be confused with an accelerated transition to IP.

Blessing said IP is an inevitable part of the solution to problems the independent telcos face today but he questions when and how they must transition. He agrees that IP changes everything, eventually, but he said its impact, particularly its cost savings impact, is over-hyped.

He pointed to BT’s aggressive, but admittedly and intentionally premature wholesale transition to IP as being done in the name of cost savings. “Embarq is taking a more moderate, trigger-based approach, which will get us there more gradually,” Blessing said. “We see the transition being another plateau of network functionality, but that doesn’t mean there is a wholesale change in the way we deal with customers and regulation.”

Blessing said the 90% cost reduction numbers for, say, switching environments being thrown around are over-stated. He said 50% may be possible, but that’s only 20% of his company’s overall switching costs.

He did say that although cost savings may be over-hyped, the technical and economic advantages will be substantive. “So ILECs must out-compete the over-the-top service provider with new features and content and they should start now,” Blessing said.

Of Vonage, Blessing said, “They have challenged economics and I don’t believe they will be a significant competitor for the long run.” However, portals like Yahoo!, Google and even Microsoft will be, although he called them “marginal for now.”

To protect against the inevitability of that changing, Blessing said, “We must not mortgage our future by protecting our past.”

Tekelec’s Todd Daniels agreed that Vonage has its challenges. In addition to acquiring customers, Daniels said, “They have high costs so how long can they continue without the support of the stock market. That is problematic. They may continue, but they won’t be dominant unless they overcome the quality issues and the churn.”

Chris Campbell, director of operations at OmniTel, said, “Vonage is only a threat if we don’t offer the right products and services.”