VoIP on the verge: with incumbents and new entrants alike capturing residential market share, VoIP is on the threshold of something big

Telecommunications Americas,  Nov, 2004  by Jon Arnold

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VoIP is everywhere these days, and is arguably the hottest thing since the tech bubble of 2000. So, right away there should be some cause for concern. Depending on what hat you're wearing, this is true, but it is also an exciting time for anyone close to this market. With low barriers to entry and minimal regulation, VoIP is attracting new money and new players. The market will go through its natural--and necessary--cycles of speculation, investment, exits and consolidation, but there is an undeniable sense that VoIP is poised to fundamentally alter the telecom landscape.

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So, what is happening with VoIP? At the consumer level, broadband telephony is redefining voice communications, and the benefits of IP are going mainstream. VoIP has had numerous false starts, and has simply moved outward from the network core to the edge and access space, where it becomes real for the end user. IP technology has proven itself effective at reducing network operating costs, and the focus has now shifted to revenue generation via IP services.

VoIP is really just a technology, or an application in a data network. VoIP is not really an industry; it's an enabling technology that supports something much bigger--IP communications.

Why Now?

The simple answer on the timing of VoIP is the "V" word: Vonage. The "Vonage effect" is real, albeit far out of proportion to its impact in taking market share away from the RBOCs. No other virtual operator has come close in demonstrating proof of concept and bringing a consumer-friendly value proposition to market. By doing so, Vonage has had a substantial impact in accelerating the deployment plans of all the Tier 1 service providers.

Underlying that, however, is a more pervasive factor: broadband adoption. There is no VoIP market without broadband, and penetration has finally reached a critical mass where a number of offerings can be supported. By year-end, one in four U.S. homes will have broadband, and with the RBOCs finally making a serious push into DSL, the take rate will steadily increase over the next few years. In fact, VoIP itself may soon become a driver for getting broadband.

Just as voice and data are converging at the desktop, Frost & Sullivan sees several other factors converging that makes today such a dynamic environment for VoIP:

* It works. This sounds like an obvious statement, but residential VoIP did not work well for a long time. VoIP has had several false starts since its inception in 1995. Although it is not 100 percent ready for prime time, it is certainly good enough now for mainstream use.

* Regulations. So far, the FCC has taken a laissez faire approach to VoIP, which has been critical for early-stage success. Had cellular been regulated in its early days, it may well have not evolved to where it is today. Regulation will come to VoIP, but not likely until it becomes more established.

* Competition. This is a crucial driver that was absent in telecom until last year. Rising broadband adoption and the cost efficiencies of IP have led all types of service providers to offer VoIP, and begin competing for customers who previously were the sole domain of incumbent telcos.

* End user demand. In the long run, the laws of supply and demand rule, and we are now truly seeing signs of VoIP demand from consumers. VoIP has been a supply-driven market to date, but as services are rolled out, consumers are quickly recognizing the value proposition of IP services.

* Triple play. For the cable operators, VoIP completes the triple play, which is their main strategy for taking on the RBOCs. To counter this, the RBOCs are adding video to their triple play, along with voice and high-speed Internet. This sets the stage for the "battle of the bundles," which we expect will determine who wins control of the broadband home.

* Wireless substitution. This trend impacts telecom on many levels, but in terms of VoIP, the key issue is the unprecedented decrease in access lines for the RBOCs, which are largely migrating to cellular. With the declines in wireline subscribers and long-distance revenues, RBOCs are under heavy pressure to offset these losses with new services, which brings us to VoIP.

Who Is Leading the Charge?

The United States has seen tremendous activity in 2004, both in terms of VoIP subscriber uptake, and the variety of operators coming to market. At this point, five operators have demonstrated notable success in attracting subscribers: Vonage, AT & T, Primus, Cablevision and 8X8. There are several others, of course--some who are in the market now, and others who are very close to entering. However, these five account for the vast majority of residential U.S. VoIP subscribers.

* Vonage. Clearly the market leader on many fronts, including subscribers, service coverage, mind share, channels, money raised, first mover, etc. Vonage has been able to sustain a healthy growth rate even as new offerings come to market, and is currently in the range of 250,000 subscribers. Vonage's main vendor partner is Cisco for media gateways, and for applications, dynamicsoft (soon to be part of Cisco) is the engine upon which it develops its own features. On the premises side, Vonage has adopted a strategy of supporting multiple ATA vendors, including Motorola and Linksys.