Light Reading

AOL VOIP: You've Got Apathy

Light Reading
News Analysis
Light Reading
4/7/2005
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Time Warner Inc.'s AOL division finally rolled out its consumer VOIP service today, and even though the service isn't a big deal to analysts, its existence, backed by AOL's marketing muscle, is forcing the VOIP issues with incumbent carriers.

New AOL users can get AOL with phone service for $29.99 per month for the first six months. Existing AOL members can buy the VOIP service alone at introductory prices of $19 for a local plan, $30 for an unlimited U.S./Canada plan, or $30 for an unlimited global plan.

AOL’s entry into the VOIP business is an indicator that consumer awareness of, and interest in, low-cost telephony services is growing. IDC research predicts the number of U.S. VOIP subscribers will grow from 3 million in 2005 to 27 million by the end of 2009.

That won't make anyone a pile of money, but it will force competitors to ante up. For example, Verizon Communications Inc. (NYSE: VZ), which rolled out a new pricing scheme for its VoiceWing VOIP service this week, won't talk about how quickly its service is going to make money. "I won't speak to it in terms of profitability," says Verizon spokesperson Bill Kula. "It's necessary for us to offer a VOIP service to balance out our overall broadband portfolio.

“AOL is a terribly formidable brand… but we think the Verizon brand is very helpful when we introduce any kind of new service," he adds. VoiceWing is available nationwide, and users can get phone numbers with area codes representing 37 of the 50 states.

AOL's new service essentially adds voice as a communications option to its popular instant messaging and email “dashboard” software application. The AOL Voice kit includes a Motorola Inc. (NYSE: MOT) telephone terminal adapter/broadband router, which AOL members use to link their broadband connection to their phone.

Even if competitors are moving to keep from being underpriced, analysts aren't terribly impressed with another AOL add-on service. “VOIP is still in its infancy now, and that’s why I don’t think this is that big a deal,” says Argus Research analyst Joe Bonner.

“This is probably a relatively negligible event,” says analyst Aaron Chew of J.P. Morgan Chase & Co. “It’s more of an incremental change to their service, but nothing transformational.

“Obviously they are trying to add some value-added services for the existing subscribers. But one thing we haven’t been able to figure out, based on the information we’ve gotten from the company, is whether this service will be cashflow positive, or if it’s something where they will take a small loss but do it anyway to make their customers happy.”

Indeed, AOL members haven't exactly been asking for VOIP -- in fact, most of them don't know what it is. "Over 60 percent of consumers don’t know what VOIP is or don’t understand what it is, but it is possible they could be sold on it," AOL CEO Jonathan Miller said during a conference last month (see AOL: We've Got VOIP ).

But a VOIP offer may help AOL stem its subscriber loss. J.P. Morgan's Chew says AOL’s combined dialup and broadband subscriber base shrunk from 24 million to 22 million at the end of 2004, and J.P. Morgan expects AOL to loose 12 percent of its compound membership every year for the next five years, bringing the number of subscribers down to “ten or eleven” million in 2010.

So, for now, AOL's moves in VOIP are of primary interest to competitors, such as Verizon; network partners, such as Level 3 Communications Inc. (Nasdaq: LVLT); and the equipment vendors powering AOL's VOIP network, such as Sonus Networks Inc. (Nasdaq: SONS).

Level 3 provides the telephony infrastructure over which AOL members’ calls will terminate or be passed on to other networks around the world. The company also contributes the emergency 911 and number portability services to ensure that the new service complies with Federal Communications Commission (FCC) requirements.

AOL has deployed Sonus's softswitches, which include the ASX and PSX, and its EMS management systems. Sonus was well entrenched with Level 3 before AOL's Voice product existed, supplying the carrier with just about every product in its portfolio. Sonus chief marketing officer Steven Edwards says his company developed what it calls an “ISP software release” especially for the AOL account.

Sonus hopes to sell the release to other ISPs such as Yahoo and MSN, which are widely rumored to be preparing to enter the voice market.

— Mark Sullivan, Reporter, Light Reading

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OldPOTS
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OldPOTS,
User Rank: Light Beer
12/5/2012 | 3:19:43 AM
re: AOL VOIP: You've Got Apathy
Is there going to be any profit in VoIP with all the various competitors, or is it a must have to keep customers loyalty?? Market Projections?

OldPOTS
falsecut
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falsecut,
User Rank: Light Beer
12/5/2012 | 3:19:42 AM
re: AOL VOIP: You've Got Apathy
I don't think that I have much in the way of marketing projections to offer but it certainly is one more way that revenue is being pushed down for the RBOCs. My experience with VoIP in my company is that the initial set up of the system is sometimes painful and generates calls to the provider. If there isn't good margin in the business after that initial set up cost are tallyed up, then you'll never recoup your up front investment. If it maintains customer loyalty or other factors come in, then that's a plus that someone can factor in. I hope someone here can elaborate on both declining set up costs, if any, and the overall profit picture.
falsecut
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falsecut,
User Rank: Light Beer
12/5/2012 | 3:19:40 AM
re: AOL VOIP: You've Got Apathy
Perhaps it is a feature on the engineering side but it is most definitely a product to people determining whether to offer it or not. Anytime you decide to offer anything to a customer which provides a radically different functionality, which voice does for consumers at least, then you had better do some homework on profitability.
materialgirl
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materialgirl,
User Rank: Light Beer
12/5/2012 | 3:19:40 AM
re: AOL VOIP: You've Got Apathy
Profit? What product? In the IP world, voice is a feature, not a product.
optoslob
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optoslob,
User Rank: Light Beer
12/5/2012 | 3:19:38 AM
re: AOL VOIP: You've Got Apathy
I have to agree with Materialgirl, Voice is a dead product.

If your business plan is requires that VOIP be a revenue generating stream than I would focus on the corporate market. LD voice revenues will only continue to decline regardless of if it is VOIP or POTS. I know that my cell phone contract included so many off peak "nation wide" minutes that I would use a cell phone for most of my personal LD needs. This equals no LD revenue for VOIP and no LD revenue for POTS.

The problem with third party GÇ£consumer VOIPGÇ¥ is that the pipe is supplied by either RBOC's or MSO's and neither is happy about enabling local competition. This means we can expect legislation granting RBOC's and MSO's the right, better still the obligation, to monitor and police the contents of their IP network. Look at what is happening in the P2P arena where laws are quickly being written to require service providers and server operators to monitor content and police "acceptable usage rules", this is all happening at the behest of the RIAA. The RIAA and MPAA are championing the notion that "P2P network = Child porn" and so laws will be developed which require the ISP to "examine" any suspected P2P traffic (BTW. VOIP is a form of P2P data). This will be accompanied with appropriate delay / shaping effectively destroying local consumer VOIP as a product.


Anyway I've started raving on, the truth is that AOL has no choice, they need to sweeten their "value proposition" so that they can hang on to customers for a little longer. The notion that they can provide voice services will probably slow the drift away from AOL, for a while.

Sorry but no profit from this product!

optoslob
rjmcmahon
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rjmcmahon,
User Rank: Light Beer
12/5/2012 | 3:19:37 AM
re: AOL VOIP: You've Got Apathy
Materialgirl; The free rider problem of television resulted in advertisers funding the content production. That funding model distorts a neutral point of view in the reporting. It's seems likely that the production of content for the internet will go down this path unless we find a better funding model. Annual fund drives, public donations, and tip jars don't seem to be enough. Do you have an opinion on solving this problem?
DZED
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DZED,
User Rank: Light Beer
12/5/2012 | 3:19:36 AM
re: AOL VOIP: You've Got Apathy
Find the killer app and you solve all these problems!!!!

eg Videophone/video conferencing.
It seems to me once you have a broadband connection it would be a doddle, and novel extra content people might be prepared to pay a premium for compared to voice.
People have video capability on their mobiles now, it seems to be a no-brainer.
Unless someone has a better idea of course.
iponthebrain
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iponthebrain,
User Rank: Light Beer
12/5/2012 | 3:19:35 AM
re: AOL VOIP: You've Got Apathy
This announcement would have been exciting two years ago. Now its just a "me-too" announcment for a zero-sum game product offering. AOL has to find its differentiation at a quicker pace or it will continue its slide. They need to get a leapfrog product offering - maybe get into the IPTV space like Yahoo is doing with SBC.
dljvjbsl
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dljvjbsl,
User Rank: Light Beer
12/5/2012 | 3:19:35 AM
re: AOL VOIP: You've Got Apathy

Find the killer app and you solve all these problems!!!!

eg Videophone/video conferencing.
It seems to me once you have a broadband connection it would be a doddle, and novel extra content people might be prepared to pay a premium for compared to voice.


The problem with this kind of analysis is that it is all based on the capabilities and needs of the supplier. The supplier needs a new source of revenue and the suppliers equipment can now do video. Therefore customers are going to pay for video.

Customers do not see it that way. They have their own application needs and d not give two figs about the revenue needs of the supplier. The fact is that video either as video-telephony or video-conferencing offers next to nothing to the customer. In fact, video-telephony creates enough issues for privacy and the like that the video component actively works against the types of collaboration that voice can provide.

Customers buy applications because they are useful to themselves not to provide revenue to the supplier. A great deal of research has proven that video is of next to no use to the vast majority of customers. Why does this industry keep trying to force it onto them?
DZED
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DZED,
User Rank: Light Beer
12/5/2012 | 3:19:34 AM
re: AOL VOIP: You've Got Apathy
"Customers buy applications because they are useful to themselves not to provide revenue to the supplier."

Exactly, find the application customers want, which requires high bandwidth, and you have a lever for revenue.

Video was just an example, since its the most bandwidth hungry thing I can think of.
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