Even as tens of millions of telephony customers around the world embrace VoIP as their preferred voice technology, independent VoIP providers are struggling to retain market share and preserve their businesses amid escalating competition.
The independent VoIP companies, also known as hosted VoIP providers or virtual VoIP carriers (VVCs), face a competitive onslaught from cable companies, established telcos and wireless providers, many of which are moving their legacy voice systems to IP networks. As a result, independents are struggling desperately to reinvent their businesses and attract new customers.
One of the industry's best-known VoIP pioneers, US-based Vonage Holdings, is struggling to save its business after a federal court decision in March that the company infringed upon Verizon Communications' patents in the way it connects calls from the Internet to ordinary telephones. Vonage, which also faces patent lawsuits from Sprint Nextel Corp and two other phone companies, warned in a regulatory filing that it faces possible customer losses, employee layoffs, financial problems and even potential bankruptcy because of the suit. Meanwhile, Vonage's CEO recently resigned, it is planning $140 million is spending cuts and it is paring staff while it appeals the ruling.
The Vonage dispute underscores the weakest link in the VVO business chain: the networks. The VVOs don't own one and so must rely on others to transfer customer calls to the public-switched telephone networks. 'They all have the same inherent problem. They don't control the network their service is running over,' says Michael Arden, principal broadband analyst with ABI Research.' That is really going to hurt them.'
The stupendous growth in VoIP worldwide might suggest there is plenty of business for everyone. ABI estimates that worldwide VoIP subscribers will grow from 38 million in 2006 to 267 million in 2012. In the Asia-Pacific region, subscribers are projected to grow from 14.88 million last year to 92.25 million in 2012. And hosted VoIP subscribers are forecast to rise in Asia from 1.74 million in 2006 to 11.8 million in 2012. However, VoIP over DSL/fiber will rise to 65 million from 10.8 million while cable subscribers will reach 11.45 million from 2.35 million in Asia during the same period. It's a similar situation in North America, where ABI estimates that hosted VoIP subscribers will rise from 2.3 million in 2006 to 15.9 million in 2012. But the independent VoIP market share will still lag behind both cable and DSL/fiber.
And there are other issues threatening to derail the struggling independents. In markets like the US, VVCs could see market growth frozen if regulators decide against them on the 'Network neutrality' issue now being fiercely debated by regulators and legislators.
'One of the uncertainties is, if the operators gain the legal right to block hosted providers from their networks, they are really left out in the cold,' notes Arden. In Europe, incumbent telcos such as BT are building IP networks and migrating their own voice customers to VoIP, posting a serious challenge to independents.
China's success
Surprisingly, China, has emerged as a bright spot as VVOs capitalize on the country's relatively high long-distance calling rates to gain new customers.
Kevin Li, In-Stat's China analyst, says VVC subscribers will hit 1.23 million by year's end in China and grow to nearly 13 million by 2011.
'The biggest driver is lower price, which is attractive for SMB customers and consumers with high demand for long-distance calling,' says Li. 'VVCs are having success.'
Li adds that VoIP has existed in China for about nine years, and licenses were awarded to six traditional telcos to provide IP card service. These telcos - including China Telecom, China Unicom, China Netcom, China Mobile and Tietong - have also started trials of broadband IP telephony, with the number of VoIP subscribers in the country growing from 50,000 in 2004 to 720,000 by the end of 2006.
Despite this, many VVCs in China have gained a strong foothold because they offer lower prices although services are limited. (One example: customers often can only make outgoing calls because incoming calls can't be connected to the legacy network.) The independents appear to operate outside established parameters.
'The Ministry of Information Industry has declared that broadband IP telephony service can legally be provided only by traditional service providers. Thus VVCs are operating illegally and have little phone-number resources,' Li says.
However, he notes that the VVCs typically focus their VoIP business on just one or two provincial markets. 'Little application innovation has been developed on VoIP, so price competition among VVCs is serious,' he adds. 'They are thriving because they offer lower prices than traditional calling services or IP card services.'
A spokesman for one such Chinese hosted VoIP provider, Beijing Zhong Tong Interconnected Technology, said VoIP service has been offered for more than three years. The company offers VoIP as a value-added service delivered through its IP platform to Internet users who pay a one-time fee of $50 yuan ($6.48) for the IP number and a monthly fee of about 18 yuan for PC-to-PC and phone-to-PC calling. The MII does not have a clear regulatory policy over VoIP, the spokesman added, and hasn't required the VVCs to obtain a license.
Loren Zhao, market researcher for iSuppli China Research, says the number of VVCs has deceased from several thousand to several hundred in China during the past two years because the government declared VoIP a basic facility-based service that can only be provided by traditional service providers. He estimates that the total VoIP equipment market in China will grow from $561 million in 2005 to $762 million in 2007 and $1.1 billion in 2010.
Meanwhile, China's MII estimates that total IP traffic volume hit 12.7 billion minutes in January 2007, an 8% increase over the same period one year ago.
In-Stat's Li says the VVCs in China are 'facing the pressure from carriers and MII.' As in other markets, the independents will have to redefine their business if they hope to survive amid a tumultuous VoIP market. 'It's a gray zone on VoIP operations in China,' says Li.
'VVCs could be treated as a channel partner of carriers that also will benefit from the VoIP revenue. It's like a balancing game. On the one hand for the sake of money, carriers will not kill these VVCs at once. On the other hand, carriers don't want these to VVCs to grow and threaten their market position. Maybe in two or three years MMI will open VoIP operations to other companies besides carriers.'
Market uncertainty
Hosted VoIP carriers face much of the same market uncertainty around the world. 'Going forward, VoIP technology stands to change the market by liberating voice from the phone,' says Sally Cohen, analyst with Forrester Research. 'But to win users today, pure-play VoIP marketers should position their services closer to the traditional phone, while calling out expanded features.'
Cohen notes that even in mature markets like the US, most consumer are ambivalent about VoIP. In fact, just 5% of online households say they use VoIP. Many consumers are drawn to VoIP by monthly discounts for bundled services - something cable operators and incumbent telcos emphasize in their marketing efforts.
'Vonage was the only [VoIP] company doing any marketing,' she notes. Price alone often isn't compelling enough for consumers to make the switch because they often use wireless phones to make inexpensive domestic long-distance calls. Often, they capitalize on the 'buckets' of free calling minutes offered as part of monthly service contracts.
So to be successful, the independent VoIP providers in the US and other markets need to emphasize premium features such as caller ID and voicemail that are often add-on expenses to existing landline service. VoIP providers can also differentiate their service 'with applications that mimic a seamless voice experience across multiple lines and phone numbers and the PC,' Cohen says. Finally, the independents must position VoIP as a true landline replacement.
'Marketers of pure-play services should hitch their messages and campaigns to voice, not the VoIP technology itself,' she adds, and avoid emphasizing the Internet aspect of the technology because many consumers distrust it.
In short, VVOs need to emphasize better service and bundling to help convince reluctant customers that VoIP is just as easy and beneficial as traditional, reliable landline voice service. Stressing the interoperability of VoIP with landline and mobile services could be a big help. So could developing bundling deals between VoIP providers and entertainment providers that link home communications and entertainment services.
Even so, an ongoing war is being waged on the worldwide VoIP battlefield. Right now, the independents seemed outgunned by the larger service providers, but there is still time for them to implement a new, more appealing engagement strategy.
Convergence could hurt independents
Consumers are moving to VoIP now because of lower cost and simplified billing, but this will change by the end of the decade, when the driving motivation will be how well VoIP telephony converges with video, online gaming and other services. And that fact will hurt hosted and independent VoIP providers in their ongoing market-share battle.
Michel Arden, ABI's principal broadband analyst, says in a research report that it is service providers' desire to leverage their new broadband networks that will propel VoIP forward. 'Hosted service providers, the pioneers of commercial VoIP, are going to grow to some extent, but it will be cable operators and other broadband providers trying to leverage their high-speed data networks that will really push VoIP in the future,' says Arden.
While traditional telcos have been slow to embrace VoIP due to their huge investment in conventional telephone networks, their desire for total control of service quality and their fear of upsetting their existing customer relationships, the development of VoIP markets will play out differently in different regional markets.
In Asian markets like Japan, meanwhile, Arden says the VoIP drive 'isn't coming from the telecom operators or even from the cable operators. 'It's really the third-party broadband players such as SoftBank.'
In Europe, by contrast, Arden says many telecom operators are upgrading and implementing Ethernet networks for increased operational efficiencies.
(BT is the primary example.) 'When they do so, they're taking VoIP into consideration and making it part of their network upgrade,' explains Arden.
In the US, for example, Arden notes the VoIP market is being driven by competition from cable operators that utilize VoIP to attract customers away from incumbent telephone companies. 'Eventually the cable operators will start offering converged services, and to compete, the telcos will have to go to VoIP as well,' says Arden.
- Al Senia